Is the unhackable bitcoin network prone to frauds? Read in our latest chapter on Bitcoin Guide!
Power to Bitcoin
When bitcoin was first introduced in 2008, by an unknown person, everyone thought it is the next digital currency waiting to fail. Previously, numerous attempts have already been made in introducing different kinds of digital currencies. However, none of them saw any real success. Hence, there didn’t exist any reason for people to believe in bitcoin. Or for people to think that bitcoin might actually work.
But this cryptocurrency proved to be different from others. Its decentralized peer to peer platform separated it from the others. The instant transfer of currency, without being touched by any third party like banks and government, gave people a sense of relief in the financial chaos of 2008. Moreover, the amalgamation of blockchain technology and cryptology made it possible for bitcoin to be almost unhackable!
Hmm, so then why almost?! When over the past few lessons, all we have boasted is about the unhackable and one of a kind bitcoin network. Well, it is true. The bitcoin network is seemingly impossible to hack. However, there are still chances of bitcoin fraud in the rarest of rare case, when a person(s) has a control on more than half of bitcoin network.
Bitcoin protocol is based on consensus mechanism. Since it is decentralized, there is no central authority to deem transaction as valid or invalid. Miners use their hashing power to filter out dishonest transactions, thereby maintaining the authenticity of the blockchain. Consensus mechanism ensures that maximum nodes agree to the fact that transactions added to the block are legitimate and honest.
But what if, maximum nodes team up to even include a transaction that actually did not happen? In theory, this situation is possible when a miner or a group of miners, team up and control 51% or more of the total mining activities; of the bitcoin network.
Though rarest of the rare, an attack on the bitcoin system although tough, is not impossible. A 51% attack is when a miner or group of miners successfully try and spend the same bitcoin twice, thereby deceiving the entire system. This bitcoin fraud attack is also known as the ‘double spending’ attack as the same token is used twice.
What can a miner/s controlling 51% of bitcoin network do?
Theoretically, it can block other miners from solving computational problems, and earn bitcoin rewards by monopolizing mining. The hacker can even include fraudulent transactions and dismiss legitimate ones. The attack can also allow the hackers in double-spending a coin.
Let’s say in this example (in one of our previous lesson), Aman controls 51% of the bitcoin network. Now, it becomes possible for him to even include his transaction first. This would automatically make the other transaction of, sending money to coffee shop, invalid. In turn, this allows Aman to spend the same BTC again on some other transaction.
Note: Even for a miner/s controlling 51% of network, it is not possible for them to create new coins or alter very old blocks. Furthermore, the older the transactions are, the more difficult it is to change them.
Though, in reality, such an attack is impossible on bitcoin blockchain (Some cryptocurrencies have been subjected to a 51% attack in recent times.) It would actually require a lot of computational power in order for any hacker to perform this stunt on bitcoin. The computational resources required to pull off such an attack would cost more than earning bitcoins through mining.