It’s pretty hard to trust in something that is very promising, from efficiency to value, that seems too good to be true. Furthermore, transitioning to digital currency and digital assets is a difficult thing to grasp (pun intended) given that we have gotten used to an economy where pretty much everything we own is tangible in one way or another. People tend to lose sense of security when they are not able to grab what they own. Because of this, people who are interested in cryptoeconomy tend to doubt its integrity and often leaves them discouraged to join.
With this in mind, this article is written to answer the number one concern that most, if not all, interested people have in mind: HOW TRUE IS CRYPTOCURRENCY’S PROMISE OF SECURITY?
Before we proceed, let us first define what cryptocurrency basically is in order for us to go in-depth with cryptocurrency’s security properties.
What is Cryptocurrency?
It is a virtual currency that has four significant properties:
- Open source
- Cryptographically secured via blockchain
Security Through the Power of Consensus
Decentralization is the key feature of cryptocurrency. Although we have gotten used to our money being regulated and circulated by banks and by the government, this system actually relies too much on our obligatory trust in a central entity that handles our properties and transactions. Perhaps we may feel secure that there is some stronghold in which all our precious belongings rely on, however, it is not a 100% guarantee that these central entities are indeed strongholds. The current economy is plagued with countless needless fees, deductions and interference because of these central entities, but because of cryptocurrency, a decentralized, trust-free system has become possible. In this way, all transactions are done instantly without the need for inconvenient verifications, fees and regulations, which saves a lot of time and resources that would have been used for middlemen if otherwise.
Peer-to-peer networks is what makes decentralization possible. As opposed to central regulation, everyone involved in cryptocurrency is involved in the machinery of cryptoeconomy. Everyone is in charge. All transactions are verified via consensus instead of a single authority.
In addition, since cryptocurrency is open-source, it is open to everyone, giving more credibility and integrity to the consensus as it increases in size. This is the reason why digital currencies in the past have failed— because they are not decentralized. Overreliance to a central authority makes the system susceptible to bias and fraud. Governments can make unfair laws, a bank may suddenly go bankrupt and authorities may turn against their people. With a consensus, on the other hand, everyone cooperates for the good of the system as everyone is a beneficiary of the system. Given the case that a group of individuals choose to sabotage the system, such an attempt would not succeed as all processes rely on the power of consensus. And if, hypothetically, the consensus decides to sabotage itself, it would be nothing but economic suicide and an exercise in futility.
Cryptography as the Tool for Data Security and Immutability
Yes, transactions are rest assured to be validated correctly via consensus, but how do we make sure that the records of the transactions can remain unforgeable and unaltered?
This is where the blockchain protocol comes into play.
Blockchain is an openly distributed ledger composed of a continuous chain of records, called blocks, which are secured by cryptography. Each block, when successfully added by the consensus, contains a cryptographic hash of the previous block, making the alteration of single blocks impossible without altering the whole chain. Furthermore, since every piece of cryptocurrency is a blockchain in of itself, everyone has the copy of the same ledger, hence preventing the spread of fraudulent chains, once again due to the decentralized consensus. Timestamps and transaction data are also stored within each block in the blockchain, making blockchain not only an efficient security measure, but also a record-keeping tool that is useful for verifying and proving the validity of transactions.
So cryptocurrency seems to be safe and secure, after all. What now?
Hold your horses! Cryptocurrency’s basic foundations may seem foolproof, but we have only scratched the surface. Just like any other system, there are loopholes that exist that threaten the absolute security of cryptocurrency. Anyone who would tell you that no such thing exists would be lying otherwise. After all, it’s not a perfect world. However, no problem is without a solution. By identifying these hypothetical attacks beforehand, the system of cryptocurrencies is able to avert these threats before they even happen and provide countermeasures to ensure that no such event should ever happen.
Decentralized(ish) – The 51% Attack
Just as previously mentioned, decentralization is the key for a strong consensus which makes the validation of blocks in the blockchain possible. However, what would potentially happen in case this decentralization is compromised? Case and point, The 51% Attack. Before we discuss The 51% Attack, however, let us first familiarize ourselves with the concept of mining pools.
The consensus which validates transactions is achieved with the collective effort the so-called ‘miners,’ which are individual users who contribute computing and processing power in order to validate these transactions and in return receive a piece of cryptocurrency which they ‘mine’ as a reward. As transactions increase, however, they become harder and harder to process as the cryptocurrency available for mining decreases in quantity and increases in value. As a consequence, these miners start to work collectively to comply with the increasing computing and processing power demands, thus forming ‘mining pools.’ Nowadays, transactions are impossible to process in solo effort and mining pools have grown into very large top-dollar operations.
As mining pools grow excessively large, this poses a threat to decentralization since the a large percentage of the hashrate, the processing power of the whole network, becomes concentrated on a single entity.
Once that mining pool reaches 51% of all the cryptocurrency supply, this instantly abolishes the consensus because a single entity has become the majority, technically making it the authority.
This grants the dominant mining pool the ability to manipulate the system by validating all transactions it wishes to validate as well as forking the blockchain according their will. The blockchain, still remains immutable, however, and its blocks, once attached, can never be altered, which, on a positive note, is a testament to blockchain’s cryptography-based security.
This incident has happened once in the Bitcoin cryptocurrency when the mining pool GHash reached 55% back in 2014, an incident which they immediately took action within 24 hours, cutting down their operation to minimum, realizing that self-sabotage is useless suicide, as I have mentioned before.
Hypothetically, once an intentional 51% attack has been successful, the system is susceptible to the following risks:
- Random Forking
- Selfish Mining
- Transaction Manipulation
All these attacks, though varying on their approaches, have one goal—to steal more assets in the system by duplicating transactions and validating them simultaneously, ultimately breaking the system.
The Countermeasure: The Impracticality of Initiating a 51% Attack
The loophole of a hypothetical 51% attack may seem alarming at first, but when we look at the actual cost of successfully pulling off an assault, it would require resources too ridiculous in size that it’s laughable.
Just as Andreas Antonopoulos, one of the world’s foremost bitcoin and blockchain expert, said in a 2014 press conference when asked about the risk of a 51% attack,
“Bitcoin has achieved a level of computing that no single nation state can overthrow it through computation alone. The effort to do so would require a massive covert operation of chip fabrication then the coordinated assault that would give them dominance over the next block for the next ten minutes until we kick those bastards off the network, rework the protocol around them. They would be revealed. They would have lost a billion dollars doing this and all they got to do was one double spend… It would take a billion dollars to pull the most ridiculous keystone cops failure in history.”
To this day, the 51% threat remains hypothetical, even after four years after the statement has been given because of the near-impossible cost and the sheer impracticality of pulling off such an attack.
Proof of Stake: Eliminating the 51% Attack Risk Altogether
In order to eliminate the 51% Attack threat completely, developers have come up with a new system of block validation in order to eliminate the threat of centralization, specifically the threat of large mining pools on the decentralized cryptocurrency system. This said system is the proof of stake. In this system, miners who are constantly competing to validate transactions are scrapped off. Instead, they are replaced by what are called validators. These validators are individuals who are randomly selected to be the next person who would validate the next block on the chain. Validators are required to deposit a stake of a certain amount into the system, and the amount of stake placed is linearly correlated to chances of being selected. Once the transactions has been validated in the block, all the said fees in the block goes to the validator as a reward. Furthermore, in order to assure that all validations are correct, the system penalizes the validator for validation mistakes by cutting off a portion of their stake. In this way, the possibility of 51% attack would be exponentially more costly than previously stated, hence putting the threat out of the picture entirely.
No system is perfect. Like I have mentioned before, it’s not a perfect world. However, we can always compare which system is better by how well these systems adapt to threats and come up with countermeasures that outperform said risks. Cryptocurrency, together with blockchain technology, provides a secure system that constantly evolves in order to provide a secure system which has the ability to fight ferociously against loopholes, and the fact that cryptoeconomy stands strong and thriving to this day is a testament to that feat.