When he made his debut, Bitcoin (CRYPTO: BTC) was considered innovative as the world’s first secure peer-to-peer electronic payment system. Its most striking features (compared to other digital currency predecessors) were its cryptography and verification process. Without it, Bitcoin would be nothing more than a string of code that anyone could copy and paste, which would quickly break trust.
But its new transaction confirmation process, called proof of work, also has its drawbacks. If an entity, such as a government, took control of 51% of the network hash rate, or mining computational power, it would be able to reverse transactions, block the execution of new transactions, etc. . It’s not just Bitcoin; altcoins that use a PoW consensus mechanism, such as Ethereum Classic and Bitcoin Gold, have all suffered 51% of attacks in the past. So how much should you be worried about?
The economics of hash attacks
Starting with the basics, Bitcoin is transaction-encrypted using something called a 256 secure hash algorithm (abbreviated as SHA-256). It’s a one-way function, which means it’s easy for anyone to calculate an output (or a value that comes out) using an input (a number that powers an algorithm), but it’s very difficult to calculate. the entry using the exit. For each new block, his network publishes a target hash, and the first miner to calculate the correct hash brings home the rewards.
Right now, the hash rate of Bitcoin networks stands at 133.494 million terahashes per second. This means that mining machines around the world are doing 1.33494 * 10 ^ 20 (a 21-digit number) every second to find out what the correct hash is for checking blocks.
To put it economically: It would cost over $ 2 million per hour in utility bills for hackers to launch a 51% hash attack on the Bitcoin network. And that’s just the maintenance Cost. Hackers would also have to first invest tens of billions of dollars in advanced computers and circuit machines to create hundreds of millions of terahash in order to mount the offensive.
But the variables are slightly more accessible for some altcoins. It would cost hackers less than $ 200,000 an hour and $ 30,000 an hour to launch 51% attacks against Litecoin and Bitcoin Cash, respectively. And it would take less than $ 20,000 an hour to temporarily take control of PoW networks from popular privacy rooms like Hyphen and ZCash.
The real threat
This brings up the main point: the lower the market cap of a PoW coin, the lower its network hash rate, which means it is easier for invaders to attack it. Indeed, it costs as little as $ 1 an hour to support 51% of the hash rate of cryptocurrencies traded below a market cap of $ 10 billion. But correlation does not necessarily equate to causation. There are outliers like Dogecoin, which has a huge market cap but can cost as little as $ 40,900 an hour to control 51% of its hash rate.
Also, keep in mind that it is not only hackers who can use 51% hash attacks as a means of achieving their ends, but also regulatory agencies. Due to its decentralized structure, the industry has a significant share of scams or fraudulent activity. So don’t be surprised if the US Securities and Exchange Commission starts launching its own hash attacks to disconnect overdue regulatory altcoins.
Bitcoin investors shouldn’t worry too much about these threats, but it’s something that PoW altcoin investors should at least keep in mind before investing.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.