Why you need to convert your Bitcoins

What is a 51% attack?

51-attack

Bitcoin miners use powerful computers to verify that each person who wishes to spend Bitcoins actually has Bitcoins to spend and isn’t trying to fool the system. They do this by reviewing the Blockchain – a digital file that documents every Bitcoin transaction ever made. Miners usually groups together in mining pools so they can combine their mining power and become more efficient.

The power of the miners verification process comes from it’s decentralization. For example, let’s say there’s a transaction that is going through the block chain. Each miners will review this transaction and decide if the sender actually has the bitcoin he wants to send. If the majority of miners rules the transaction is valid it will go through.

But what if someone could get a hold of more than 50% of the network’s mining power and manipulate the system for his own needs. Theoretically speaking, if someone manages to pull off such an attack he can double spend his money – meaning he can pay with the same Bitcoin twice or even more.

The attacker will also be able to prevent transactions from being confirmed and prevent other miners from generating new Bitcoins. But more on double spending and confirmations will be reviewed in later videos.

For now, here’s a real live example of the 51% attack. In January of 2014 one of the mining pools got so big it neared 51% of the total mining power. This of course created some panic in the Bitcoin community but was fixed shortly after by miners who left the pool in order to balance things out.

One of the things to keep in mind is that someone with so much mining power would probably make more money using this power to mine legitimately than by actually blocking transactions or double spending. This reduces the risk for such an attack substantially.

Another explanation

majority-scales

It all starts with the miners. They are the ones who verify the transactions and the verification process is based on the MAJORITY of the miner’s who agree that a transaction is valid. So let us say that a majority of miner’s decide to agree that a bogus transaction is valid, in that case that bogus transaction will be accepted on the network and processed, which causes obvious issues.

So, in order to get a majority of miner’s to agree on whatever transactions you want you need to control EXACTLY 51% of miner’s So if a pool has 51% of the global mining power of a coin it can accept bogus transactions into the network and disrupt it, causing a huge problem.

One such scenario that could happen as a result of the 51% attack is that the pool owner who owns 51% of the mining power could double spend his coins which means spending coins that he does not really have.

Current threats

miningpool-hashrate

 

The above chart is taken from blockchain.info on 6/19/14 We can see that GHash.IO is at around 45% which is a Red Alert that it is getting close to 51%.

ghashio51

It looks like there is nothing to worry about since the hashrate is so low. But is ghash telling us the true amount of hashing power that they control? What about this “Unknown” category, does GHash.IO have some miners in that category? Here is what noSlave has to say from reddit:

….the “funny” point is, that Ghash.io has already left a lot’s of their miner to “unknown”. So we see a much lower hashrate then they acually control. If now some miners switch back to Ghash.io, Ghash.io will have over 51% before we mentioned it.

….but it’s no problem. Ghash.io told us they are the good boys.

Lets assume that GHash.IO does control 51% of bitcoin’s mining power, what can they do? According to Bitcoin Developer Gavin Andersen:

“Even if GHash.IO is evil and intends to destroy Bitcoin they would be able to do only two things,”

“Even if GHash.IO is evil and intends to destroy Bitcoin they would be able to do only two things,” In other words, GHash will be able to double spend transactions, and selling bitcoin for dollar an an exchange then rewriting the records to look like it never happened. They would end up with both bitcoins and dollars so in a way “double spend” their money. However, there are many problems with such an attack. Andersen writes:

They are likely to get caught, because it is impossible to wire money to a bank account anonymously. It seems very likely they would find themselves in legal trouble for defrauding the exchange.

The second possible scenario that could happen form a malicious 51% attack is a complete shut down of the network. In essence, the attacker, in our hypothetical case it would be GHash.IO, would stop accepting any blocks to the network. It would effectively deny all transactions which will result in a halt. The network would be shut off and any transactions you make would never process. However, this attack is also unlikely because of the social issues that would arise. Here is what Andersen has to say about this attack:

I think either attack is extremely unlikely from an economically rational mining pool– blockchain history would make it obvious that they were mis-using their power, and I’m certain either technical or social solutions would be found to punish the bad behavior. However, this is a good time to re-iterate my standard disclaimers: Bitcoin is still a work in progress, and you should only risk time or money on it that you can afford to lose.

How to protect yourself from the 51% attack

The easiest way to protect your bitcoins from a 51% attack is to convert your coins to altcoins. You can distribute your bitcoins into different well established coins like Litecoin, Vertcoin, Dogecoin. There are coins who have many mining pools and are not centralized like Bitcoin is. Let us take a look at some charts.

litecoinsThe above chart shows the mining pool hash power distribution for litecoin. As you can see the top mining pools have around 25% power of the total network, which is a 50% decrease then those of bitcoins. This decreases the chances of a 51% attack by at least half

vertcoins

The above chart shows the hashrate distribution of vertcoin, here you see it looks similar to litecoin’s. If you are worried about a 51% attack on Bitcoin or believe that GHash.IO may be up to no good, you can simply exchange your bitcoins into litecoins or other altcoins whose hashrate distribution is not as threatening.

Effect on the market?

investing-in-Stocks

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Will all the attention to the possibility of the 51% attack on bitcoin cause the exchange rate between bitcoins and altcoins to go up? That is a possibility and you should start watching those markets. We cannot be sure what effect the auction on 6/27/14 will have on the bitcoin price. But the introduction of 30,000 bitcoins into the market means more supply, and basic economics tells us that an increase in supply drives market price down.

 UPDATE:

litecoin-market

As a disclaimer the below is pure speculation and we are not responsible for any loss of your coins. As of 6/19/14 we can see that litcoin price has experienced a significant jump from 9.6 to as high as 10. As we discussed earlier in this article litecoin’s hashrate distribution not as threatening as the one of bitcoin. So even if you loose a few dollars in the process of converting your bitcoin to litecoins you can atleast sleep knowing that the network will not come to a halt one day and all your bitcoins will be trapped for ever.

  • Expanse <3

    Perfect explanations. 🙂