Articles outlining threats against the Bitcoin network are all across the internet. One of the most widely talked about threat to Bitcoin is referred to as the “51% attack.”
In short, should you be worried? No.
The incentive structure of the Bitcoin blockchain makes it not in the miners financial interest to perform such an attack. This type of attack is theoretical for Bitcoin. However, it has been successfully accomplished on other blockchains.
Bitcoin miners compete to secure the Bitcoin blockchain. The blockchain is secured through the deployment of dedicated machines (ASIC miners). These machines compete to solve complex math problems while verifying transactions on the blockchain.
Some machines are better than others at solving the math problem. The benchmark used to compare the different machines at solving the math problem is called hashrate.
One of the key attributes of the Bitcoin blockchain is the hashrate is distributed across the world. This means that the ASIC miners are deployed across different continents with different entities. Making not one entity owning the majority of the hashrate on the Bitcoin blockchain.
But what would happen if one entity controlled the majority of the hashrate? What kind of damage would they be able to do?
In short, a 51% attack is a method of using large amounts of hashrate to generate fraudulent transactions.
With this much hashrate power, a miner would be able to intentionally exclude or modify the ordering of transactions. They would also be able to spend the same bitcoin twice. Resulting in recipients being defrauded as their coins would be canceled.
However, limitations exist as to what can be accomplished. The attacker would not be able to reverse transactions from other participants nor prevent users from sending transactions on the network. The attacker would also not be able to create bitcoins out of thin air or halt the entire network.
Although a 51% attack can cause significant damage on the blockchain, they cannot completely destroy it. Luckily, Bitcoin has never suffered from such an attack. As more ASIC miners come online and compete, the less likely such an attack will occur.
In theory, a 51% attack is feasible. However, the incentives to do so are aligned against it. A miner that successfully carries out such an attack would undermine the confidence in using Bitcoin as a currency.
Mining is very capital intensive and expensive. Miners have a vested long-term interest in the integrity of the blockchain in order to have a profitable business model. Thus, the value in mining hinges on the integrity of the blockchain.
A 51% attack would make users lose confidence, destroying the value of the bitcoins and thus the miners rewards. Therefore, attacking Bitcoin is highly unlikely if carried out for a profit motive.
What if such an attack would be carried out purely for the malicious intent of destroying Bitcoin?
A government or private entity could purchase their way to controlling 51% of the network’s hashrate. Again, although possible, in practice the feasibility of such an effort makes this attack highly unlikely.
An entity purchasing large quantities of ASIC miners would lead to a significant price increase of the miners. This would reward current miners and allow them to invest more heavily in their own operations – making it harder to attack Bitcoin.
As existing miners will be able to expand their operations, it will drive up the total hashrate of the network, making it ever more costly to attack Bitcoin.
The malicious attacker would find themselves at a constant disadvantage as their efforts to take over the majority of hashrate will lead to faster growth of existing mining operations. Ultimately, this leads to making it harder for an outsider to attack.