Blog 5
Dr. Neeraj Oak continues his examination of why Bitcoin is designed the way it is. In this post, he concentrates on the concept of a shared transaction ledger, and examines the concept of a ‘51% attack’.
A feature of decentralised systems such as cryptocurrencies is that there is no one entity dedicated to keeping the ‘history’ of the system in order. If one entity did control the history of the system, it would be possible for that entity to, either by incompetence or malfeasance, adjust past transactions. This could be used to steal funds, or make them disappear or appear at will.
The only solution is for everybody to keep the history of the system simultaneously. This sounds like a difficult proposition, but it’s actually quite simple. Every user of Bitcoin maintains a copy of the same ‘ledger’ of transactions on their device, and this ledger can only be updated by public announcements.
To see how this works, imagine someone making fraudulent changes to the ledger on their machine. The next time their ledger is compared to that of another user, the mismatch will become apparent. All the other user needs to do to verify that the person they are dealing with is a fraudster is to compare ledgers with a large number of other users, and to accept the most commonly held ledger as genuine. This means that a criminal would need to include over 50% of the machines on the network to make adjustments to the ledger and get away with it. This is known as a “51% attack”. However, this kind of attack is unlikely to occur for well-established cryptocurrencies such as Bitcoin because the cost of buying up or suborning so many machines into a single criminal conspiracy would be enormous. Indeed, such an attack hardly seems worthwhile, as it’s unlikely to obtain more money than it costs to perform. This may not be the case for smaller cryptocurrencies which have low market capitalisation. However, once it becomes known that a currency has been compromised, it becomes worthless very quickly, so 51% attacks on these currencies don’t seem worthwhile either.
An interesting side effect of this design is that every user of the system has a complete record of all the transactions ever made through the system. This actually has some radical privacy implications that aren’t always made clear. It would be rather like your bank erasing all the names from your monthly bank statements and then handing copies to any criminals, government agencies, friends and neighbours who ask for it. While it doesn’t mean that any of these people can directly exploit the information or steal your money, it would certainly make me uncomfortable.
Join me for my next blog post, in which I look at blocks, chains and the double-spending problem.