What Does The 51% Attack Mean For A Trader?

Summary:
• 51% attack is one of the threats that faces cryptocurrency networks and exchange platforms. But what is it and how does it work?

If a person or organisation holds 51% or more of the mining or authentication capacity of a cryptocurrency system, this could make a cryptocurrency platform susceptible to a “51% attack”-referring to the abuse of the power that comes with such control. Such an attack can come when a group makes use of such authority to either originate activities that are invalid or refuse lawful activities.

The 51% attacks are extremely rare for both financial and logistical reasons, but they are not unthinkable. It is quite probable that the cryptocurrency will lose the confidence of society as well as at least part of its financial worth if a 51 percent attack is successful. In the following paragraphs, we will discuss several important components of the 51% attack that every dealer needs to be aware of.

51% Attack: Explanation and Illustrations

A cryptocurrency system is said to be vulnerable to a 51% attack if a single user or group manages to take possession of far more than 50% of the platform’s total computational or verification power. When one person or group has the most power over a cryptocurrency’s blockchain, they can initiate and change transactions.

The potential of a person or group possessing more than 50% of the total mining or processing capacity of a cryptocurrency such as Bitcoin is so remote that it is almost inconceivable. However, in theory, the 51 percent attacks may affect major cryptocurrencies; but this is very unlikely to happen. Attacks that use the 51% threshold are more likely to work on weaker cryptosystems because these networks either use less computing power or have authentication power that is more centralized.

The following are some instances of 51 percent attacks:

• Bitcoin Gold, in the Year 2018: An attack was launched against Bitcoin Gold, a commodity that was initially founded on Bitcoin. This attack resulted in the loss of $18 million worth of Bitcoin Gold through cryptocurrency marketplaces.
• In 2019, there was a 51% attack on the cryptocurrency Ethereum Classic, which is based on the Ethereum blockchain. 
• An effective 51 percent attack may cause significant harm to a cryptocurrency’s credibility and reputation, in addition to measurable financial value loss. One or more attacks that use 51% of the network’s hashing power could cause the value of a cryptocurrency to go down.

How Is The 51% Attack Executed?

Although 51% of attacks are challenging to carry out in practice, the following outlines how they work in their most basic form:

The Ability To Mine Or Validate Anything Is Accumulated

Virtual currencies that run their own blockchain networks and employ the proof-of-work smart contract may be managed by amassing 51% of the overall cryptocurrency’s hashing or processing power. On the other hand, cryptocurrencies that run their blockchain networks using the proof-of-stake framework can be controlled by amassing 51% of the coin itself. For an attack to be successful 51% of the time, it is necessary to have 51% of the item in question.

Note: A miner or regulator would need a huge amount of computational power or a large amount of money invested in the cryptocurrency being attacked in order to pull off a 51% attack.

Irrespective of the sort of consensus mechanism being used, it is impossible to collect this amount of energy, whether it be in the form of computational resources or validator power. Possessing 51% of a virtual currency is financially impossible, as is attempting to regulate 51% of the mining equipment and reimburse for 51% of the power consumption of a huge cryptocurrency system.

Managing 51% of the mining equipment as well as reimbursing for 51% of the power consumption of a sizable cryptocurrency system has been both incredibly costly and operationally unviable. The control of a cryptographic network may remain decentralised thanks to the inherent restrictions that come with the technology.

The Miner or Validator seizes control of the 51% attack.

If a person or group can start taking command of more than 51% of a system by any means, they may use their mining or validation ability to prevent legal activities from going through while allowing illegitimate activities to pass through. The miner or regulator can also have the ability to rearrange the blocks that are included on the blockchain that is used by the cryptocurrency.

Changes Have Been Made To The Crypto Network

If a miner or regulator controls 51% of the assets used by a cryptocurrency network, they can reroute operations, double-spend cash, and eventually steal cryptocurrency from the system. The miner or validator hasn’t stolen anything until they’ve traded their illegally earned cryptocurrency winnings for the next cryptocurrency.

As a Concluding Remark

Regular traders are not required to fear excessively regarding 51% attacks if they mainly engage in the biggest digital currencies, which frequently have much more robust blockchain networks. This is due to the fact that major cryptocurrencies, such as Bitcoin, account for the vast majority of the market or exchanges like bitcoin circuit. It is simply not possible to launch a 51% attack on the cryptocurrencies with the highest market values and increase adoption because the costs and resources required to do so are far too high. A 51% assault on a large cryptocurrency is something that could only be considered seriously by state-sponsored criminal gangs.

You may reduce the likelihood of having to cope with a 51 percent attack by minimising the proportion of your cryptocurrency holdings that are invested in less well-established but potentially dangerous cryptocurrencies. Understanding what a 51% attack is and how it works is a wonderful first step in reducing the possibility that your cryptocurrency will ever be subject to one.