The 51% attack is treated as a doomsday scenario in the decentralized finance world of blockchain. Powered by distributed ledger technology, the blockchain is designed to be secure and immutable, but the consensus mechanisms that govern it (Proof of Stake (PoS) and Proof of Work(PoW)) require independent participation of the majority. So what happens when a malicious actor or group manages to become a majority in a network? We analyze the possible consequences below:
What is a 51% Attack?
When a single actor or group gains control of more than 50% of a network’s nodes, they can game the consensus mechanism to favor their actions and dictate the truth. When this is done maliciously to exploit other investors, it is called a 51% attack.
The Immediate Impact: Double-Spending
While it is not easily feasible to simply write a fake transaction onto the blockchain and expect it to be confirmed by the network, it is theoretically possible for someone or a group to gain access to more than 50% of a network node and determine the consensus of whether the transaction should be verified or not. This can be used to verify a fake transaction or reverse a transaction while keeping the goods or services obtained with it. This kind of attack is known as the 51% attack.
Censorship and Network Paralysis
The 51% attack can also be used to attack adversaries by censoring their transactions. This is done by refusing to validate any of their transactions, thus rendering their funds unusable. They can also decide to block all transactions on the network to create a “denial-of-service” state for the entire network. This stops all economic activity and renders the blockchain useless for users.
What an Attacker Cannot Do
While a 51% attack is certainly powerful, it still comes with limitations on what the attacker can do. The attacker cannot simply reach into a user’s wallet without private keys, as personal wallets are separated from the public ledger. The attacker also cannot create coins out of thin air unless they follow the network’s protocols. This means they can’t change the consensus rules as well.
Long-Term Consequences
The potential long term consequences of such an attack include loss of trust in the project, desertion of nodes, market volatility, exchanges delisting the coins, and hard forks.
Disclaimer: BFM Times acts as a source of information for knowledge purposes and does not claim to be a financial advisor. Kindly consult your financial advisor before investing.
