The blockchain technology is most exalted for its promise of decentralization and immutability. Many hold the position that the blockchain is an unalterable, unhackable, and unmanipulable digital ledger. However, as the ecosystem grows and the stakes increase, many are questioning whether it is indeed possible to fake a transaction on a blockchain.
To refresh our knowledge of how transactions are validated in a decentralized network, they are validated not by one centralized authority but by a consensus of nodes in the network. A private key is used to authorize every transaction, imprinting it with a nearly unforgeable digital signature. Once the transaction has been broadcast to the public ledger, the nodes in the network form a consensus on whether the transaction should be verified if the signature is valid and the sender address has enough funds for the transaction.
The Theoretical “Fake”: The 51% Attack
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.
While this is definitely manipulating history, it is not forgery in the typical sense, and for bigger networks like Ethereum or Bitcoin, such an attack would be economically irrational given the cost of mounting such an attack.
The Centralization Risk: Exchanges vs. Blockchains
Centralization comes with huge risks in the blockchain universe, as seen by recent funds lost due to centralized exchange fraud and scandals. The security of an exchange is completely different from the security of a blockchain. A centralized exchange records transactions on its internal database instead of the public blockchain directly, so it is entirely possible for the exchange to fake the internal balance sheet and cause the users to lose their assets. This is not a blockchain failure, but one of the centralized entities managing the user’s keys.
Smart Contract Vulnerabilities
It is also possible to have a transaction behave in a way that the original creator of the smart contract does not intend by exploiting vulnerabilities or bugs in the smart contract. In this case, the transaction would be technically valid since the code rules are obeyed, but the outcome would be fraudulent.
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.
