It's Now Cheaper to Bankrupt Crypto Networks

One of the arguments made for bitcoin’s security is the cost associated with a 51% hack attack on its network. To orchestrate such an attack, the hacker would need to make expensive investments into mining equipment to fork bitcoin into a new and workable chain. The associated costs have increased substantially in the last year as bitcoin’s network has grown due to a surge in its popularity, the argument goes. The same holds true for other, major cryptocurrencies that use a Proof of Work (PoW) algorithm, similar to that of bitcoin. But a new post indicates that the argument may not hold true for much longer.

Husam Abboud, a managing partner and co-founder at Brazil-based PDB Capital, has calculated that an average investment of $70 million is required to bankrupt Ethereum Classic (ETC), a cryptocurrency that is worth $1.5 billion as of this writing. In other words, this means that a hacker can double his or her profits by creating a separate fork that invalidates Ethereum Classic’s existing blockchain. According to Abboud, a 51% attack on Bitcoin Cash (BCH) and Bitcoin Gold would cost $2 million and $200,000 respectively. As of this writing, BCH was worth $16 billion while Bitcoin Gold had a total valuation of $711,000 in cryptocurrency markets. (See also: Are Large Mining Pools Bad For Cryptocurrencies?)

How Are The New Estimates Calculated?

Previous cost estimates for executing a 51% attack are added to the costs of owning a mining machine and electricity to arrive at the final figure. Abboud’s model, which is called the Rindex v2.0 model, assumes a leasing model instead of total ownership. The proliferation of forks, in which new cryptocurrencies that use the original’s algorithm are created, has popularized the leasing model. This means that machines that are already being used to mine one cryptocurrency can be multitasked to mine another using profits generated from the previous one. (See also: High Bitcoin Prices Boost Profits For Miners In China).

For example, Ethereum Classic uses the same mining algorithm – ETHASH – as Ethereum. But the latter’s mining network and market valuation are bigger. Even with a small percentage of Ethereum’s overall network hash, a miner can still make substantial profits and plow them into instituting a 51% attack on Ethereum Classic. Based on Abboud’s calculations, miners with a 2.5% share of Ethereum’s network (approximately $380,000 in profits per day based on a $2 billion valuation) can use their generated funds for a 51% attack on Ethereum Classic. As mentioned earlier, other cryptocurrencies which have been forked or share the same mining algorithm are also vulnerable to similar attacks from miners.

What Do These Calculations Mean For The Crypto Ecosystem?

The calculations are further proof of the inefficiencies inherent in the Proof of Work (PoW) algorithm, which relies on a supply of coins from miners to power a network. The algorithm has increasingly been criticized by experts and notable figures within the cryptocurrency ecosystem for several problems, from clogging of networks to governance problems. In fact, Ethereum is expected to move towards a Proof of Stake (PoS) algorithm that distributes rewards based on the number of coins held by a node, later this year. In addition to encouraging long-term investment into cryptocurrencies, the move towards PoS will help investors have a greater say in their future development direction.

Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns 0.01 bitcoin.

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