A study released in July 2018 by the Bank of Canada (BoC) concludes the dreaded “double spending” attack on public blockchains is an “unrealistic” outcome.
Blockchain Technology Scrutinized
The research study, titled “Incentive Compatibility on the Blockchain,” examines incentive rewards for maintaining a distributed ledger and models the behavior of a “cheating” participant who tampers ownership records for their own benefit. The research is valid only for Proof-of-Work protocol blockchains, such as Bitcoin and Ethereum.
Researchers noted that blockchain technology primarily creates a system that both guards and maintains itself, acknowledging Satoshi Nakamoto’s white paper in creating a trustless system.
The BoC paper points out that Nakamoto was the first person, or group of persons, to recognize the implication of running a blockchain system without rewards and solving the concerns by introducing Bitcoin.
The paper ascertains that system participants, or miners, are rewarded with digital tokens in turn for their computing power and defines each “payment unit” as a cryptocurrency, which derives value from demand and incentive benefits.
Interestingly, Initial Coin Offerings (ICOs) are highlighted as “tokens akin to shares in crowd investments,” further indicating that cryptocurrency investors can consider airdrops as a type of “additional share.”
51 Percent Attacks Explored
The paper noted that blockchains are resistant to theft as their inherent mechanism requires a mandatory private key to control and transfer assets.
However, a dishonest group or individual may hypothetically acquire 51 percent or more of the total hash rate and alter the blockchain, subsequently misleading participants to trust the altered blockchain.
The paper refers to this as a “51 percent attack,” adding:
“Confirmation lags, in theory, lose their power in controlling double-spending incentives. The dishonest miner creates an arrival rate that is larger than those of the other honest miners combined and, thus, can always cheat by double spending.”
They also determined that such dishonest miners must have “deep pockets” to successfully conduct a mining attack.
Additionally, the difficulty of launching a 51 percent attack increases as a blockchain has more participants and the deceptive miner has more substantial computational power against other users to diligently maintain a shared ledger.
The BoK study concluded that such invasion tends to be “unrealistic,” and holds limited economic incentive for miners to execute.
Concerns Remain High
Despite the authority’s conclusion, these types of attacks have plagued the cryptocurrency ecosystem since inception.
In May 2018, Bitcoin Gold suffered a double-spend attack with hackers stealing over $17.5 million worth of the forked cryptocurrency. In its defense, the BTG foundation claimed that exchanges were compromised instead of individuals.
As reported by CryptoSlate, privacy cryptocurrency Verge faced a double-spend attack on May 23, 2018, after nefarious characters stole over 35 million XVG on the protocol’s Scrypt and lyra2re algorithms.
Meanwhile, a study by consultancy firm Bain & Company echoed BoC’s research conclusions, stating distributed ledger technology “has the potential to revolutionize transaction banking.”