Observations from BSV: Why Bitcoin Isn't Afraid of 51% Attacks

Author: HSL

Source: https://mp.weixin.qq.com/s/jM1g4xO6R6pIIDBzVW6bOg

Recently, several KOL have claimed that as Bitcoin’s block rewards continue to halve, miners’ rewards will diminish. If the price of Bitcoin doesn’t double accordingly, it could be argued that the security model of Bitcoin might be at risk.

The Proof of Work (PoW) mechanism operates optimally when block rewards are sufficient, as miners tend to cooperate and adhere to Bitcoin’s transaction rules, which align with their self-interest.

However, when block rewards become too scarce (without a corresponding increase in price), miners might resort to attacking the network to turn a profit. So they propose altering the Bitcoin block reward halving mechanism to cease halving at an appropriate point to prevent miners from attacking the network.

This reasoning is typical nerd behavior.

Nevertheless, the market has repeatedly demonstrated that inadequate miner rewards do not necessarily threaten Bitcoin’s security.

The operational history of BCH (Bitcoin Cash) and BSV (Bitcoin SV) provides compelling evidence.

BTC (Bitcoin), BCH, and BSV all share the same SHA256 mining algorithm. Yet, BCH and BSV have significantly lower prices than BTC. As a result, miners who work on these networks are often seen as operating with reduced block rewards, akin to the hypothetical scenario mentioned earlier.

At present, BCH’s hash rate is less than 1% of BTC’s, and BSV’s hash rate is roughly one-thousandth of BTC’s.

It could be argued that BCH is a mirror of BTC after undergoing numerous halving cycles, with block rewards now accounting for just 1% — equivalent to 0.0625 BTC after six halving cycles (6.25/2⁶=0.0977).

However, BCH remains secure, demonstrating that Bitcoin’s system security doesn’t rely on inflationary block rewards.

BSV has experienced 51% attack incidents, even with block reorganizations extending to 500 blocks. But here’s the crucial point: Bitcoin’s PoW security model isn’t fundamentally troubled by 51% attacks, and BSV has weathered several such attacks while continuing normal operations.

The potential damage inflicted by miners initiating 51% attacks on the Bitcoin network (applicable to BTC, BCH, and BSV alike) primarily involves two facets:

1. Transactions made during the attack don’t receive confirmations.

The security of Bitcoin transactions is probabilistic — the more confirmations a transaction has, the more secure it becomes because reversing a block (i.e., a 51% attack) incurs a cost. The more blocks reversed, the higher the cost. Beyond a certain point, it becomes financially impractical to reverse blocks.

When mining rewards are too low, and there is minimal mining participation due to idle SHA256 miners, it becomes cost-effective to launch a 51% attack. This is why BSV has suffered multiple 51% attacks because there are too few SHA256 miners engaged in legitimate BCH mining. With just a few rented miners, a 51% attack can be executed.

However, a 51% attack doesn’t result in the theft of users’ coins, and miners cannot create counterfeit coins. It merely delays the confirmation of users’ transactions. Once the attack ceases, users’ transactions can be confirmed.

In practice, BSV has weathered several rounds of 51% attacks without instances of miners stealing users’ coins or creating counterfeit BSV coins.

2. 51% attacks can facilitate double-spending attacks against exchanges and similar platforms.

Cryptocurrency exchanges typically operate on the principle that when a user deposits Bitcoin, they receive credited funds after a certain number of confirmations (Binance accepts 1 confirmation). Once the deposit reaches a sufficient confirmation count (Binance accepts 2 confirmation), users can trade their BTC.

During a 51% attack, an attacker who deposits a substantial amount of BTC into an exchange can swiftly convert it into another cryptocurrency (e.g., ETH) as soon as the deposit is credited (usually after a few confirmations). The attacker then initiates a 51% attack from the block preceding their deposit, mining several consecutive blocks (e.g., 7). This creates a longer chain than the previous six-block chain, leading miners to adopt the longer chain, which contains the attacker’s transaction instead of their original deposit.

As a result, the attacker’s initial deposit vanishes, and the exchange loses the ETH converted from the BTC.

This is a double-spending attack, and its primary victim is the exchange. However, it’s essential to note that many exchanges have implemented robust safeguards against double-spending, such as Know Your Customer (KYC) requirements. Attempting a double-spending attack on such exchanges is likely to result in legal repercussions.

Double-spending attacks are currently more focused on cross-chain bridges. This explains why most bridges do not extensively support PoW chains, as they are susceptible to 51% attacks. In contrast, PoS mechanisms offer deterministic block confirmations after a set number of blocks, making transaction reversals difficult.

Even though BSV has experienced attacks, its security system remains intact, with damage primarily limited to specific exchanges.

Moreover, from a technical perspective, preventing 51% attacks is relatively straightforward. Introducing a dynamic checkpoint to the blockchain can suffice.

A checkpoint is a hash value that includes data from the current block and all previous blocks. Blocks with checkpoints are impervious to reorganization.

In Satoshi Nakamoto’s initial Bitcoin release, a checkpoint appeared every 500 blocks. Consequently, Bitcoin cannot undergo reorganizations beyond 500 blocks. It can only be reorganized by up to 500 blocks, and no further.

This checkpoint technology, which has been proven secure, is employed in contemporary block confirmation models like PoS.

Those asserting that Bitcoin needs to exceed its 21 million supply cap might have ulterior motives.