Proof-of-Work, 51% attacks & Long-tail Cryptos
This is the 4th time Vertcoin (VTC) is under a 51% attack in the past few months, causing its dwindling community to panic. For those unfamiliar with VTC, this coin was launched in the early days of the altcoin boom in 2014, in response to the production of ASICs. ASICs, short for application specific integrated circuits are basically special mining hardware created to mine cryptocurrency, especially Bitcoin. In the same way Litecoin changed its hashing algorithm to Scrypt (this ASIC-resistance has diminished over time), VTC did so to avoid ASIC miners. VTC was a serious development attempt in the early days, with a talented pool of developers dedicating time and effort to its codebase. VTC today can only be mined with a graphics card, allowing the coin to achieve a greater level of decentralization. While Bitcoin mining today requires a large amount of capital, economies of scale, and access to cheap electricity, anyone in the world no matter where, would be able to use an entry-level graphics card to mine VTC. Decentralization is a key feature of crypto, and that some believe that Bitcoin mining operations have become way too centralized.
What is a 51% attack?
In proof-of-work (PoW) systems such as Bitcoin, if a majority of the hashpower is controlled by honest actors, then the honest chain will always grow the fastest and outpace any competing chains created by dishonest actors. This also means that if one took control of >50% hashpower in any PoW systems, the dishonest actor could pick an arbitrary historical point in the blockchain and start to rewrite history. Once it outpaces the main chain, the new history becomes the “truth”. We call this “chain reorganization”. This would be a monumental failure for any PoW-based coin because it allows double-spends. Imagine a scenario where the dishonest node deposits 100000 VTC to an exchange, executes a sell trade and withdraws the proceeds (e.g. in Bitcoins), before proceeding to rewrite history as though he never sent it in the first place. The exchange would now be sitting on massive losses.
This bear market has taught new investors one thing: just as with any Cambrian explosion where thousands of cryptoassets are launched, each epoch sees a Permian mass extinction event which will wipe out most cryptoassets in a Darwinian fashion. At Circuit Capital, we believe that >95% of cryptoassets today be it (1) utility tokens, or (2) cryptocurrencies, will eventually approach the zero asymptote. The survivors however will see incredible, massive economic value accrue to it as the space continues to mature in a winners-take-most pareto distribution.
VTC isn’t the first cryptoasset to encounter 51% attacks. BTG, a fork of Bitcoin suffered a 51% attack in September resulting in a $18m loss. XVG, a privacy-focused coin with questionable implementation of privacy features has also been repeatedly attacked every few months. Small/micro-cap cryptoassets (long-tail) are especially susceptible. We expect an eventual delisting of such coins from reputable crypto-exchanges. This also calls into question, could actively avoiding ASIC resistance actually be bad for a PoW coin?
Evaluating cryptoassets is tricky because each and every one of them is unique. Bitcoin isn’t perfect unfortunately, and the world continues to experiment with consensus protocols. Could Bitcoin one day fail? Sure. Unfortunately for a lot of Bitcoin maximalists, the reality is that a complete failure is a non-zero probability. For PoW coins, there a couple of ways to assess and monitor overall security.
With an increasing number of PoW-based assets under risk from the bear market, we remain watchful of the rapid development among the PoW and mining community.
Will other consensus mechanisms like PoS or DAG-based blockchains ultimately prove to be superior, rendering vast mining operations obsolete overnight?
Again, mining operations going to a big fat zero is a non-zero probability.