The cryptocurrency exchange giant, Binance, has finally been hacked. But with mass adoption still the priority for many of us invested in the crypto space — both financially and philosophically — it is becoming more and more important that we are able to understand and communicate some basic truths about blockchain so that when we are questioned by friends and family we can confidently articulate the truth of the matter.
When the public hears “Crypto Exchange Hacked” they immediately associate that with an inherent failure or risk within Bitcoin or other cryptocurrencies. It is a similar sort of problem that crypto has when people attempt to peddle the myth that the only use for crypto assets is illegal activity — as though cash has a pure record.
So let’s get two things straight,
- What is a hack?
- Is Bitcoin hackable?
What is a Hack?
When an exchange gets hacked what has happened is that the exchange’s infrastructure has been compromised and taken advantage of. This is never a good thing, to be sure, but it is important to be clear what has been compromised and what exactly was ‘hacked’. For example, with the recent Binance Hack, independent malicious actors spent months gaining access to individual users accounts via many varied points of weakness in their personal security. Additionally, they found ways to compromised Binance’s APIs. through this combination they executed the removal of 7074 bitcoins totaling ~$41m USD. However, both of these things have nothing to do with Bitcoin. Bitcoin was not hacked, a centralised custodial service provider was.
It would be the same if a bank was hacked. If a hacker could steal client’s passwords and manipulate online banking APIs before they moved $41m out from the bank and into their pockets nobody would say that the US Dollar was hacked.
Whether it is Mt. Gox, Cryptopia, Bitfinex or Binance what is happening when there is a hack is that a centralised, trusted authority’s security models and practices have been bested by a third party. Because these giants are holding other people’s assets (i.e. they are trusted custodians) once the hackers are inside and past security, they then have access to funds.
Is Bitcoin Unhackable?
Bitcoin is a digital currency that does not physically exist as such but is rather a shared, global ledger that documents transactions between participants. It is not a company, or a bank or an exchange. In this sense it cannot be hacked.
The Bitcoin ledger remains highly secure due to its Proof of Work consensus algorithm which basically demands and incredibly high energy cost to confirm transactions are valid. Once transactions have been confirmed and settled on the blockchain it is nearly impossible to go back and edit them because the entire global network has agreed to their legitimacy and spent large amounts of energy to secure them.
Attacking the legitimacy of the ledger by manipulating the Proof of Work consensus algorithm is possible, but very, very difficult, expensive and risky. Such an attack has never been carried out successfully in all of Bitcoin’s 10+ years of existence. The most obvious (perhaps the only) way to “hack” Bitcoin would be to acquire more than 51% of hashing power of the Bitcoin hash rate (computing energy used to secure the network), which is currently at about 46 million terahashes. Once this enormous amount of hashing power is in agreement and targets the Bitcoin blockchain it can theoretically then manipulate the transaction history as well as future transactions, but the more manipulation the more difficult the task.
The bottom line is that Bitcoin was not and has not been hacked. Bitcoin remains secure because of it’s decentralised, global network effect and nature. Centrlaised trusted custodial service provides can be, have been and will continue to be hacked. The ethos of Bitcoin is that people will own their own private keys and thus have ownership over their funds, their value.