Just How Secure is Blockchain Technology?
by Gregory Rocco
Blockchain technology is best known for both its security and immutability. In a blockchain ledger, blocks act as a living record of transactional flow and are secured through heavily incentivized consensus mechanisms. These consensus mechanisms are incentivized due to the distributed nature of the system and anonymous participants. Its underpinnings have been around for several years but it wasn’t until the creation of bitcoin that the first example of a successful implementation of a decentralized ledger was deployed in a secure fashion.
Bitcoin and Asymmetrical Cryptography
The Bitcoin network relies on what’s called “public key cryptography,” where both a “public key” and a “private key” are used to transact. A public key is the equivalent of your address, or rather, where you will receive cryptocurrency. In the case of bitcoin, when transacting, ownership rights of the bitcoin in question are signed off on by using a private key to do so.
For example, let’s say Alice wants to send Bob one bitcoin. Alice will create a transaction to be sent to Bob’s address, and in doing so, she is giving Bob the right to transfer that bitcoin. Both her transaction and Bob’s future transactions involve proving ownership using their keys. The public key acts as ownership proof on the network while the private key exists to sign off on transactions.
It is important to remember that private keys should never be given out, as it is what keeps your funds secure. Giving away your private key is the equivalent of giving away access to your bank account — you wouldn’t want it falling into anyone’s hands. However, a public key must be given to any party wishing to send funds to your wallet. A recommended security practice to protect one’s privacy is to never reuse public keys and to instead generate a new one for each transaction.
The public key is derived from the private key, and both are required in the movement of value on the network. After the transaction is sent, it is then relayed to the network and included in the next block on the blockchain to eventually be mined and secured on the ledger.
How Bitcoin is Secured Through Proof of Work
Consensus algorithms are a key component in distributed computing systems, and “proof of work” is the consensus algorithm the bitcoin network utilizes to both confirm transactions and add blocks. By that point, proof of work was also the first consensus mechanism to be deployed in a blockchain network.
In a proof of work system, individuals are pointing computing power to the network to solve a cryptographic equation and find what’s called a “hash.” Once solved, they have the chance to mine the next block, which contains a bundle of recent transactions that have yet to be secured on the ledger. As the network grows, so does the difficulty of solving that equation which leads to more computational power being added to secure the network.
Related to security, each new block hash contains the hash of the previous block which allows the longest chain to continue to grow. Once mined, transactions in the block are now considered to be confirmed.
The mining incentive to secure bitcoin’s blockchain is what’s called a “block reward.” The first miner to solve the required computation correctly and mine the next block is rewarded with a fixed amount of bitcoin which “halves” after a certain period. This is to ensure that miners are paid for adding their power to secure the network, and to keep bitcoin with a controlled supply. The current block reward is 12.5 bitcoin.
Imagine the case of a horse race occurring on average every ten minutes. The gun fires, and the first horse to cross the finish line earns the bitcoin and transaction fees associated with each block. The race then resets in perpetuity. The process itself is like finding a needle in a haystack — with enough computational power and generation, the answer is bound to be found eventually. The block reward is what keeps miners incentivized to continually try to find a solution to the puzzle and lend their computational power to the network.
Over time, the bitcoin network has experienced an exponential amount of hashrate being added at the cost of the centralization of mining. Over 75 percent of the mining is currently controlled by five large pools, each containing both large organizations and individual miners contributing their hashing power. All of this has effectively led to a form of delegated proof of work in which hashing power is delegated to larger pools due to efficiency rather than individual miners each competing for the block reward at the expense of their computing power.
Although this has added plenty of hashing power to the network and allowed individuals to be granted fractions of a block reward otherwise unobtainable, this does leave the network open to threats due to its concentration. However, incentive mechanisms inherent to the blockchain makes the risk of attacking the network not worth the reward.
Attacking the Network
Distributed ledgers aren’t necessarily free from malicious actors, but incentive systems exist within the networks to keep participants in line. There are a few ways in which disruptors could potentially wreak havoc on the network, with one of the major attack vector being a 51 percent attack.
A 51 percent attack is where an entity controlling a majority of the network hashrate can take control by preventing new transactions from confirming and modifying the history of the ledger. However, the cost of acquiring the computational power necessary to assume that level of control is immense, considering the current hashing power of the network.
Malicious actors are also incentivized to stay in-line due to market effects. If users of the bitcoin network knew that the network was compromised, a mass exodus would occur, dramatically dropping the price of bitcoin which would effectively leave the miners with less than what they spent to control the majority of the hashing power. Information leading to this conclusion is public, as network hashrate distribution can be found with a simple search.
Other Consensus Models
Bitcoin’s proof of work isn’t the only consensus algorithm that secures distributed networks. Another popular type of consensus mechanism is proof of stake, which involves individuals “staking” their cryptocurrency to potentially be selected to create the next block. In this system, blocks aren’t “mined” through hashing power, but “forged” or “created” by participants. This eliminates the arms-race involved in proof of work systems to secure the most computational power, and is a greener consensus mechanism due to reduced emissions.
An argument in favor of a proof of stake consensus mechanism relates to a deeper conversation, specifically on ethics. As we’re tapping into a financial goldmine and securing a network, how can we best protect that which is inherent and has been slowly drained in the background due to increased energy consumption? Methods of liberating those in financial need should also best-serve their surroundings as well.
The likelihood of an individual being selected to create the next block is directly dependent on how much of that cryptocurrency they own. Although the consensus could be affected by a smaller group of large holders due to the increased likelihood of them being selected, they are incentivized to act efficiently, as the value of their holdings are proportional to the success of the network. In the future, Ethereum will be switching to a proof of stake system to replace their existing proof of work consensus.
Some platforms even use a combination of both proof of work and staking to both have a form of block reward to secure the network and using the latter for network maintenance. One example of hybrid system is DASH where typical proof of work mining is deployed but nodes staking DASH participate in its governance.
New blockchain consensus mechanisms are being explored every day to bring higher levels of efficiency and security to distributed systems. Considering how far we’ve come from an original proof of work deployment in a short span of time, the innovation soon to come will be incredible.