51% is all you need to destroy bitcoin

Some of you may have heard of the currency Bitcoin, a digital currency that is created by a network of computers.  These computers act as verifiers to ensure that the coin is mined correctly and that transactions are valid.

Because the task of mining a Bitcoin is computationally large, there are organizations called pools that group a team of miners together.  These miners of Bitcoins work together to generate new Bitcoins. Whe a coin is successfunlly generated by the pool, it is split amongst the miners, usually based on their computational efforts.

Recently one such pool, ghash.io is getting very close to collecting a majority of the miners.  This can be a problem because if a pool or a miner makes up 51% or more of the total computational power for mining and reviewing the transactions, they are able to do many things that normally would not be possible.

Bitcoin relays on trust. When you make a transaction, or mine a coin, it is verified by the network. If the majority of the network says that the transaction or coins are good, then it is accepted into the ledger.  If an agent has 51% of the network, they are always the majority, as a result, they can, at least in theory, accept and reject transactions as they please.  This means they can reject coins that are mined outside of the network, effectively mining all coins.  They could even rewrite history: if a transaction has happened, they can reverse the transaction at a later date.

If anyone reaches 51% they gain a lot of power, and there is no regulatory body to enforce that they will play nice.  This means that the Bitcoin can lose it’s value overnight, as people will not be able to trust doing transactions anymore.

Just food for thought for those people looking to do their own mining or dumping cash on investing.


Further reading:

The Block chain

51% attack

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