NEW YORK (InsideBitcoins) — Contrary to what many people in the bitcoin community will tell you, bitcoin is not completely immune from malicious attacks. Although concerns related to a possible 51% attack on the network are still discussed by bitcoin researchers on a regular basis, it’s becoming clear that a more legitimate threat at this point may come from an attacker who is hell-bent on destroying the network.
Hostile governments and fearful financial institutions are the two main organizations that could fall into this category, and the structure of incentives built into the bitcoin protocol would not matter much to someone who just wants to watch the world burn.
So, if a large, malicious government or other organization wanted to destroy bitcoin, what course of action could they take?
Harsh regulation and market manipulation
Although governments may not be able to regulate the bitcoin protocol, they can certainly do all they can to regulate everything built on top of or around the core technology. Some would say that this form of attack is already in place by certain governments around the world. Harsh regulations on bitcoin would be no means destroy it, but they could at least make the process of changing from bitcoins to fiat or vice versa a troubling proposition.
Of course, some countries may decide to simply throw people in jail if they’re caught transacting in bitcoin. These sorts of laws and regulations are already in place in some countries where foreign currencies, such as the relatively stable US dollar and euro, are banned. The large black markets for foreign currencies in countries where these sorts of bans take place should illustrate the impractical nature of such restrictions.
If the use of bitcoin is banned, it would also make sense for a government to prohibit bitcoin traffic on the Internet. Various VPN services and Tor make this another restriction that would be quite difficult to enforce. The Great Firewall of China hasn’t stopped that country from becoming the home of the largest number of Twitter users.
Governments could also attempt to manipulate the market and increase volatility after purchasing a large number of bitcoins. This could turn out to be a rather costly attack at this point, although governments also have the ability to manipulate the market through regulator and central bank announcements. For example, there was a time when any mention of bitcoin by a government official in China would cause a large swing in the bitcoin price.
Target large bitcoin mining operations
If regulators are unable to force changes to the bitcoin protocol, then they may decide to target the organizations that handle accounting for the bitcoin network. These accountants are, of course, the miners. There’s nothing to stop a government from forcing a local mining operation to censor certain transactions on the bitcoin network. In fact, self-censorship is already in place by at least one mining pool.
@Daniel_Plante MSC is winning just fine; other than Eligius no miners are blocking MSC in any way. Frankly this is a problem for ViaCoin.
— Peter Todd (@peterktodd) September 4, 2014
There are some issues with this form of attack on bitcoin. For one, mining is geographically distributed across many different jurisdictions. It would be unlikely for the United States, China, Iceland, Russia, and many other countries to all agree on which transactions should be censored on the network. Miners also have the option of simply packing up their hardware and moving to another country if the forced-censorship of bitcoin transactions begins to hurt the value of the bitcoins they are mining.
Build their own mining operations
The third course of attack on bitcoin for a government or financially-threatened entity is to create their own mining operation that controls 51% of the network hashrate. A government could decide to simply seize the equipment of large mining institutions in the local jurisdiction, or they may need to spend billions of dollars on building their own hardware. Once 51% of the network is owned, the entity would basically block all activity on the network and prevent anyone from using bitcoin for payments.
Bitcoin Foundation Chief Scientist Gavin Andresen has written about this issue on his blog, where he admitted that he is not quite paranoid enough to consider it a credible threat. However, he has proposed a solution for the attack.
It’s important to remember that this attack is not as simple as throwing a lot of money at building the hardware needed to attack the network. A malicious attacker would also need to continue to pay for maintenance and electricity for their mining hardware for the attack to continue over the long term. There is also the issue of the attack turning into a substantial waste of money when it could be subverted by switching bitcoin’s hashing algorithm away from the attacker’s SHA-256 ASIC devices.
As a final note, it should be understood that these attacks become more prohibitively expensive over time. As the bitcoin network continues to grow, a growing number of people have an incentive to protect it. It would have been rather trivial for a relatively large institution to break bitcoin in the early days when everyone was mining on their laptops, but we’re now looking at a digital currency that once had its total supply valued at over $10 billion. In other words, we may already be in the land of no return.
If you’d like to share some other possible attacks on the bitcoin network, feel free to post them in the comments.
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