Today, Bitcoin's Doomsday Scenario Arrived

There is only way to hack the entire Bitcoin network, which has continued to hum along in the face of numerous Bitcoin business failures.

It involves a series of group of Bitcoin miners taking control of 51% of the Bitcoin’s processing power, thus giving them the power to confirm transactions that don’t exist. Miners are simply computers that unscramble the encrypted series of numbers attached to every Bitcoin transaction. There is profit in numbers, and many miners have formed large pools to extract the maximum amount of profit for their work.

As a completely unregulated global currency made out of computer code, the only thing that has prevented the 51% threshold from being reached has been a form of mutually assured destruction: As soon as the 51% figure is reached, the price of Bitcoin will tank, leaving the digital junta little time to make much of a profit.

Today, mining pool GHash’s share of the Bitcoin network ticked 51%:

Prices briefly sank 2% as word spread that the 51% level had been achieved. The crisis was momentarily resolved after a member of GHash agreed to remove some of its resources from the pool.

But there is now debate raging in Bitcoin world about what to do next. One commentator who wished to remain anonymous told BI, “This is not Bitcoin anymore, it’s centralized GHashcoin….They are killing what is a big part of Bitcoins value.”

Two Cornell computer scientists posted a note to HackingDistributed confirming that, indeed, this is a doomsday scenario:

Is this really Armageddon? Yes, it is. GHash is in a position to exercise complete control over which transactions appear on the blockchain and which miners reap mining rewards. They could keep 100% of the mining profits to themselves if they so chose. Bitcoin is currently an expensive distributed database under the control of a single entity, albeit one whose maintenance requires constantly burning energy — worst of all worlds.

Jeff Garzik, one of Bitcoin’s core developers, was slightly more sanguine, Tweeting that the total share of processing power owned mattered less than the leadership at the top of that share.

The two Cornell researchers, Ittay Eyal, and Emin Gün Sirer, propose creating a “hard fork” on the Bitcoin network, a set-aside part of Bitcoin’s transaction ledger that would sacrifice some Bitcoin attributes in the name of preventing another similar attack. Others have proposed creating a peer-to-peer network of mining nodes which, instead of being able to access the entire blockchain, only target specified branches.

There is a third way, the Eyal and Sirer say, which seems to describe the current situation:

…We can carry on as if nothing of importance happened. GHash will be on their best behaviour for the next few weeks, and Bitcoin will limp along. What will bring the actual demise of Bitcoin is the subject of a future blog post, but this is by no means the end.

But it doesn’t look good.

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