Charlie Lee announced that Litecoin controls 98 percent of the hash rate for its “Scrypt” mining algorithm. This dominance is critical for the security of LTC. Meanwhile, other coins which have minority control over their algorithm, such as Bitcoin Cash and Bitcoin SV, remain at high risk of malicious attack.
On Aug. 12, Litecoin creator Charlie Lee announced that his coin had over 98 percent of the market share of its unique ASIC-dominated mining algorithm ‘Scrypt.’
Here’s the current state of Scrypt mining after the Litecoin halving.
Litecoin still dominates the Scrypt mining scene with 98.57% of all Scrypt hashrate pointed at mining Litecoin. 👍
— Charlie Lee [LTC⚡] (@SatoshiLite) August 12, 2019
Hash rate majority over Scrypt, or any mining algorithm, plays an important role in maintaining the security of the network against hostile mining attacks meant to pillage a cryptocurrency.
Hostile mining attacks
Game theory plays an important role in well-designed cryptocurrencies. Unlike its technological predecessors, crypto leverages economic incentives to ensure participants are honest and that networks are salient against bad actors. When these incentives are misaligned the system breaks.
One poorly understood aspect of proof-of-work cryptocurrencies is the importance of hash rate dominance within a particular mining algorithm. If a miner is able to achieve majority hash power (51 percent hash rate) in a particular coin, then there are several hostile attacks that they could perform on a network.
One obvious attack is rejecting blocks from everyone else, allowing a miner to take every block reward. Other more complex attacks include denying transactions and attempting to conduct double-spends, as described in an essay by renowned Bitcoin developer and evangelist Jimmy Song.
Another more exotic attack described by Ethereum co-founder Vitalik Buterin is described as “selfish mining,” where a miner with less than 25 percent or less of the network hash rate can coerce other miners into cartelization by manipulating how blocks are found.
For smaller coins these attacks are even easier because a large miner on a dominant coin can easily control more than 50 percent of a smaller coin’s hash power. For more information on the anatomy of 51% attacks read here.
Incentives usually align between network and miners
That said, even if a miner had majority control of a coin’s hash power, there are concrete reasons why they are still incentivized to behave honestly. Hostile miners take on lots of risk, as described in a highly cited essay by David Vorick, the co-founder of Sia and Obelisk.
Other stakeholders in a network can limit the damage done by a hostile miner. For example, in Bitcoin full node operators could reject blocks from hostile miners, says Vorick.
The value of the cryptocurrency the miner is attacking would also likely plummet, decreasing the long-term profitability of that miner’s highly specialized mining equipment (for ASICs). This is in addition to the reputational damage a miner would face.
As said by David Vorick:
“To put it simply, this attack really doesn’t make much sense from an economic perspective because there is simply not enough upside for the attacker.”
ASICs as bonds
In a sense, ASICs behave like a security bond between a miner and the cryptocurrency network they support. Assuming the coin has a dominant position for its mining algorithm, if a miner were to conduct an attack it would damage the value of the cryptocurrency they are mining. This would reduce the value of subsequent block rewards and as a result, reduce the long term revenues—and value—of that miner’s ASICs, assuming they couldn’t switch to another coin.
Proof-of-stake algorithms attempt to mimic this dynamic through the use of stake slashing, where stakers put down collateral in the form of more coins that can be redistributed.
In aggregate, the short-term revenue from double-spends, block reward hoarding, and transaction denial would need to outweigh both the risk of failure and the long-term damage to revenue.
Pillaging attacks on minority coins
That said, there are key circumstances where the economics actually encourage hostile attacks on a cryptocurrency—specifically in cases where a coin has the minority share of a particular mining algorithm.
When two or more cryptocurrencies use the same mining algorithm seldom do they have a similar proportion of the total hash rate. Bitcoin, for example, has a 90 percent dominance over SHA-256 while Bitcoin Cash, Bitcoin SV, and all other forks control less than 10 percent. Another drastic example is Zcash, which maintains a 98 percent share of Equihash while coins like Horizen (formerly Zen) and Hush control the remainder.
In these scenarios, it makes sense for a miner to switch from mining a dominant coin, such as Bitcoin, to a secondary coin, like Bitcoin Cash, to conduct an attack.
Hash rate privateers
The reasoning: there are fewer economic penalties for this behavior. As mentioned above, hostile attacks usually reduce long term miner revenues. When a miner attacks a minority coin the reduction in long term revenue may be negligible.
These attacks aren’t just a concern for ASICs but also for general purpose hardware. CPUs and GPUs have healthy secondary resale markets. Many coins are also designing their mining algorithms to compete for these devices. As a result, miners can attack and switch with impunity.
In these scenarios a miner can switch to a secondary coin and ransack the cryptocurrency. After flooding the market with illicit coins the miner can then return to safely mining the dominant coin while reaping a tidy profit.
Not just theory
These attacks aren’t just theoretical. Both Ethereum Classic and Zen (which rebranded to Horizen to mitigate reputational damage) suffered 51% attacks because of the phenomenon described above. Bitcoin Cash and Bitcoin SV also suffered similar attacks during their split and their ensuing hash war.
These considerations are important to keep in mind for those looking to hold cryptocurrency, especially altcoins, as investments. Evaluating whether a coin is at risk of mining attacks, or relatively safe like Litecoin, has meaningful implications for long term returns.
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