Hackers compromised the cryptocurrency Bitcoin Gold—a lesser known offshoot of the original Bitcoin—this month, using superior computing power to falsify the currency’s ledger and swindle at least $18 million from online exchanges.
The hacking incident, which was reported in a blog post earlier this month, is significant because it shows how a so-called 51% percent attack, which poses an existential threat to any Bitcoin-like currency, is not just a theoretical concern.
The threat is known as a “51% attack” because it stems from a malicious actor obtaining more than half of the mining power on a cryptocurrency network.
This dominant level of computer power makes it possible to manipulate the blockchain ledger on which transactions are recorded, and to spend the same digital coins more than once. As an analogy, it’s as if a fraudster got access to the clearing records of a stock exchange and falsified a series of share transfers.
This is basically what happened to Bitcoin Gold. According to the website Bitcoinist, the records of a digital wallet show hackers made a series of fraudulent deposits in which the money never ended up with the recipient exchange:
“The attacker sends a particular number of BTG tokens to an exchange, trades them for another coin and makes a withdrawal. The hacker then returns those same coins in his/her wallet, hence the double-spending problem. Thus, the attacker can spend and hold the same coins at the same time. Looking at the image above, if all 76 transactions were indeed part of the hack, then the hacker has stolen about $18 million based on the current BTG price.”
The Bitcoin Gold network still appears vulnerable to further such attacks. The hacker has yet to strike again, however, possibly because further attacks could trigger a massive sell-off as Bitcoin Gold holders lose faith in the integrity of the network.
The price of Bitcoin Gold fell slightly on news of the attack but so far there has been no sign of panic selling.
On Tuesday morning, a Bitcoin Gold developer acknowledged the ongoing risk in a blog post, and added there are plans to introduce a software update known as a “hard fork” that will decentralize the mining power on the network. (The blog post doesn’t state if the hard fork will restore the coins swindled from the exchanges).
As Quartz notes, the crisis at Bitcoin Gold represents the “nightmare scenario” for any cryptocurrency, and could theoretically happen to numerous other currency networks.
While the threat has existed for years, the chances of it materializing appeared to diminish as more and more people joined cryptocurrency networks—which in theory makes it harder to obtain control of over half the network. But the rise of massive mining conglomerates that deploy specialized computer equipment has seen a growing centralization of mining in recent years.
For now, there appears to be no imminent threat of a 51% attack on Bitcoin itself—in large part because of the size of the network—but other smaller networks could be more exposed.