Bitcoin Security

Bitcoin Security bitcoin security - Bitcoin Security

Is bitcoin secure? One of the most often asked questions about bitcoin security is whether or not the entire ecosystem is secure enough to withstand attacks from hackers — those people who set out to disrupt the bitcoin network in an attempt to spend their digital currency balance more than once.

The answer to that question goes way beyond a simple yes, and can sometimes lead to drowning in technical jargon. This chapter covers the basics, explaining whether and in what ways bitcoin is secure, and what is being done to increase the level of security as the bitcoin ecosystem grows larger.

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The Bitcoin Network: An Overview of How It Works

If the mainstream media were to be believed, the bitcoin network and protocol have been hacked several times in the past few years.

Nothing could be further from the truth, however. The bitcoin network itself has never been hacked successfully, nor is it ever likely to be hacked in the traditional sense.

Granted, several bitcoin users have lost coins over the course of the years, but none of that could be attributed to a flaw in the bitcoin network itself. Associated services built on top of the bitcoin network, such as exchanges and wallet providers, have become victims of poor security implementations.

Once these services were breached, affected users lost their coins. Again, it had nothing to do with a flaw in the bitcoin network itself, as a decentralized network such as bitcoin cannot be “hacked.”

What makes it secure

What makes the bitcoin network so secure that there is no threat from hackers to worry about? Let’s take a look:
✓ The bitcoin network is decentralized, and every individual user ensures there is no central point of failure to hack the bitcoin protocol.

Any individual user can become the victim of a hack, but that would have no impact on the bitcoin network.

Even if all users in the United States got hacked at the exact same moment, the bitcoin network would remain intact and carry on undisturbed.

✓ The bitcoin network uses strong cryptography to guarantee the integrity and chronological order of the blockchain and all of its associated transactions.

This level of cryptography can be hacked in theory, but it would take the combined processing powers of all supercomputers in existence today an unfathomable amount of years (a number with more than 15 digits, and we and our editor just don’t know the right word for that number.

Perhaps it could just be described as a quantum leap in computing power) to have even the slightest chance at breaching the bitcoin network itself.

✓ Every individual bitcoin wallet address is protected by a private key, which needs to be provided whenever an outgoing transaction is broadcasted to the network.

Users who keep bitcoin wallet software on their computer or mobile device are the sole owners of that private key, and unless their own device becomes compromised, that key cannot be discovered by anyone else in the world.

✓ The generation of new bitcoins, called mining (see HERE for more on mining), operates using a distributed consensus system that confirms (or rejects) transactions broadcasted to the bitcoin network through complex computational algorithms.

Dedicated hardware is required to mine bitcoin successfully, and the current total amount of hardware generating additional bitcoins is still growing monthly.

Plus, this is where decentralization plays a key role as well, as there are bitcoin miners all over the world. There is no option for a government to shut off the generation of new bitcoins altogether because there is no central point of failure.

For a far more detailed explanation of the bitcoin network, check out the white paper drafted by creator Satoshi Nakamoto at https://bitcoin.org/bitcoin.pdf.

Individual bitcoin users are not the only driving force in terms of securing the bitcoin network. Over the past few years, dedicated bitcoin nodes have been added to the network with the sole purpose of receiving and broadcasting new bitcoin transactions to other users and nodes on the network.

Doing so takes the entire decentralized aspect of bitcoin to a new level.

Every bitcoin node is a device — such as a computer, mobile device, or even small devices such as a Raspberry Pi 2 — that hosts the entire bitcoin blockchain since the genesis block was created in 2009. The genesis block was the first block of data on the bitcoin network, which awarded Satoshi Nakamoto with 50 bitcoins.

Ever since that time, bitcoin users have been able to generate additional bitcoins and broadcast bitcoin transactions
throughout the world.

A bitcoin node has the bitcoin client software installed but does not receive and transfer coins on its own accord, unless the node owner decides differently.

These nodes are simply additional sources where the entire blockchain is stored to verify the integrity, neutrality, and chronological order of all bitcoin transactions between the genesis block and right now. (See here for more on the blockchain.)

Running a bitcoin node does not reward the owner with additional bitcoins. The sole purpose of a bitcoin node is to strengthen the network.

At the time of writing, there were more than 6,000 bitcoin nodes in operation, with more being added all the time. To find out more about the location of specific bitcoin nodes, visit the Bitnodes website at https://getaddr.bitnodes.io/.

Defending Bitcoin from Hackers

As mentioned earlier, the bitcoin network is a secure technology that is unhackable by even the strongest computers or most skilled hackers in the world.

Cryptography — a technique for secure communication in the presence of third parties, using long sequences of unguessable secret codes — plays an important role in bitcoin’s security. Properly implemented, cryptography can make a system extremely secure.

In recent years, there has been a lot of confusion in mainstream media regarding how bitcoin really works. Contrary to popular belief, Bitcoin is not run by a single person or authority, and there is no such thing as the “the boss of bitcoin” or “the CEO of bitcoin.”

Every individual user plays an integral role in the bitcoin network, and all users are equal. And this makes it less of a juicy target for hackers.

Trying to hack the bitcoin network would be like trying to hack the Internet. There is simply no way to do it. Both bitcoin and the Internet are decentralized, with no central point of failure. Take down one part, and the network routes around the problem and continues on. The same principle applies to bitcoin.

Having no central point of failure means there is no on/off button for the bitcoin network itself. The bitcoin network spans the entire globe across all continents, and it is impossible to shut down every computer or other device connected to the bitcoin network at the same time.

Not even governments could do it. Government officials may have the power to ban bitcoin usage in certain countries, but that doesn’t mean the bitcoin network is not operational in those parts of the world.

Furthermore, there is no incentive to hack the bitcoin network either, because it wouldn’t provide any financial benefit to hackers. All the previous network blocks include BTC that have already been distributed to other bitcoin users, and there is no chance of changing that fact.

Any new coins being generated, even if the bitcoin network were to be hacked (which is all but impossible), would not go to the hackers directly either.

The bitcoin network is a technological marvel in its own right, as it provides levels of financial security we have never seen before. Despite all of that promise, there is much about the bitcoin network — and the blockchain that powers it — that we do not fully understand, and that is cause for concern.

Fully comprehending the bitcoin network and its technological power will take many more years, which is why it is so important to keep growing the bitcoin community. Everyone has a different view on things and how they could be improved or potentially exploited. Preventing attacks is always better than fixing things after a successful attack.

Hacking bitcoin services

Of course, there is always the possibility of bitcoin platforms being hacked at some point. The reason for this is simple: despite being a decentralized concept, most bitcoin services or platforms (as opposed to the whole bitcoin network itself) do rely on one or more centralized servers.

By providing hackers with a target in the form of one central point of failure, shutting down a bitcoin service is far easier than attacking the bitcoin network itself. Even if a bitcoin service is breached by a hacker, there is no impact on the bitcoin network itself, as these things are not linked to each other.

Bitcoin services use the blockchain to check and handle transactions, but they are not hooked into the blockchain itself. Some people assume that if a bitcoin exchange is hacked, their connection to the blockchain makes the bitcoin network itself vulnerable as well.

This is not the case, as bitcoin exchanges are services built on top of the blockchain, albeit in a centralized manner.

In fact, no direct connection exists between the bitcoin network and any bitcoin service in existence today. The only connections between users and the blockchain come from Bitcoin wallets, which are in a way layered on top of the blockchain itself as well.

Direct interaction and alteration of the bitcoin blockchain are impossible for individual users, which is why an individual user getting hacked does nothing to disrupt the bitcoin network at all.

The same principle applies to bitcoin services being hacked, as they are a layer on top of the bitcoin network without having any direct effect on the way the network works.

All bitcoin services do is broadcast certain types of transactions to the bitcoin network, but if those transactions never get relayed, the bitcoin network will continue working as before.

At its core, the bitcoin network is unaffected by anything taking place outside of its own direct reach. Only if the bitcoin network were breached and altered by 51 percent or more would there be a problem.

Given the current computational processing power securing the network, obtaining 51 percent of that amount is next to impossible for any individual or government.

On top of that, hacking bitcoin services is far more lucrative than targeting the bitcoin network itself; bitcoin exchanges, for example, store a lot of customer funds in bitcoin value, which makes it appealing for hackers to try and steal a portion of that money.

Over the course of the years, many bitcoin exchanges have fallen victim to these hacks, due to poorly implemented security measures.

No matter how many bitcoin services and platforms get hacked, those situations have no effect on the blockchain itself. So long as there is at least one user running bitcoin software on any type of supported device, the blockchain will carry on and do its thing.

And every day, more and more devices are running bitcoin client software to help secure the bitcoin network even more.

Watching Out for a 51 Percent Attack

One of the very few things that could do irreparable harm to the bitcoin network is the so‐called 51 percent attack. To put this in simple terms (and I like simple terms as much as you do), a 51 percent attack means that a miner or mining pool owns 51 percent of the entire bitcoin mining capacity.

This could lead to a bitcoin fork, creating a secondary blockchain, which would deem any transaction on the “old” blockchain invalid.

Theorycrafting the 51 percent attack

The 51 percent attack is very unlikely to ever take place in the world of bitcoin, though it is not impossible. Once an attacker gained hold of 51 percent (or more) of the bitcoin network’s computing power, he could exclude and modify the ordering of transactions for as long as he was in control of the entire bitcoin blockchain.

A 51 percent attack could have some dire consequences for the bitcoin network as a whole. For example, the person, group, or entity in charge of 51 percent of the bitcoin network would have the power to reverse transactions being sent while they were in control.

Double‐spending transactions — the ability to spend the same amount of bitcoin twice — would become a real issue at that time, and it would be impossible to tell which transfer was legit and which wasn’t (more on this later in this chapter).

On top of that, the person or people in charge could prevent any and all transactions from getting network confirmations.

Additionally, miners would be unable to mine any valid blocks on the network, with all earnings going to the people in charge if they so desired. This is the major reason why bitcoin industry experts want to make sure a 51 percent attack can never take place under any circumstance, even though it is all but impossible to prevent.

But there are some extra points to make about this theoretical situation. One of the things the attacker(s) wouldn’t be able to do is reverse bitcoin transactions from other users because they have no control over that. Only their own transactions would be affected — yet that alone could do some major damage to the bitcoin network as a whole.

Understanding theorycrafting

Theorycraft refers to any strategy that exists only in theory and is never actually put into action.

In the bitcoin world, this means coming up with potential flaws in the network before they have been exploited. It is always a good practice to be safe rather than sorry, and bitcoin developers are working around the clock to ensure the network is safe from harm.

As technology keeps evolving, developers will have to stay on their toes and take new advancements in technology to heart. Security is an ever‐evolving creature, and if proper attention isn’t paid, a lot of bad things could happen.

Luckily, the bitcoin developers are keeping an eye on things for us.

Preventing transactions from other users would not be possible either, as the attacker(s) would only have the power to prevent those transactions from getting any confirmations on the network.

Confirmations can only occur through the generation of new blocks on the bitcoin network, and the attack(s) could shut that down completely.

Furthermore, creating coins out of thin air, or even changing the number of bitcoins rewarded per block, are two major things that can’t be altered either.

Despite owning 51 percent of the bitcoin network’s computational power, there are only so many things an attacker can affect on their own. Sending coins they never had access to is not one of those possibilities either.

Most security experts do not expect to see a voluntary 51 percent attack taking place any time soon. There is no real incentive to do so, other than having the option to double‐spend coins owned by the attack(s) in charge. Without having any bitcoins in their wallet, pulling off such a successful attack would offer no monetary gain whatsoever.

How likely is a 51 percent attack?

Pulling off a 51 percent attack as an individual bitcoin miner or hacker would be nearly impossible. However, in recent years, some of the world’s largest bitcoin mining pools have come close to owning 50 percent or more of the network’s computational power.

Due to time changes to the affected pool, these attacks have been thwarted successfully in the past.

Ghash.io, which was one of the world’s largest bitcoin mining pools a few years ago, has shown signs of an involuntary 51 percent attack on multiple occasions.

The last time Ghash.io crossed the 51 percent threshold was in July 2014, forcing the bitcoin community to open a dialogue with the pool owners and the entire bitcoin mining community to come to a solution.

Temporary measures were introduced, including a pledge by Ghash.io to never exceed 29.99 percent of the entire bitcoin hash rate (the total computational power pointed to the bitcoin network by the miners) from that point forward.

Although that amount is still fairly high for one mining pool to control, it could also be seen as a buffer against anyone trying to maliciously execute a 51 percent attack on the network.

This was the second time in less than a year Ghash.io was close to — or surpassed — the 51 percent mark of the entire bitcoin network’s computational power. In January 2014, the mining pool had come close to owning 51 percent of the network as well — which resulted in the suspension of new account registrations for a longer period of time.

At the time of writing, the bitcoin network’s computation network is divided across multiple mining pools. The largest mining pool at this time is China’s F2pool, which holds 24 percent of the network, followed by AntPool (16 percent), BTCChina Pool (13 percent), and BW.com (10 percent).

For the most up‐to‐date information showing actual data, check out KaikFor at https://kaiko.com/mining.

All the aforementioned mining pools are operated by Chinese pool operators, making China the country that owns more than half of the bitcoin network’s computation power.

After the 2014 debacle, Ghash.io disappeared into obscurity as far as bitcoin mining is concerned. The overarching company, CEX.io, decided to halt all cloud mining services at the end of 2014 due to the low bitcoin price, which made it unprofitable to operate mining equipment pointed to Ghash.io.

Should the cloud mining part of CEX.io be turned on again in the future, it will be interesting to see whether or not Ghash.io can reclaim some of its former glory.

Double‐Spending

One major point of concern associated with bitcoin is whether or not a hacker can double‐spend his or her coins. In theory, a double-spend could occur, and in fact, it has happened.

However, the risk factor associated with such an event taking place is nearly zero, because the odds are in favor of the bitcoin user or merchant. But what is a double‐spend attack exactly, and how would a user be able to pull it off?

Theorycrafting the bitcoin double‐spend attack

As the name suggests, a bitcoin double‐spend attack would technically be speaking, allow one user to spend all the coins in their balance twice.

For example, if someone was holding 5 bitcoin in their wallet, they would theoretically be able to spend 10 bitcoin during the double‐spend scenario.

However, the bitcoin network has various rules in place to prevent double‐spends, making them a very rare occurrence.

Every bitcoin transaction broadcasted to the blockchain is verified by all individual nodes on the network. Every bitcoin transaction consists of an input, which is the same as the last unspent output associated with the coin balance in question. Every unspent output can only be spent once, which should make double‐spending bitcoin impossible.

The race attack

Bitcoin double‐spending attacks are very rare these days, yet there is always a chance someone might become a victim of a double‐spend.

For convenience, merchants and traders are leaning toward accepting bitcoin payments based on 0 confirmations — which leaves the door open for the same amount of coins to be double‐spent by an attacker. As the transaction gains more valid network confirmations, the chances of a double‐spend are shrinking exponentially.

Merchants can take several precautions to protect themselves from double‐spend attacks. First and foremost, working with a bitcoin payment processor that negotiates the risk on behalf of the merchant is a step in the right direction.

Most bitcoin payment processors will protect the merchant from financial harm, even when a double‐spend is taking place.

Additionally, merchants and individual users can modify their bitcoin software client settings to not accept incoming connections, and only connect to trusted network nodes. Doing so all but nullifies the risk of a double‐spend attack, even though waiting for at least six network confirmations is still advised at this stage.

Various types of double‐spend attacks may be made against the bitcoin network. The one just discussed is called the race attack, which has a window of operation so long as the transaction has received no network confirmations.

Waiting for confirmations is the best remedy to ensure that a transaction is legitimate, even though this is not a feasible option for every merchant.

The Finney attack

Another popular form of double‐spending attack is called the Finney attack, which requires the participation of a bitcoin miner once a block has been mined on the network.

Precautions taken by a merchant cannot prevent the Finney attack from being executed successfully, yet a specific sequence of events must occur before the attack can be deemed a success.

Overall, this method is fairly costly and can only occur every so often, making it less of a threat to merchants and service providers.

Both the Finney attack and the race attack can be combined to execute a Vector76 attack. In theory, this type of attack allows double‐ spending bitcoins even while having one network confirmation on the transaction.

A successful attack would cost the attacker one block — an attacker needs to sacrifice the block by not broadcasting it to the whole network and instead relaying that block to the attacked node on the hope that they could collect the product/service before the network realized that it was an attack.

The brute force attack

Last but not least, there are the brute force attack and the >50 percent attack, both of which require an enormous amount of the bitcoin network’s computational power. Neither of these types of attacks is likely at this stage, as the attacker would need to control a substantial amount of the entire bitcoin network’s mining power.

The brute force attack works as follows:

1. The attacker submits to the merchant/network a transaction that pays the merchant, while privately mining a
blockchain fork in which a double‐spending transaction is included instead.

2. After waiting for n confirmations, the merchant sends the product.

3. If the attacker happens to find more than n blocks at this point, he releases his fork and regains his coins; otherwise, he can try to continue extending his fork with the hope of being able to catch up with the network. If he never manages to do this, the attack fails and the payment to the merchant will go through.

The probability of success is a function of the attacker’s hash rate (as a proportion of the total network hash rate) and the number of confirmations the merchant waits for. For example, if the attacker controls 10 percent of the network hash rate but the merchant waits for 6 confirmations, the success probability is on the order of 0.1 percent.

As described in a previous section, the >50 percent attack, on the other hand, will only succeed if the attacker controls more than half of the network hash rate.

Because the attacker can generate blocks faster than the rest of the network, he can simply persevere with his private fork until it becomes longer than the branch built by the honest network, from whatever disadvantage. No amount of transaction confirmations can prevent this attack.

The biggest threat for merchants and bitcoin service providers is a >50 percent attack, as that would indirectly make a brute force attack a guaranteed success as well. Given the current amount of computational power pointed at the bitcoin network, it seems very unlikely such an attack will ever be pulled off successfully.

One of the biggest issues with the bitcoin network is that there are too many centralized services. Nearly every bitcoin exchange and most Bitcoin mining pools are centralized services. If a bitcoin exchange gets hacked, it will not affect the blockchain itself, nor open the door to double‐spend attacks.

But when a large mining pool gets hacked, the story could become quite different. Luckily for everyone involved, currently there is no bitcoin mining pool controlling half of the network. The largest mining pool owns about 25 percent of the entire network’s computational power.

However, even that percentage is sufficient to pull off a “brute force attack” in order to double‐spend bitcoins, should an attacker decide to do so.

 

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