A handful of cryptoassets has been attacked successfully over the past month. Hackers have exploited Verge, a small privacy-focused coin, twice, both times accelerating coin issuance and stealing coins worth millions of dollars. Ironically, Verge had introduced complexity into its protocol to address perceived weaknesses in Bitcoin’s security and decentralization model, but the hackers were able to exploit the new security features, forcing Verge’s team to attempt a patch. Complex systems fail in complex ways, and Verge is a classic example of added complexity increasing the potential for attacks.
While the Verge hack illustrates the hidden cost of complexity, other attackers have focused on blockchain assets that are sub-scale. A well-known hack against cryptoassets is a 51% attack, in which a nefarious actor dominates the network’s mining power and, effectively, spends the same coins twice. Because of its scale, Bitcoin’s blockchain enjoys some measure of protection against this risk, as an attack would require billions of dollars in mining equipment and, if successful, would push the value of both the currency and the mining equipment into a downward spiral. Smaller cryptocurrencies using the same mining algorithms do not enjoy the same measure of protection. An attacker can target smaller networks without putting the value of their mining equipment at risk. Bitcoin Gold, a currency that forked from bitcoin and now is worth almost $800 million, seems to have suffered this fate, experiencing several 51% attacks during the past week.
Unsurprisingly, these attacks are increasing in frequency. Suffering from choppy price action and questions about the underlying value of cryptoassets, attackers seem to be looking for returns on capital in the absence of asset price appreciation. While the networks under attack haven’t paid much of a price thus far, market participants are unlikely to remain tolerant if the scale and frequency of these exploits increases.
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