Never say never. Ethereum Classic, a spin-off from the original Ethereum network, is still recoiling from the impact of its "51-Percent Attack", an assault upon its blockchain infrastructure that blockchain supporters have claimed could never happen. Known for its apparent hack-proof nature, blockchain updates are supposed to be immune from compromise, since so many independent entities must concur on changes to each block. There seems to be one exception to this rule - a 51-Percent Attack.
Shockwaves went through the industry three days back, when Coinbase, the largest U.S. crypto exchange, halted trading of Ethereum Classic (ETC), citing that it had found "deep reorganizations" within the Ethereum Classic Blockchain, which indicated that over $500,000 of transactions had been paid twice. We have been led to believe that such a "hack" was not possible, but insiders quickly asserted that, if someone were able to gain more that 50% control of the network, they would have the power to conduct such transactions and falsify others.
Few details were released over the past two days, but Anthony Lusardi, U.S. director of the Ethereum Classic Cooperative, admitted in a phone interview that, "It did happen, everything Coinbase published is accurate." The cooperative funds much of the development in the Ethereum Classic network and also noted that the system "remains under attack by some of the so-called miners whose servers support the underlying network operations."
When the news broke on Tuesday, headlines suggested that hackers were "able to wrest control of more than 50 percent of Ethereum Classic's network, and therefore were able to dominate decisions about what did and didn't belong on the digital coin's blockchain". As odd as that last sentence may sound, blockchain experts said that this kind of 51-percent attack is "an anomaly that is extremely rare for cryptocurrencies, but represents one of the biggest threats to the technology's success."
Is this event the first time that a 51-percent attack has occurred? There were actually three such attacks last year. Litecoin, Bitcoin Gold, and Zencash were the victims, but the problem has usually been one reserved for smaller systems. It had been thought that larger programs were insulated from these "takeovers", since it would be "prohibitively expensive to take over more than half of a gigantic distributed system."
Ethereum Classic is not a small system. It is ranked 18th in market capitalization among its other crypto brethren, sporting a valuation above $500 million. Investors have not lost confidence in ETC. After a 10% plunge and small recovery, the damage stands at roughly 7.5%. Coinbase may have halted trading, but other exchanges have yet to follow suit. Kyle Samani, managing partner of crypto hedge fund Multicoin Capital, said:
I'm surprised that ETC is not down 50 percent or more. The most probable explanation is that the biggest holders store their assets off exchange.
It has also come to light that the development team might be in disarray. According to a Bloomberg report:
The incident comes several weeks after the main development team supporting Ethereum Classic disbanded amid a lack of funding. In a Medium post yesterday, developer Donald McIntyre, who used to work for the shuttered group, called the attack "a significant setback" but said a mining algorithm change could help protect the network in the future.
We now know that a blockchain network is not infallible. One insider confirmed that:
Broadly, the Ethereum Classic fiasco demonstrates how difficult it is to build a reliable public network. It also exposes the vulnerability of less popular crypto assets. Turns out that not all blockchains are immutable.