The 51% attack refers to an attack on the block chain network, deceiving the miners with a duplicate block chain which has more than 50% acceptance and spending the same bitcoins again.
To put it in simple words, a single miner or a pool of miners controlling more than 50 (say 51%) of the cryptocurrency network’s mining hash power, can attack the block chain network and reverse the transactions. Once they have more than 50% of hashing power they can take control of the cryptocurrency network and they could double spend the coins.
However, by controlling the majority of computing power on the network, a single miner or a pool of miners can interrupt the block chain integrity and can do a fraud. Not only that, they can monopolize and prevent other miners from creating new blocks.
Before we find out how does this work, let us understand few facts about these crypto currency networks −
The Cryptocurrency network is a distributed and public network. Anyone can join.
Everybody will have a copy of the block chain which holds the entire transactions of every bitcoin ever made, which are maintained in blocks. It is a peer to peer network without any central authority involved. These blocks are attached to each other with the hash value of each block, holding the chain together.
Every block is verified by the miners before it is added to their own block chain. A block becomes valid if it has at least 50% acceptance. Once a block has minimum 50% approval it can be added to each individual block chain increasing the length of block chain. In this case the other 50% of miners will not waste their time to verify the same block again. They will simply add the verified block to their block chains and move on to create and verify new blocks.
The network always recognizes the lengthiest block chain as the most verified and newest version of block chain.
The miners who have more hash power will verify the block and add to their block chains first. To verify a single block, the miners will get 12.5 bitcoins as reward. So, people try to verify blocks faster using more hash power to get that reward. This is a kind of competition about who wins first.
Once you understand the facts above, I will discuss how does the 51% attack works.
Let us say, I have more hashing power, above 50% hashing power when entire miners are put together, I will start creating block after block and create my own private block chain. Meanwhile I will spend the Bitcoins with me to buy a luxurious car, private jet or a house. I will announce my transactions on the public block chain and everybody will have a copy of that transactions.
However, I will not mention these transactions in my private block chain and go on creating blocks faster with my enormous hashing power and build my private block chain. Once I have my block chain ready (it should be longer than the available public block chain), I will make it public. Now because my block chain has more blocks, the network recognizes it as a valid block chain and people start adding their blocks to this new block chain.
As I have not mentioned my bitcoin transactions in my own block chain, they are shown as un spent on the new block chain. Now I can spend them again. This way I can double spend my bitcoins. Hope you understood the concept now.
Until the time this has really happened, people thought this is a hypothetical theory. There have been instances like Ghash.io, a mining pool has briefly exceeded 50% of total Bitcoin network’s computing power in 2014, and they have voluntarily reduced their share of network and slowed down.
In 2018, there has been a 51% attack on the Bitcoin Gold, where the attackers have stolen $18 million worth of Bitcoin Gold.