How Crypto Can Be Manipulated: Fake Identities in a Peer-to-Peer Model

Depending on who you ask, cryptocurrency is either a fantastic new era of financial regulation or a confusing mess of gobbledygook. The reality is that it’s both – and its peer-to-peer architecture represents a world-first in currency valuation and control.

Sybil attacks occur across all peer-based platforms. It describes the process of an attacker creating and orchestrating multiple fake identities: one example is an Amazon seller, creating fake accounts to fill his product with false reviews. From an outsider, these identities appear legitimate. Just as Amazon reviews depend on other legitimate users, Bitcoin depends on its nodes. But some people want to skip the queue of slow, hardware-demanding mining, searching for a mythical BTC-printing shortcut.

A sybil attack on Bitcoin could earn the attacker millions – but how much would they have to spend to pull it off?

How Proof of Work Works

Financial regulation is the skeleton of any currency. Real-world currencies are controlled, validated and overseen by singular, mammoth institutions such as banks. A bank will sit and evaluate the purchasing power of each coin, pulling various strings to keep the currency as high-value as feasible.

Without this tight fist on currency supply, cash value sinks like a stone – and we end up in awkward situations like hyperinflation.

Bitcoin and other cryptos are generated and controlled in a decentralized manner. This, for Bitcoin, is achieved via Proof of Work. A single Proof of Work (PoW) is generated when a high-intensity piece of data is produced. This is generated when a CPU and GPU tries to solve chunks of a highly complex puzzle. When a solution is reached, that CPU will add this new solved piece onto the current overall jigsaw – or blockchain.

The larger crypto market might be in dire straitsat the moment, but Bitcoin is still big business. Current valuations place 1 BTC at tens of thousands of dollars. When one block is added to the chain, a reward is paid to the miner that solved that block. The exact reward varies, thanks to the architecture of the chain. Block #1 rewarded the miner 50 BTC, and this halves every 210,000 blocks. For now, miners can expect a reward of 6.25 BTC per block.

So, blocks are worth a lot. That’s a 6-figure incentive to skip the hard work and reap the rewards. How do cryptocurrencies make absolutely sure that each block is legitimate?

How Nodes Stay in the Know

Let’s dig deeper into the process of block verification. The architecture of blockchain means that data is stored globally, across thousands of servers, and a network user needs to be able to see all the blockchain entries at any time.

This is handled by what’s called a ‘full node’. A full node is a computer which stores the entire hundred-gigabyte length of the blockchain. For Bitcoin, verification happens before a block is added and rewarded. When a block is claimed to be solved, full nodes will analyze the proposed new block, comparing and matching it with the ‘winning’ block. If there are any discrepancies, the block will be rejected.

Because full nodes verify legitimate Bitcoin blocks, they prop up some significant chunks of the Bitcoin architecture. This makes them a promising potential target.

How Sybil Attacks Work

A Sybil attack is nothing more than a person controlling multiple accounts, nodes or computers. The weakness of a decentralized verification process is that it is particularly susceptible to this type of attack. This is not to imply that this type of architecture is inferior in any way: many find decentralization a fairer and more transparent form of currency management than real-world banks. It’s just similar to how ballot stuffing could be used to undermine a democratic process.

Sybil attacks create and manifest their power by appearing as different identities, hence the name: Sybil was a 1973 book featuring a woman with a dissociative identity disorder. Each node must be visible as a different identity to avoid raising suspicions.

For cryptocurrency, a sybil attack would manifest as an attacker creating and controlling a majority of nodes. Called a 51% attack, the attackers would then be able to halt new transactions from being issued confirmations, allowing them to halt payments between users. Thanks to the fact that other computers refer back to full nodes, Sybil attacks can be used to scrape information about the IP address of a user connecting to the network. This would hugely compromise theanonymity of miners and users.

Attackers would also be able to reverse transactions that had been completed, meaning they could spend already-spent coins. This would not go down well with Bitcoin currency value.

Bitcoin’s Inherent Sybil Protection

One of bitcoin’s mining rules is that block creation must be proportional to the total processing power of the Proof of Work mechanism. This is why block volume halves every so often. The side effect of this is that you have to actually own the computer power involved in creating this new block. This means that – in order to conduct a 51% attack – attackers would have to buy, maintain and own over 51% of the Bitcoin network’s processing power.

Running and maintaining a full node would also be highly resource intensive. It’s not uncommon for full nodes on high-speed internet connections – the recommended way of running a full node – to use 200 GB of internet connection a month just for uploading it. Download usage is more or less an additional 20 GB a month, and around an additional 340 gigabytes the first time the node is started. A node also needs to be run continuously.

Compare this to the fact that – in 2019 – Bitcoin exceeded over 100,000 active nodes.  There is no technical way to fully prevent a Sybil attack, short of verifying each node with personally identifiable information. Though Bitcoin’s Proof of Work doesn’t technically guarantee against Sybil attacks, they make it highly impractical for an attacker to successfully carry out a Sybil attack. Nowadays, it would cost tens of millions to develop a network strong enough to carry out a 51% attack.

Ultimately, whilst mining Bitcoin is hardware intensive, a large scale Sybil attack would represent even more of a challenge. By undermining any sort of financial benefit from an attack, legitimate mining remains the easiest way of profiting off Bitcoin.