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How Exploiting One Alt Coin Affects Others

By this point, everyone should already be at least somewhat familiar with the concept of the 51% attacks that can be done on proof of stake coins. To cut it short, it is a method of overpowering the main blockchain to create double spends (which is essentially the same thing as counterfeiting). What a lot of people do not consider, however, is how an attack on one coin affects others. That is what I want to look at here, and from the perspective of exchanges and purchases.

Exchanges

When someone sends funds to an exchange, the goal is to convert them in to another form to withdraw. Whether this is going from Bitcoin to an alt coin or alt coin to Bitcoin is irrelevant; it all works the same way. But consider what happens when someone ends up getting away with a double spend:

  • The person sends a deposit to the exchange
  • The exchange credits the account with the deposit
  • The user is able to convert that in to a different form of coin
  • The user can now withdraw those coins, which usually gets broadcast instantly
  • The user then sends the same coins again
  • The account is credited with the deposit again
  • The user can convert them to another coin and withdraw again

Hopefully you see what the issue is here: people can deposit the same coins more than once and then convert them to something else, followed by withdrawing them. This is essentially a way to create free money.

Its Effects

Now, one of the first things you would probably think of in terms of effects is that the person doing the double spend needs to dump their coins as fast as possible to get it all handled before the breach is found. This means that they are selling at the market buy price, which is going to likely tank it as a result. Some would argue that this is something we deal with on a regular basis anyways (from early adopters that dump and do not care how much profit they get, as long as they can get out quickly and with more than they started with), but when dealing with double spends, we are talking about a lot more than would normally be available to people.

The other big thing is that it lowers the amount of money the exchanges have, which has to come from somewhere. To help illustrate this a bit better, let us create a scenario with an exchange that only has two coins available: Bitcoin and Litecoin.

  • The exchange has 100 Bitcoin and 500 Litecoin available (deposited on it total among all the members)
  • Someone makes a deposit of 100 Litecoin and trades it for 20 Bitcoin, then withdraws it
  • The exchange now has 80 Bitcoin and 600 Litecoin
  • The same person double spends another 100 Litecoin deposit, and trades it for another 20 Bitcoin and withdraws it
  • The exchange now has 60 Bitcoin and 700 Litecoin… or so it thinks

In reality, the exchange now has 60 Bitcoin and 600 Litecoin due to the double spend. Assuming all of the Litecoin holders want to cash out, that is simply not possible; when there are only 600 in the exchange, how could they withdraw 700?

This is where things start to get more and more complicated, and is also why an attack on one coin, followed by sending coins to an exchange to withdraw after trading for another, is so problematic. It affects not just one coin type but any that are brought in with it, because as soon as the conversions and withdrawals are completed, people are going to be left without their money.

Why This is An Issue

All too often people use the reasoning that most alt coins are going to die off and therefore they are not important. When they make it on to an exchange like Cryptsy, however, they become more important to protect because every other coin on that exchange is at risk as well. While a lot of them can handle themselves pretty well, some simply can not. Adding a coin to the exchange right after it is released is a recipe for disaster, and we have seen multiple coins exploited in the past. Usually people end up just writing them off because they were “pump and dumps” or scam coins to begin with, but the simple fact is that each of those is destroying the legitimate coins too. The only solutions to keep this from happening over and over are to change the way the coins work (and move more towards the proof of stake model or something similar) or to alter them in some other way to help prevent the 51% attacks and double spends. As it is right now, while it has not happened on a very large scale yet, they are all at risk.

Exchanges


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