A well-known cryptocurrency may have suffered a confidence-breaking attack

The exchange and wallet firm Coinbase said it had detected a so-called “chain reorganization” in which nearly $500,000 worth of ethereum classic was spent twice.
An Ethereum ATM in Hong Kong.
An Ethereum ATM in Hong Kong.Kin Cheung / AP file

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/ Source: CNBC.com
By Arjun Kharpal, CNBC

A major cryptocurrency exchange said Monday that it had suspended movement of widely known cryptocurrency token ethereum classic after it detected a potential attack on the digital coin’s underlying technology.

The exchange and wallet firm Coinbase said it had detected a so-called “chain reorganization” in which nearly $500,000 worth of ethereum classic was spent twice — an anomaly that is extremely rare for cryptocurrencies, but represents one of the biggest threats to the technology’s success.

It could have been the result of what is known as a 51 percent attack, exposing a potential flaw in the cryptocurrency’s underlying technology known as the blockchain.

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In essence, Coinbase is saying that a malicious party may have been able to wrest control of more than 50 percent of ethereum classic’s network, and therefore was able to dominate decisions about what did and didn’t belong on the digital coin’s blockchain — the digital ledger that depends on a widely distributed consensus of users to record the asset’s history.

In theory, the records on a blockchain cannot be altered because enough disparate parties are incentivized to maintain an accurate accounting of who owns what. But a 51 percent attack can change that calculus, allowing someone to falsify transactions and spend the same holding more than once, fundamentally damaging the usefulness of a digital payment system — and people’s trust in it.

Ethereum, the cryptocurrency without “classic” in its name, is the world’s second-largest digital token, with a market cap of more than $15 billion, according to CoinMarketCap.

The team behind ethereum classic said Coinbase did not try to connect with it and it’s still an “ongoing process.” In a separate Twitter post, the team said it was not trying to downplay the events but there is more work to be done to uncover what happened.

“Facts are facts and as the situation develops we’ll soon get a full picture of what actually took place,” the ethereum classic Twitter account tweeted.

Like bitcoin, ethereum is based on blockchain technology, in which computers compete against each other to solve complex math problems that in turn creates a distributed, secure and transparent system that can have a variety of applications.

Proponents of blockchain technology often talk up the security of the network, but a 51 percent attack is one of the flaws. They are currently quite rare but have occurred in some instances, particularly with smaller cryptocurrencies. Last year, litecoin cash and zencash both suffered 51 percent attacks. The size of a cryptocurrency’s network is thought to therefore be a defense: it becomes prohibitively expensive to take over more than half of a gigantic distributed system.

As of Tuesday morning, ethereum classic had a market capitalization of more than $500 million. That pales in comparison to bitcoin’s nearly $70 billion market cap, but still means the token ranks in the top 20 cryptocurrencies measured by CoinMarketCap.