For as long as we’ve been handling paper currency, we’ve been wary of counterfeit. We now know how to differentiate between real and fake currency by scanning it for identifying characteristics.
How do you tell the difference when the currency in question doesn’t physically exist? Well, most experts agree that you may never need to do so.
How would counterfeiting cryptocurrency work in theory?
Ben Fung, Scott Hendry and Warren E. Weber, employees of the Bank of Canada, wrote a paper titled Canadian Bank Notes and Dominion Notes: Lessons for Digital Currencies in 2017.
Initially, they commended digital currencies for having many characteristics of a suitable medium of exchange. However, they arbitrarily decided that it was possible to counterfeit cryptocurrency.
Their reasoning for this conclusion was that fiat currency had been counterfeited in the past. Given this history, it was more likely than not for cryptocurrency to receive the same treatment.
However, computer hackers and cryptocurrency experts have, for years, tried and failed to create counterfeits.
In theory, counterfeiting cryptocurrency would mean changing the code on your copy of the blockchain to say you have more money than you do.
It’s easy to see why this wouldn’t work. Cryptocurrency uses a decentralised network to keep track of transactions, with several thousands of users on the network.
Assuming you had the computing power, you could change the code on a few versions of the blockchain, but a majority of the users wouldn’t agree that your version is the truth. Hence, your chain will be erased.
Also read: Cryptocurrency: Difference between a Hard fork and Soft fork
Other illicit ways of duplicating money
Double-spending is a familiar topic to all those investing in cryptocurrency. Usually, the protocol dictates that the network consider the longest version of a given blockchain to be the truth.
Any malicious miner who has 51% or more of the network’s computational power can add blocks to their version of the chain faster than the rest of the network, forcing them to accept the corrupt chain as the truth.
The malicious miner does not store any record of his previous transactions on the corrupted chain. Therefore, when the network switches over to his chain, he regains his money as there is no record of him ever spending it. Hence, he will have both the product he bought and the cash he spent.
However, the attacker will need to have more computational power than the rest of the network combined. As a result, such attacks are sporadic.
Another way to cheat the system is by taking advantage of structural weaknesses.
When cryptocurrency undergoes a hard fork, an entirely new blockchain is created. During this period, there is instability, price fluctuations, and reduced peer-to-peer interaction.
A corrupt miner would need to convince trading platforms and wallet providers that their blockchain is the right one to make a profit. Users would not know which version to trust, leading to chaos and economic uncertainty that could be taken advantage of by a corrupt miner.
This, however, has more to do with the efficiency of wallet providers and trading platforms than the blockchain itself. Such an attack is unlikely to happen if they can verify that they deal with the right counterparty.
All in all, it is borderline impossible to duplicate cryptocurrency.
Also read: 5 risks you should know when investing in cryptocurrency