Quantum Computing Could Threat Blockchain, Crypto

Quantum computers have the potential to crack the most advanced cryptographic protocols, including those used for the blockchain protocols in operation today. That’s because quantum computers, which are based on the principles of quantum mechanics, can in theory complete certain computationally intensive operations that would take today’s classical computers an extraordinary amount of time.

A quantum computer works using quantum bits or qubits. Unlike traditional binary bits, which can only be 0 or 1, qubits can be a combination of 0 and 1 at the same time. This property of qubits, known as superposition, allows quantum computers to perform multiple calculations in parallel. Furthermore, a phenomenon known as entanglement allows two qubits to be connected in such a way that the state of one qubit affects the state of the other, regardless of the physical distance between them. This effect, combined with the superposition, allows quantum computers to perform certain calculations even faster.

But today’s quantum computers are finicky and of limited utility. They are susceptible to the slightest environmental interference, such as the Earth’s magnetic field, local radiation and even cosmic rays, which make the calculations performed by current quantum computers prone to error. Because of these technical and operational challenges, quantum computers are currently accessible to only a small handful of companies and researchers, and it could be a decade or more before quantum computers impact current cryptographic protocols.

However, recent research suggests that this tipping point may come sooner than expected. A June 2023 paper by IBM and UC Berkeley researchers showed that even noisy and error-prone quantum computers can provide utility beyond what is capable of today’s classical computers.

This potentially accelerated timeline could have far-reaching consequences, including for many cryptocurrencies and their underlying blockchain protocols, as cryptographic functions and the encryption standards they are based on could soon be vulnerable to quantum attacks.

For example, cryptocurrency miners using quantum computers may be able to mine cryptocurrency much faster than other miners. This could threaten the decentralization of many mining-based blockchain protocols. Quantum computers could also decrypt the private key from a public key, allowing bad actors to control and eventually steal other cryptocurrencies.

Quantum computers could therefore pose a significant threat to cryptocurrencies and blockchain technology. In response, some developers are already working on future-proofing their blockchain protocol by exploring ways to transfer the cryptography that currently secures the protocol to quantum-resistant cryptography.

Investors, users and regulators need to carefully consider the potential risks quantum computers pose to cryptocurrencies and blockchain technology more generally.

Stop mining cryptocurrencies

Many of the world’s most popular and widely used cryptocurrencies, including Bitcoin, rely on proof-of-workmining to protect the underlying blockchain protocol. A PoW blockchain protocol requires network participants known as miners to compete with each other to be the first to solve complex mathematical puzzles to validate new transactions on the blockchain. The winner of the mining competition is rewarded with cryptocurrency known as a block reward.

A quantum computer could eventually solve mining puzzles much faster than current generation mining devices, allowing those with access to quantum computers to accumulate mining rewards and control the transaction validation process by detecting most of the network computing power. This is known as a 51% attack. Researchers have suggested that 51% of bitcoin attacks by quantum computers may not be possible until 2028, however recent evidence indicates it could happen sooner.

Decryption and theft of private keys

Quantum computers capable of breaking modern cryptography can also allow bad actors to control and steal other people’s cryptocurrency. In particular, quantum computers in the future could ascertain cryptocurrency private keys from their corresponding public addresses, since private keys are encrypted using so-called digital signature schemes based on modern cryptographic protocols. This would be similar to a hacker gaining access to a victim’s email password based on their publicly available username or email address.

Researchers generally believe that this type of security threat to public blockchain protocols is more likely to be technologically feasible than a quantum attack on the cryptocurrency mining process due to fundamental differences in the algorithms that would be used to carry out the attacks.

Risks and potential consequences

The global market capitalization of cryptocurrencies is over $1.15 trillion. Cryptocurrencies are an ever-growing and integral part of the investment portfolios of both retail and institutional investors worldwide. While they pose no immediate threat, quantum computers could soon pose significant and material risks to this expanding and resilient resource class.

Therefore, there may be certain circumstances in which various entities, including asset managers and public companies, may wish to consider public disclosure of the impact quantum computers could have on cryptocurrency investments or investment strategies involving cryptocurrencies.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

About the author

Daniel Davis is partner and co-chair of Kattens Financial Markets and Regulation Practice.

Alexander Kim is an associate in the financial markets and regulatory practice of Kattens.

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