Understanding Canada’s Marijuana Market, 51% Attacks

Q: Vin, there was a big story in The Washington Post about the strength of Canada’s underground marijuana market. I thought legalizing marijuana would eliminate the black market. What gives?

A: You’re right. One of the goals behind legalizing marijuana is to eliminate the underground – and potentially unsafe – market for it. And as a general rule, people are willing to pay a premium for legal, regulated products. We’ve seen it in the tobacco, alcohol and casino industries. Are there still underground aspects of those industries? Yes. But they’re just a tiny fraction of the overall market, so it doesn’t set off any alarms.

But as The Washington Post story you cited notes, the underground marijuana market is still thriving in Canada.

In a national poll Ipsos conducted for Global News a month after legalization, more than a third of Canadian cannabis users said they were still buying from their regular dealers and hadn’t even tried the legal system. Five illegal sellers in Quebec told The Washington Post their sales are slightly up.

So why haven’t Canadians turned to the legal market en masse like everyone expected? There are two reasons, actually.

The first is simply a function of time. The legal recreational marijuana market is extremely new in Canada. It just opened up in October. People have been buying marijuana from their own sources for decades. It’s going to take time for consumer behavior to change. But as generations of Canadians grow up under a legal marijuana regime, buying pot from government dispensaries will become the norm.

The second reason behind the continuing strength of the underground market is that Canada has done a terrible job of incentivizing customers to switch. I’ll let the great Canadian Tommy Chong explain.

Like when they legalized alcohol, the government took control of the monopoly and you could only buy booze from the government, and the government is trying to do the same thing with pot. They want to make it so that they’re the only supplier and it’s not going to work that way. So what Canada has done now, legally, they’ve kept the underground market alive and vibrant, because people still go to their dealer to get the best weed and the quickest weed.

Essentially, the government is selling substandard marijuana. And the existing market doesn’t want to pay a premium for bad product. So it’s sticking with its existing supply.

This will change over time. The product at government dispensaries will improve. And when it does, you’ll see the underground marijuana market in Canada fade away.

+ Early Investing Senior Managing Editor Vin Narayanan

Q: What is a 51% attack, and how dangerous is it for crypto?

A: A 51% attack takes place when a hostile party gains control of 51% of the mining power in a proof-of-work (PoW) cryptocurrency.

Once the bad actors control a majority of the network, they can effectively steal coins from others. When this happens, it’s called a “double-spend” attack.

Smaller cryptocurrencies can find themselves vulnerable to this type of attack (I’ll explain why I’m not worried about a 51% attack on large coins like bitcoin farther down).

For example, the most recent 51% attack was launched against Ethereum Classic (not to be confused with the real Ethereum network). Think of ethereum classic as the bitcoin cash of Ethereum. It’s a small crypto with almost no active developers and no real applications being run on it.

Cointelegraph published a nice, lengthy explainer piece on this recent attack:

The controlling CPU power will allow an attacker to create a separate chain from any previous block in the blockchain. Given that it has the majority of computing power, its new chain will eventually overtake the accepted chain by the network, thereby defining a new transaction history.

In this new chain, the attackers are able to double-spend virtual currency, meaning that the funds that have already been spent on the network’s chain could be spent again on the attackers’ chain.

So that’s how 51% attacks work. Now let’s answer the second part of your question: How dangerous are these types of attacks for crypto?

My answer is that 51% attacks are something to keep an eye on, especially if you own any smaller PoW coins.

But even for smaller coins, there are thousands of developers and exchanges working on ways to counter these attacks. And not all coins use PoW. There are fascinating new cryptocurrencies using new methods such as proof of stake and the directed acyclic graph, which avoid PoW altogether. They are not vulnerable to these types of attacks.

And as I mentioned, these types of attacks don’t represent a credible threat to large established coins like bitcoin. Bitcoin’s network is large and decentralized, and the mining community is always on guard against the possibility. For anyone to gain 51% control of the massive bitcoin network would be a herculean feat. It would cost billions of dollars to start. And even if someone somehow managed to gain such control of the network, they would be mining a ton of bitcoin and would be incentivized for the network to succeed.

Importantly, these attacks are possible only because of the decentralization of PoW cryptos. And decentralization is a critical feature for any crypto project.

So these attacks are certainly something to be aware of. But they’re nothing to fret over. We’re witnessing the birth of decentralized money. Of course, there will be bumps along the road. Fortunately, the crypto community is dedicated to overcoming them. And I’m confident we will.

+ Early Investing Co-Founder Adam Sharp