A View from Tom Simonite
Bitcoin Slump Shows the $8 Billion Cryptocurrency Lacks Mature Infrastructure
The technology underpinning Bitcoin has flaws that threaten to undermine the currency’s value.
The cryptocurrency Bitcoin has earned the backing or approval of major online retailers, tech investors, and regulators. But the rapid slump in the value of the currency over the weekend is a reminder that it is quickly outgrowing the technical infrastructure on which it operates.
The crash began last Friday, when the largest exchange for swapping bitcoins for conventional currency, Mt Gox, abruptly ceased operations, freezing the bitcoin accounts of all its customers. Today it emerged that the Japan-based company did so after realizing that it had failed to properly account for a known flaw in the Bitcoin protocol.
Quartz has a good explainer of the quirk, known as transaction malleability. In short, it means that people could fraudulently claim that they hadn’t received bitcoins from Mt Gox, compelling the company to give them a second payout.
Bitcoin enthusiasts are currently debating how much blame Mt Gox deserves for the slump in bitcoin value. A statement by the company calls transaction malleability “A bug in the bitcoin software.” But Greg Maxwell, one of the “core developers” who maintains the Bitcoin protocol, told Cryptocoins News that the problem was known since 2011 and Mt Gox could have worked around it.
No one comes out of this looking very good. Mt Gox looks to have been negligent, using internal technology incapable of accurately accounting for trades in its system. Meanwhile, the Bitcoin protocol has an undesirable problem that core developers acknowledge but aren’t about to fix soon.
Most worryingly, given the effect this low-priority bug has caused over the weekend, Maxwell says there are far worse issues than transaction malleability still lurking:
“It’s never been a particularly large concern. This wouldn’t make the top ten list of dangers in the Bitcoin technology.”
If the value of Bitcoin continues to grow, some people will be very motivated to find and exploit those dangers. We might be due further spectacular crashes due to Bitcoin companies like Mt Gox discovering their infrastructure is unable to provide the reliability and security expected of financial companies.