Popular digital currency Bitcoin lost around 20 percent of its value Feb. 10 in the wake of an announcement by popular exchange Mt. Gox that it was suspending withdrawals until it could resolve a flaw in the underlying technology. A separate statement from the Bitcoin Foundation contended that the flaw was already well-documented, and some experts questioned the motives of Mt. Gox's announcement. Nonetheless, the incident underscored the volatility of the emerging currency and and highlighted the need for careful software design as Bitcoin seeks to establish mainstream credibility.
According to Mt. Gox, unusual activity in certain bitcoin wallets prompted the company to take a closer look at the way transactions were carried out. Due to a bug known as "transaction malleability," in which a transaction can be modified during a short window after it occurs, someone could take advantage of the Bitcoin network to make it seem as if a transaction did not occur and effectively send the same bitcoins multiple times. Mt. Gox noted that the problem was an underlying flaw that affected all Bitcoin services, as well as other cryptocurrencies using the same transaction method, not just its own exchange.
"We have discussed this solution with the Bitcoin core developers and will allow Bitcoin withdrawals again once it has been approved and standardized," the company noted. "In the meantime, exchanges and wallet services – and any service sending coins directly to third parties – should be extremely careful with anyone claiming their transaction did not go through."
In the wake of the announcement, bitcoin continued to lose value after sliding in trading at the end of the previous week, CNBC reported. While bitcoin was trading around $850 for most of the previous week, its value fell to $680 on Friday and again to $538 on Monday, when Mt. Gox published its announcement. Experts noted that the rapid fluctuation in price due to such errors could damage the currency's credibility as it seeks to become more mainstream.
Others suggested that the credibility of Mt. Gox might be more questionable. Mt. Gox is the oldest Bitcoin exchange and still accounts for a large percentage of overall Bitcoin trades, although its market share has slipped in recent months in the midst of a variety of problems. Garrick Hileman, an economic historian at the London School of Economics, told CNBC that Mt. Gox's decision to highlight the problem now could be a delaying tactic as the exchange deals with other internal complications, either technological or financial.
Mt. Gox acknowledged that the problem of transaction malleability had been previously known but "largely ignored." However, while Mt. Gox has taken the opportunity to highlight the issue, Bitcoin's core developers downplayed the suggestion that Bitcoin itself is at fault. Jeff Garzik, a Bitcoin core developer who works for payment processor BitPay, explained that Bitcoin exchanges should be able to work around transaction malleability through their own internal controls and suggested that an emergency update to the software was unlikely.
"First and foremost, bitcoin is not broken," he told MarketWatch. "There is no fundamental flaw in bitcoin."
In a statement on the Bitcoin Foundation website, developer Gavin Andresen expressed similar sentiments, explaining that any problems with transaction malleability Mt. Gox was having could be attributed to the exchange's own "unpreparedness" for the issue. He explained that transaction malleability has been known about since 2011, and any company working with Bitcoin should have a way to validate transactions built into its own software.
"The Bitcoin core development team has worked to limit transaction malleability," Andresen wrote. "There is broad agreement in the community that this needs to be eliminated. Finding the best and most responsible solution will take time. In the meantime, users of the reference implementation do not need to be concerned. Transactions are always tracked properly by the Bitcoin-Qt/bitcoind software."
He added that Bitcoin is still a young currency and is still being worked out. However, for companies looking to work with Bitcoin in some way, it is critical to follow best practices to work around known issues. Andresen stressed that the Foundation is willing to work with companies to improve their software and avoid issues like transaction malleability.
While the software error could be damaging to the credibility of Bitcoin as a whole and can certainly be tied to the currency's precipitous drop, the long-term effect may be more one for developers looking to implement Bitcoin into their own software such as bitcoin wallets. Taking time to work around existing issues and check for errors with thorough source code analysis and code review will be essential for delivering a viable bitcoin processing tool and avoiding the public outcry surrounding services like Mt. Gox. At the same time, the issue more broadly shows the dangers of hyping a good for which the worth is tied to properly functioning software when the software may not work as intended – something that any developer can appreciate.
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