The reports of Bitcoin’s death have been greatly exaggerated. Instead, the decentralized cryptocurrency has once again proven its resilience.
For weeks, a dark cloud has hung over the crypto-community, given the woes of Tokyo-based MtGox, the ecosystem’s first and oldest exchange for trading bitcoins. Then on February 7th, administrators abruptly halted all BTC withdrawals, sending shockwaves through the system as worried users—some of whom showed up in front of the company’s offices in the Shibuya district in protest— wondered if they’d ever get their money back.
“In the past, MtGox has taken a lot of hits in terms of regulatory intervention and hacking attempts and until now, they’ve always persevered and have been an important contribution to the Bitcoin community,” said Stefan Thomas, former Bitcoin core developer and CTO of Ripple Labs. “Without MtGox, there wouldn’t be the Bitcoin of today so it’s unfortunate that they’re having these issues.”
Three days after shuttering withdrawals, MtGox CEO Mark Karpeles would blame a bug in the Bitcoin protocol called “transaction malleability.” Since the issue has been publicly documented since 2011, any firm’s vulnerability to attack was defined by the robustness and security of its internal systems.
David Schwartz, Chief of Cryptography at Ripple Labs, talks transaction malleability with Newfination
Wallet provider Blockchain.info, for instance, was completely unaffected, according to Chief Security Officer Andreas Antonopoulos. Over at Bitstamp, the Slovenia-based exchange, a denial-of-service attack knocked out withdrawals for a couple days, but no funds were lost and the firm returned to normal operations after applying a quick fix.
For reasons specific to MtGox’s operations, the company was particularly exposed—at least according to the company’s suggestions—and the situation went from bad to worse late Monday when an alleged internal document leaked, revealing the depth of the disaster.
According to the presentation, titled “Crisis Strategy Draft,” the struggling exchange was insolvent, with 744,408 bitcoins—worth roughly $425 million—missing, either stolen by hackers or simply inaccessible due to a software glitch. “At the risk of appearing hyperbolic, this could be the end of Bitcoin, at least for most of the public,” one slide boldly proclaimed.
MtGox immediately halted all trading while industry leaders—including Fred Ehrsam of Coinbase, Jesse Powell of Kraken, and Bobby Lee of BTC China among others—released a joint statement distancing themselves from the implosion.
Predictably, a few media channels pounced on the opportunity to voice varying degrees of sensationalism. The LA Times claimed that Bitcoin “is on the verge of collapse,” quoting Mark Williams, a former Federal Reserve bank examiner, who went on to assert that the cryptocurrency is “not only fragile, it’s fragile as eggshells.” Elsewhere, the Wall Street Journal wondered if this was Bitcoin’s “Lehman moment.”
On the contrary, Bitcoin is alive and well, and in fact, doesn’t appear significantly affected—the price has stayed surprisingly steady throughout the ordeal, hovering just under $600.
After all, the Bitcoin protocol is bigger than any one service, says Ripple CEO Chris Larsen—especially one with a history of instability that technologist Marc Andreessen compared to MF Global. [Andreessen’s venture fund, Andreessen Horowitz, is an investor of Ripple Labs as well as other other cryptocurrency startups including Coinbase.]
“At the end of the day, it’s a unique problem with a very poorly run company that is not the protocol,” Larsen said. “It’s simply a user of the protocol that was using it incorrectly.”
Indeed, there were hints of a previous incident in the summer of 2011, also involving the troubled exchange, when MtGox was hacked and taken offline after prices plummeted from $17 to mere pennies in a matter of minutes. “So, that’s the end of Bitcoin then,” concluded Forbes, a prediction that was clearly off-target.
Time and time again, the community has rallied, says Thomas, having coordinated with Bitcoin’s team of core developers, including prominent open source contributor Peter Wuille, concerning the issues with transaction malleability.
“Every time there’s a crisis, we make sure that our channels of communication are open and that we’re sharing our insights,” said Thomas, who, during the recent attacks on exchanges, was up until 5 a.m. working to secure the network. “We worked with our partners like BitStamp and Kraken to help review their systems.”
“It’s the nature of the passion of the open source community,” Larsen added. “It got the best brains to re-ask all these questions they had been asking themselves: ‘Did I miss anything? What came out? Was there a problem?’ It wasn’t swept under the rug. It was deeply investigated.” These collective efforts only further reaffirm Bitcoin’s tenacity and longevity, Larsen believes.
I will happily retweet all retractions and apologies from people who wrongly forecasted death of Bitcoin as result of MtGox collapse :-).
— Marc Andreessen (@pmarca) February 26, 2014
As such, the latest shocks will again reinforce the decentralized peer-to-peer protocol—like muscle fibers that breakdown after a workout only to rebuild, stronger and tougher. With “antifragile” systems, as Nassim Taleb describes it, such setbacks help expose and address weak points and ultimately increase the system’s overall fitness.
“In the short term, it’s bad because people will be weighing whether or not they should jump into the protocol,” Larsen admitted. “In the long term—like all other challenges the protocol has faced over the years—it actually strengthens the system.”
“For the people who have been in the community for a long time, we’ve been through this before, and we’ll go through it again,” Thomas added. “It’s a process of growing pains.”
This process is ongoing and is perhaps best illustrated by the transition from first to so-called second generation entrepreneurs. As TechCrunch noted, MtGox’s “demise,” along with the arrest of BitInstant’s Charlie Shrem “marks the end of bitcoin’s first wave of entrepreneurs.” Diligent hobbyists are making way for experienced professionals.
Where MtGox was originally created by Jed McCaleb to trade Magic: The Gathering cards—before he sold it to Karpeles in 2011—Powell’s San Francisco-based Kraken was built from the ground up as a secure, high-performance, and scalable trading platform. [McCaleb is a creator of the Ripple protocol and Powell is a board member of Ripple Labs.]
And while BitInstant and Coinbase arguably offer similar services, Shrem is a self-proclaimed former hacker with a penchant for anti-government ideals, while Ehrsam is a former Goldman Sachs analyst focused on doing things by the book.
“When Coinbase first began in mid-2012, no industry company was focusing on both creating a user-friendly interface to Bitcoin, while also clearly regarding consumer protection, regulatory matters, and compliance as necessary elements to succeed in this rapidly evolving landscape,” Ehrsam, Coinbase CEO, said during the recent regulatory hearings in New York. “We have since invested disproportionate amounts of time, energy, and capital into exactly these areas.”
Those investments have predictably paid dividends. Coinbase has weathered the transaction malleability saga unscathed, and during “a voluntary cross-industry effort to provide independent review of the security of Coinbase customer funds,” Antonopoulos, an industry veteran and security expert, found Coinbase to be “operating according to security best practices.”
For the company’s customers—Coinbase services over one million wallets—it’s a resounding endorsement that will help them sleep soundly at night. For the rest of the community, it’s another step in the right direction. And for Bitcoin, it’s one more sign that the best is yet to come.
“These experiences are inevitable,” Thomas said. “You’re not going to get everything right on the first try. Even so, there are lots of things that Bitcoin has gotten right.”