Share

Policy: Economy

Bitcoin's new problem

By |
Finance and Banking,PennAve,Joseph Lawler,Economy,Technology,Bitcoin,Currency

The digital currency Bitcoin is facing a new threat to its viability, this time involving its claim to be decentralized.

On Friday, a single mining pool — a group of so-called miners who direct computing power to maintain the network's ledger in exchange for payment in Bitcoin — grew large enough to command slightly more than half of all the Bitcoin system's mining power.

That is a problem because the payments system is intended to be decentralized, meaning that unlike a trusted third party system such as PayPal, it facilitates transactions that are peer-to-peer and don't go through any company or central bank. Its underlying architecture relies on majority agreement among Bitcoin miners to authorize transactions, meaning that any mining pool with power over more than half of the network could control transactions and take advantage of the system in a number of ways.

After the mining pool known as GHash.IO gained over half of mining power Friday, some analysts raised the alarm.

Two Cornell computer scientists wrote that the development represented "Armageddon" for Bitcoin, and the "main pillar of the Bitcoin narrative was decentralized trust. That narrative has now collapsed." They called for a drastic overhaul to the way miners operate.

Princeton computer scientist Ed Felten said the concentration of mining power in GHash.IO's control "might not be a short-term disaster, but it is unhealthy for Bitcoin, and the community needs to address it."

Gavin Andresen, chief scientist for the Bitcoin Foundation and the main developer of Bitcoin's open-source code, downplayed the significance of the problem, responding over the weekend that GHash.IO's size "isn't good" but that it "isn't disastrous, either." Andresen argued that the group would run into either legal or practical problems if they tried to carry out an attack on the system to enrich themselves and would harm their own interests by reducing confidence in Bitcoin.

In a Monday press release, the company behind GHash.IO said it was a "essentially being punished for its success" and pledging not to undertake any kind of attack against the network. It also called for a "round table" meeting between leading mining pools and the Bitcoin Foundation to find a long-term solution to the threat of one group controlling more than half of mining power.

The value of Bitcoin fell after the news of GHash.IO gaining more than half of mining power, dropping from $630 on Thursday to below $560 Sunday. But investors appear not to have lost confidence in the alternative currency, with the price recovering to near $600 Tuesday. The price has fluctuated wildly over the past year, from roughly $100 last June to more than $1,100 in December. As of Tuesday, according to the site Blockchain.info, GHash.IO accounted for only 32 percent of mining power.

Bitcoin remains, for now, mostly outside of the regulatory framework. Each time a major threat to the system's integrity arises, however, officials in Washington tend to respond. After the FBI shut down the Bitcoin-denominated online drug bazaar Silk Road last fall, the Senate Homeland Security Committee held a hearing on the risks and benefits involved in cryptocurrencies. After the once-dominant Bitcoin exchange Mt. Gox failed in February, costing customers hundreds of millions of dollars worth of Bitcoins, Sen. Joe Manchin, D-W.Va., called on regulators to ban the currency altogether.

After the currency weathered both of those setbacks, however, the price rose as users and investors gained confidence in its durability.

So far, neither regulators nor officeholders have weighed in on the latest threat to Bitcoin, which now would have a value of roughly $7.7 billion if all its units were converted to dollars. But the Homeland Security Committee and other officials are watching the situation, which could affect how regulation of alternative currencies unfolds.

View article comments Leave a comment