Mt. Gox : Failure and opportunity

Failure

Dear MtGox Customers,

In light of recent news reports and the potential repercussions on MtGox’s operations and the market, a decision was taken to close all transactions for the time being in order to protect the site and our users. We will be closely monitoring the situation and will react accordingly.

Best regards,
MtGox Team

Those words are the only official information released by Mt.Gox regarding their current situation. The company has gone through mostly unknown troubles these past couple of days, keeping their customers in the dark. The Mt. Gox Wikipedia entry has a timeline of events.

I had my doubts about Mt. Gox since my involvement in Bitcoin some 18 months ago. Their reputation was already put to the test on the main Bitcoin forums and subreddit. But I was just as surprised as most of you when I heard the wild speculation yesterday. We all knew something had gone wrong, but I’m confident nobody outside of a handful of people privy to Mt. Gox’s administration would have predicted the current developments. Having doubters is one thing, but losing an entire community’s trust is another. The way Mt. Gox deals with the current crisis is almost comical. A reputable company respects its customers and keeps them into the loop in times like these1. The ongoing silence of Mt. Gox is puzzling. Either they are legally bound not to say a word, or they are utterly incompetent, assuming they are rational.

Information has to be gathered from elsewhere. The statement issued by Coinbase and others regarding the incident at Mt. Gox is very positive and I agree with their stated goal. Erik Voorhees was interviewed on Bloomberg TV and Roger Ver has published a video statement, to name a few. The best information comes from Andreas Antonopoulos‘ blog post.

Opportunity

Apparently, there would be more than 700 000 bitcoins unaccounted for and many thousands of dollars sitting still in Mt. Gox’s balance sheets. While it should be repeated that this is still unofficial information, people are rightly concerned about the fate of their investments. If the coins are truly gone, some customers will have lost up to multiple thousands of bitcoins. Depending on how much was paid for the coins, this can bring people into despair. It is a truly tense situation. If you are concerned about your potential loss, please alert close ones. You don’t have to go through this alone. You may have lost money, but you haven’t lost your mind and body. You’ll make it through.

That said, may this be a lesson to everybody. Blockchain based cryptocurrencies can be kept in cold storage relatively easily, almost2 free from theft. It’s entirely up to the owner to decide how much to keep in cold storage, but the most basic rule of thumb in investing does apply here: Do not keep more coins on an exchange than you are willing to lose. The reddit thread mentioned earlier contains posts from people who would have lost their life’s savings. I have great difficulty figuring out how to justify such a move. Naïve, dangerous, inconsiderate..? All I know is that if you play with fire long enough you will get burned.

Don’t get me wrong, I do feel bad for those people. I also think there is a great need for better documentation regarding the use of bitcoins, especially on how to secure them3. Educating the public in these matters should be a priority of the Foundation. It could easily establish a standard procedure for creating paper wallets and storing bitcoins for the long term. Such efforts could only be beneficial.

Hardware wallet

After the recent debacle, cold storage should become the norm for new users. Furthermore, a reduction in trade volume could indicate a shift to long-term storage from existing users, although I doubt this will happen. Considering Bitcoin’s history, prices could go up very rapidly and profits be made, a reasoning sure to be had by other enthusiasts. No matter, we are now presented with a great opportunity for innovation. While not new, the idea of a hardware wallet is one whose time has come. I think that a professional hardware solution to store bitcoins long-term in a reasonably priced device would benefit the whole ecosystem. New users would feel more confident, and freshly burned ones could sleep better. It’s much easier for novices and non-tech-savvy people to buy a USB wallet than it is to read through seemingly cryptic documentation from multiple sources. This is just like how, when most people go to the car dealership for repairs, they aren’t actually interested in the details, but they sure want to drive a car.

Cold storage as a service

Another option is to offer cold storage as a service. There is obviously a trust barrier to overcome in this type of business, but it can definitely be done. Fees could be charged on a pay-per-month or pay-per-transaction (or both) basis. I am personally investigating my options with regards to such a business. There are clearly people who would benefit from that service.

These are but two things that could remedy a flaw in the Bitcoin ecosystem that was pointed out by the Mt. Gox situation: it’s easier to keep your coins on an exchange than manage them yourself.

Blockchain proof-of-solvency

Another thing that could become standard is a proof-of-solvency. By using the blockchain, exchanges could periodically publish the state of their balance sheets to the world. That would probably bring stability to the markets. Exchanges wanting to take part in day-trading with their customer’s funds would then be under pressure to disclose how much of the funds are being used to trade. This would not force exchanges to disclose trading strategies as one might fear. An exchange could very well be secretive about which addresses it uses to day-trade and publish only its “stagnant” addresses’ balances4.

Blockrope

The blockchain is perhaps the single most important technological contribution Bitcoin brought forth. Whenever I explain cryptocurrencies to a newcomer, I do my best so they leave knowing what a blockchain is. But the current state of the art isn’t without its potential problems. Transaction security aside, the Bitcoin blockchain is growing linearly and currently weighs just over 14 GB. This is not so concerning if you’re only interested in Bitcoin, but there exist multiple other cryptocurrencies that each have their own blockchain, which means you could end up storing very large amounts of transaction data on your computer. This problem is partly solved by thin clients like Electrum.

What I propose is not much of a scalability fix rather than a security enhancement that could be implemented by any blockchain dependent cryptocurrency. The concept of a Blockrope is very simple and demonstrated in the following image:

Image made with svg-edit http://code.google.com/p/svg-edit/
Blockchain to Blockrope

Much has been written about potential attacks against a blockchain-based network. Of these, the most probable seems to be the so-called 51% attack. By linking blockchains together to create a blockrope, one could decrease5 the odds of 51% attacks ever occurring on any currency.

The linking could be implemented in different ways, but would function much like the current hashPrevBlock. Say Blockchain B has been around for longer than Blockchain A. The latter could, once every n blocks, incorporate the hash of the most recent B block into its block header. “Roping” them this way could be called commensalist roping, since only one of the blockchains benefits. Mutualistic roping would see each blockchain referencing the other. In this case, every n A block incorporates a hash of the previous B block into its header, and every p B block incorporates the previous A block’s hash into its header. The rope would then be complete.

Benefits of such junctions between blockchains regarding 51% attacks are evident. An attacker would need not only re-generate blocks from the blockchain he is interested in, but also from the other, joined blockchain.

Transaction segregation

Of course, the blockrope could be an ad-hoc addition to current protocols. What would be more interesting is to use it for experimentation. One might try what could be called time-zone transaction segregation mechanism into the protocols. What I envision is a network with a single blockrope made up of blockchains, one for each time-zone. That way, each “local” blockchain would mostly contain transactions that originate and stay in the same time-zone. This means that for example, at times of high activity in the East-coast, the West-coast blockchain wouldn’t grow as much in size6, and vice versa. A consequence of this could mean a leaner and more easily maintainable global cryptocurrency architecture.

A case could be made to establish something else, like an economic zone transaction segregation mechanism. This would work much the same way as the time-zone version described before, except that each major economic centre (NYC, Mexico, Tokyo, etc.) would be assigned a blockchain. Locals could have control over intra-chain transaction fees as well as chain-to-chain fees. The latter would apply to transactions originating in an economic zone and ending in another. This could, in my opinion, add depth to a cryptocurrency network.

These are all just ideas. Like any idea, they are bound to change as time goes on. I would be very interested in discussing these topics! Leave a message if you wish.

This is just the beginning! 2014 will surely be an exciting year!


  1. For an example of how to do proper communications, check out Multipool. They give status updates multiple times daily about anything that has to do with the pool. Very professionnal. I don’t work for or own shares in Multipool, although I mine with them. 
  2. Your paper wallet could be stolen, or your printer hijacked and the keys stolen, or you could have used a malicious wallet to generate the keys, etc. 
  3. There is already plenty of information available, but it’s in the wrong form to be digested by most potential users of bitcoins. 
  4. Let’s say Coinbase currently uses 10% of its customers’ funds to day-trade. Who knows if they even do it. If they have to report their balances once every 4 months, they simply have to tell their customers that they’re using 10% of the funds to day-trade. Simple communication goes a long way. Customers not wanting their funds to be used by an exchange could then choose with whom to do business accordingly. 
  5. I haven’t done any calculation yet about how much of an improvement a blockrope would give. Feel free to do it. I don’t have much time right now. 
  6. Length would obviously have to stay the same, but size would differ. 

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