Posts
Financial crisis revealed and resolved in the world of
Bitcoin
By Adam B. Levine
Contributing writer for End the
Lie
(Image credit: Adam Crowe/Flickr)
Monday, March 11th saw calamity
strike at the core of the Bitcoin system – over the last 3 years the number of
users has increased exponentially, and the value along with it. In the
past we’ve seen large public thefts, but Monday’s event was fundamentally
different.
Note: be sure to read Adam’s
previous article, “Ulterior motives behind the Copyright Alert System“
Bitcoin is basically one big public
distributed ledger (known as The Blockchain) where the ownership of every
Bitcoin ever created is tracked, accounted for, and verified automatically by
various participants in the system. Transactions can be detected within a
few seconds, but merchants generally take the hour or so to gather 6
confirmations to ensure the payment cannot be reversed.
Other participants, upon receiving
news of the ownership transfer (payment), check the payer’s account to ensure
that they haven’t already spent them publicly. A confirmation is the
return message saying “Yes, this all seems to be in order, the value is truly
available to be transferred to the intended recipient and we’ve updated our
ownership records to reflect that.”
With that background in mind, on
Monday the blockchain split in two without warning.
Why’d it happen?
Call it growing pains – Berkeley
Database (BDB) was used for versions of the Bitcoin software .7 and below and
as luck would have it, will accept a maximum number of changes per block.
The protocol’s self adjusting difficulty seeks to issue a block every 10
minutes. As Bitcoin usage has increased, so have the number of
transactions contained in the average block.
So what happened?
On Monday, a single block went
through the system containing 1700 transactions, and was rejected by the
participants still running on .7 due to how many changes it made. Had
everyone been running .7, the block would have been rejected and the
transactions processed in (hopefully) smaller blocks.
Because an upgrade to .8 was rolled
out several months ago that switched to a different database system without the
same limitation, we found ourselves with two separate blockchains (ledgers)
each disagreeing with the other’s interpretation of reality. Those
running .7 saw too-large blocks as invalid, while to those running .8,
everything was normal and the larger blocks were acceptable and built upon.
Cause and effect
An alert went out immediately (at
1:30am UTC) from the mostly volunteer open source development team letting
merchants know to not accept Bitcoins for the next few hours while the system
sorted itself out. To miners, they asked that everyone revert back to .7
so no incompatible blocks will be generated. The average user was unaffected.
Crisis isn’t good for anyone, so
participants quickly fell in line wanting to resolve the issue as soon as
possible. Within 8 hours things were back to normal; If you
live in America, chances are pretty good you slept through the whole thing,
including the 23% drop in price, which vanished by morning.
Schrödinger’s Bitcoin
The “Double Spend” is the bogeyman of digital currency
world. Since Bitcoins are just data and data can be copied, what’s to protect a
merchant from being paid with money already spent elsewhere? This is the
function of the blockchain, which represents the network consensus of reality.
When that consensus broke down due
to the fork, it created a state best represented by the Schrödinger’s Cat thought experiment – one in which
a single entity simultaneously and paradoxically exists in two states, only one
of which can eventually be real.
During the disruption, one large
Double Spend actually occurred and was paid out in
US Dollars. When the faulty blockchain was abandoned, the
reality consensus settled on the backwards compatible ledger. In this
case, payment processor OKPAY was left without the Bitcoins they thought they
received, and were also still out the nearly $10,000 they exchanged for them.
This is the most valuable instance
of a successful Double Spend in the Bitcoin ecosystem, which can only occur
under the Schrödinger’s Bitcoin scenario described above.
Luckily this story has a happy ending. Both
parties “did the right thing” and have refunded each other. But will things
work so well next time? Will there be a next time, is this situation
repeatable?
I asked Gavin Andresen, Lead
Developer on the Bitcoin project about the risks moving forward:
Question: Are “Double Spends”
possible under normal circumstances?
Gavin: Double-spend risk is not a
“yes or no” — like most risks, it is “more risky” or “less risky”, down to “So
little risk I won’t worry about it. One of the reasons I still tell people
“bitcoin is an experiment” is because everybody is still figuring out where the
edge-case risks are.
Q: So for the average user or
merchant, how much risk is there in every-day use?
G: For the, average user or merchant
delivering a physical product to customers: I’d say very close to zero
risk after 3 confirmations. Exchanges or merchants that deliver
“cash-like” high-value products or services have their own particular set of
risks, and they need to be more careful. merchants that deliver services that
have a zero marginal cost to them (e.g. “Subscribe to my e-magazine”) have even
less risk than users or merchants delivering physical products.
And all of that is modified if you
have some trust in the person you’re transacting with. I recently sold a
couple thousand dollars worth of bitcoin to a friend who promised to send me a
check in the mail, and I was happy to do that.
Q: In your worst case scenario, where
you flat out do not trust the person but want to do business with them, what
would you recommend?
G: For ultimate trust transacting a
huge amount of value to somebody who I think will try to rip me off– 24 hours
would be the “100% safe” time. It really is confirmations and not time,
but unless something wacky is happening those two are equal after 6
confirmations or so.
I pick 24 hours because that would
be 120+ confirmations. I can’t conceive of a situation where “we” (the shared
consensus of the bitcoin network) would allow a 120-block fork to happen that
double-spent
Q: Now that the issue has been
resolved for a day, any lessons learned or things that will be improved on?
G: actually one really stupid/simple
thing ‘we’ should have done long ago: make it easy for bitcoin services
to get alerts sent to their email/SMS/etc. We’ll be concentrating on
things like improving communication during crises, because no two crises are
exactly alike.
Regarding specific tasks:
implementing a -alertnotify=<run some command> is very high on my
TODO list. That’s easy to do, and is the thing I’m kicking myself for not doing
sooner
Q: What does that mean?
G: That means “if you get an alert,
run this command to tell me about it” where “this command” is specified by the service
operator — send email, send sms, whatever
Moving forward
History would have us believe
Bitcoin scandal leads to big losses in the trading value of the currency, but
this time was different. Despite the currency itself seeming at risk and
the impossible momentarily made real, the price immediately bounced back up to
near all-time highs.
Bitcoin may be small as currencies
go, but the hourly chart below speaks volumes given that every 1K Bitcoins
represents about $50,000 USD.
So here we are, less than 72 hours
after the event, and we’re basically back to where we started. The system
is stable, the fork abandoned and the consensus reality once again agreed upon.
And all this with a basically volunteer development team who has no real
ability to make anybody do anything, outside of telling them it’s a good idea.
Compare that to the ongoing crisis
in currencies controlled by central banks, who have the unilateral authority
not only to make all decisions related to their respective monetary policy, but
also the ability to issue more bills at will, should the need arise.
Lacking such an option, Bitcoin is
forced to deal with its problems and try as quickly as possible to return to a
state of normality. So does it work? For now, the answer is a definitive “yes,”
but since it was just created in 2009, only time will tell.
From where I’m sitting this was just
about as good an outcome as anyone could hope for. No value was lost,
even though the system prides itself on irreversible transactions (which once
you’ve dealt with Paypal’s merchant Chargebacks,
you begin to see the appeal of).
The development team isn’t hiding
the cause of the recent issue and is instead using this as a reason to dig into
the response with work being done on an internal, comprehensive post-mortem.
They’ve taken the whole thing as a
learning opportunity and have pledged to implement a more agile
communication-alert system so if this does happen again, users will be alerted
and large users will take appropriate precautions.
I like to see people with power
admit they are not omniscient, and in this world of centrally planned money
it’s too rare a thing.
One thing is certain: Bitcoin isn’t
suffering for lack of its own Bernanke, and that should give us all reason to
hope.
Adam writes about new technology at Mind
to Matter and forestry, photography and custom wood products at NapaWood.
You can contact Adam here.
Edited by Madison Ruppert
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