Internet Monopoly money -- that's what many of us would have labeled Bitcoin in its early days. Of course, we're kicking ourselves for not buying in to the faux currency in its infancy, but that doesn't make it any more viable long-term -- it's more like a roulette wheel that is juiced to pay out for the first few years.
What about now? Though Bitcoin's value has skyrocketed, average folks can't mine coins anymore. The fixed supply means as time goes on, and more coins are mined, mining new coins requires more and more power, which means only a rare few, with a ton of computing power, control mining.
The concentration of power in these few folks has created another problem: the de-decentralization of the currency by 51 percenters, a problem that could mean that Bitcoin is broken.
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Is Bitcoin Broken?
This news isn't exactly confidence-inspiring.
The beauty of Bitcoin is that it is supposedly decentralized: it has the backing of the internet at large, rather than a single country or entity. Except, now, it isn't.
GHash, a mining pool (a group of geeks with specialized computers), seized more than 51 percent of mining power for a period of more than 12 hours, as well as a few other brief moments. Why is this a problem? Ars Technica explains:
So-called 51 percenters, for instance, have the ability to spend the same coins twice, reject competing miners' transactions, or extort higher fees from people with large holdings. Even worse, a malicious player with a majority holding could wage a denial-of-service attack against the entire Bitcoin network.
Basically, GHash could have broken the system, or at a minimum, wreaked enough havoc to destroy faith in the cryptocurrency, which could've crashed the market. Of course, if GHash owns Bitcoins, such a move would be contrary to their own interests, but still, the ability to do so has to be unnerving to Bitcoin holders.
The Future: Forks and Crashes
What does the 51 percenter problem portend for the future? In the short term, the value of a Bitcoin has fallen from a peak of around $650 last week to a low of nearly $550. It's now sitting at around $590.
Market fluctuations aside, the 51 percenter problem doesn't seem to be going anywhere. Bitcoin mining is a fixed pool, so the more that is mined, the more computing power is necessary to mine additional coins. That means becoming a 51 percenter is going to be a game of specialists with mass computing power, like GHash.
And if you thought having a government-backed currency was unstable or scary, think about a currency backed by a handful of guys on the Internet with computers. The Cornell researchers who discovered the issue note that GHash has a history of double expenditures of coins, so the disincentive of devaluing their own holdings might not be enough to prevent them crashing the market.
There maybe be a fix, however. According to Ars Technica, there are already calls for "forking" Bitcoin to a new version, one that recognizes existing coins but fixes the 51 percenter issue. As for you, if you decided to start taking Bitcoin for legal services, well, you might want to reevaluate that choice.
- Bitcoin Not Safe From Hackers, Prosecutors or Regulators (FindLaw's Technologist Blog)
- Risky Business: More Law Firms Taking Bitcoin (FindLaw's Technologist Blog)
- What's Wrong With Bitcoin? Mt. Gox and Everything Else (FindLaw's Technologist Blog)