Here's what a terrible week looks like in the world of Bitcoin: Two of the most trafficked Bitcoin exchanges, Mt. Gox and Bitstamp, temporarily halt tradingand suspend bitcoin withdrawals in the midst of a distributed denial of service attack (DDoS). On exchanges that are still open for business, the value of the currency takes a brutal, sudden hit and then continues to tumble. Bitcoin users notice strange errors in their wallet balances after making routine transactions. Rumor spreads that the Bitcoin protocol is critically flawed. And where rumor is lacking, conspiracy theories abound.
All this, and it's barely Thursday.
Some of it is true. Some of it is half true. Some of it is completely false. Here is what's really going on.
Mt. Gox, which until recently was the most trafficked of the Bitcoin exchanges, is at the center of this mess. Whether they actually caused it is a separate question and still up for debate. Either way, they've been in the Bitcoin doghouse for at least a year now, during which time they have been reliably generating bad Bitcoin press. Many traders who frequent the online exchange choose to leave some of their money (both bitcoin and fiat) in an account set up by the company. Keeping the money on site allows clients to do quick trades, but people are beginning to wonder whether Mt. Gox can be trusted to be responsible with the funds they have.
Last May,confidence was shaken by the news that the Department of Homeland Security had seized the Dwolla e-payments account of Mt. Gox CEO Mark Karpeles and accused him of operating without the proper license. After the loss of this currency conduit, customers began reporting long delays withdrawing dollars from their Mt. Gox accounts. Poor communication fomented a deep mistrust in the exchange and people began to wonder whether Mt. Gox might have squandered its clients' money. And now, as of last Friday, Mt. Gox customers can't even withdraw bitcoins.
In a statement on its website, Mt. Gox claimed that it had identified a serious flaw in the Bitcoin protocol, one that behooved it to cease transactions until developers could find a solution. Conspiracy theories immediately followed. Several people implored Mt. Gox to somehow verify the solvency of their exchange. (One guy even staked out the office in Japan to confront Karpeles himself.) But the mob lowered its pitchforks after core Bitcoin developers announced that the flaw Mt. Gox outlined does indeed exist. It's called transaction malleability, and according to Bitcoin developers, it does need to be fixed.
"Generally, malleability is a design flaw in Bitcoin, albeit a very subtle one. So we can forgive Satoshi for overlooking it," says Mike Hearn, a developer who works on the Bitocin protocol. (Satoshi Nakamoto is the pseudonym for the inventor of the Bitcoin protocol.)
In order to understand transaction malleability, you need to know that the balances of all Bitcoin addresses are maintained on a public ledger and that the changes made to this ledger are what constitute the transfer of funds.
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