Monthly Archives: February 2014

MtGox Bankruptcy: The Bad and the Good News

MtGox filed for bankruptcy protection on February 28, 2014, after losing control of almost 6% of all ‪‎Bitcoin‬ in existence at the time. You should be worried and excited at the same time.

Bitcoin is inherently a fixed supply currency. If a coin is lost, it cannot be reprinted ever. It is not mathematically possible so it’s not just a matter of attitude either. When you give someone a coin to hold for you and they lose that coin, there is no way to recover it. It is lost forever and you can jump up and down from anger as much as you want.

In essence, unless you can make 2+2 equal something else than 4 in traditional math, it won’t matter.

So, the loss of those coins, if they are indeed actually lost, is quite a blow to MtGox users. Even if you go to court and get a ruling saying you should get your money back, the money, for all intents and purposes, do not exist anymore. It would be like getting a ruling saying that you are entitled to be part of a historical event that happened centuries ago; it’s just not possible to enforce the judgment.

That’s the “why you should worry” part of this.

There’s good news, though, especially if you have followed the advice from virtually everyone who know how to tie their own shoelaces, and have kept coins in different accounts.

Imagine this: Tomorrow, the US government (or your local government) announces that 6% of the entire money supply is gone, and it’s not coming back. The money printer burned down, taking the only templates with them, and for some odd reason, it’s not possible to create a new template. You may think that this is a disaster, but it can be quite the opposite.

You see, the economy isn’t measured in number of coins, dollars, euros, or whatever. The economy is still exactly the same. You still buy the exact same amount of food, gas, electricity, and midget porn.

The means that, because there are fewer dollars in circulation, each dollar is worth more than it was prior to the accident. 6% more, actually. That means prices measured in US dollars will drop, so the money you have will last longer.
In a perfectly balanced world, where everyone kept an equal amount of money in MtGox, cold wallets, hot wallets, and other storage services, the loss of one of these services will not in any way affect the purchasing power of each individual. You can wipe out MtGox and it won’t mean a thing to Bitcoin, in the grand scheme of things.

To understand how this works, again imagine that every dollar in the world, except one, was gone in some freak accident. Suddenly, that dollar now represented the entire US economy, so it would be worth the entire supply of food, gas, electricity that the US consumes. And midget porn. A cent would suddenly be worth 1% of the entire US economy.

Similar to Bitcoin, of course, that won’t matter for those who lost all their money and it will make whoever holds that remaining dollar very rich. For those who did not lose anything on MtGox, their remaining coins are worth more. If you held a perfect balance across all your accounts, it won’t matter much.

So, it’s not all bad news, unless, you know, you just lost your entire life savings in which case… Well, you should have listened to the hundreds and thousands of community people that warned you against keeping all your eggs in one basket.

And you’ve learned.

.b

Understanding Bitcoin Malleability

Here’s an explanation of the malleability issue of Bitcoin and what it really means for you.

Let’s say you hire Jane Plumber to fix your sink for $100. After Jane completes her work, you write a check for $100, sign it, and send to Jane, thinking nothing of it.

CheckOriginal

Upon receiving the check, Jane annotates the check in some insignificant manner, for example by stamping it or writing a note that it has been received. She then sends the check to the bank to get the $100 deposited.

 CheckNew2

In Bitcoin, the check is analogous to a transaction. It is a signed statement from you that you want to transfer an amount to someone else. To declare that you intend to do so, you publish a cryptographically unique signature, or in this analogy a unique image, so that anyone can see that you intend to pay Jane $100.

All of these images or transactions are stored in the Bitcoin blockchain which is a public ledger of all transactions made by anyone. In this analogy each transaction is a picture of a check, a check signed by you, but that can be published to the public ledger by anyone who has that check.

BlockChainOriginal

As such, when Jane annotates the check, she can also publish the annotated image of the check. The annotated check does exactly the same thing; it withdraws $100 from your account and transfers to Jane. However, because of the annotations, the image that Jane publishes is different from the one you publish.

Although there are two check images published, only one of the images will be accepted by the bank or in this case the Bitcoin network. The details of how this happens is beyond the scope of this explanation, but involves a transaction history which ensures that you cannot give away the same dollar twice.

However, a malicious attacker can exploit this if you are a bit naive. If Jane’s image is the one accepted, Jane can call you and say that she never received the check. When you then go into the public ledger and search for your original image, it is nowhere to be found because it was Jane’s image that got accepted.

BlockChainHighlight2

If you are naive, you may then write Jane a new check, and she can withdraw your $100 twice, once for each check you sent her.

If this happened outside of Bitcoin, it would be very simple to check whether Jane was telling the truth. You can simply check your bank statement and see whether the charge for the personal check has been posted to your account. If so, Jane is lying and you can simply ignore her request.

BankStatementHighlight

In fact, even in Bitcoin, if someone claims that they have not received the funds you sent, it would be easy to check the balance of your address to see whether the funds are gone and thus have been sent. You may not find your original transaction, but you will find the transaction that sent the money and you could present that to Jane as evidence that the money has left your account and has been received in her account.

The malleability component of Bitcoin is the protocol’s ability to interpret the intent of the check, so to speak, even if it has been annotated with certain pieces of information or decoration. It is still the same check designed to do the same thing, but it looks a bit different than when you originally signed it.

Please also note that although you can make simple changes to a check or Bitcoin transaction, any change that is of importance, such as the sum you want to pay or to whom you send the money, can not be changed. If you attempt this, Bitcoin requires a new signature from you, and it’s not as easy as just copying the signature from a paper check.

.b