P2P Currency – Don’t Forget to Seed

by / 1 Comment / 102 View / June 18, 2014

Get your (digital) wallets ready! The U.S. Marshals Service announced plans on Thursday, June 12, to auction approximately 30,000 bitcoins worth about $17 million. These bitcoins were seized in the takedown of the Silk Road marketplace and the arrest of its accused ringleader Ross William Ulbricht – known online as “Dread Pirate Roberts” – in October 2013.

The approximately $17 million worth of online currency – as of 10 p.m. Thursday night – represents less than a fifth of the approximately 173,991 bitcoins the Federal Government seized, according to a release from the FBI’s New York Office near the time of the takedown. The Marshals Service announcement said none of the bitcoin put up for bid is from wallet files found on Ulbricht’s computers.

The announcement comes at the tail end of decisions that Expedia and Dish Network made to accept bitcoin as a form of payment. The new entrants drove up the price, from about $450 just a month ago to a $683 peak at the beginning of June. However, after the Federal Government’s offer, panic arose among the bitcoin community, leveling the exchange rate to about $590 per coin as of press time.

The future of the Internet’s favorite currency is still shrouded in mystery. Despite more and more businesses accepting bitcoin every day, the currency has a few critical issues which may hamper its long-term viability. The most immediately threatening is the potential for one group of bitcoin miners to gain control over more than half of the network power.

A user on the popular forum reddit.com/r/bitcoin explains why:

“Bitcoin is so revolutionary, because you have to ask nobody for permission, if you want to send somebody money. This is simply because there is nobody to ask! Money is sent directly from one person to another, with no middleman. BUT: This only works if there are a lot of computers in the network, which vote with their computing power, whether a transaction is valid. Now, if these computers get together in pools, and one pool gets more that 50% of the computing power, it doesn’t have to vote anymore, it can decide by itself, if your transaction goes through or not. And so we have it: A MIDDLEMAN IS BORN!”

Even though many in the bitcoin community deemed the concept of pooling to be impossible due to the decentralized nature of bitcoin, it just happened. Ars Technica reported Sunday that the popular mining pool GHASH.IO, a group of miners who pool their processing power and divide the coins amongst themselves, has surpassed the dreaded 51 percent barrier. Concerns about GHASH.IO are nothing new to the community, with threads on /r/bitcoin like “GHASH.IO IS THE ANTICHRIST!” appearing five months ago. On Thursday, however, the popular mining pool produced a majority of mining power for a sustained 12 hours.

Concerns about the structural stability of bitcoin are not the only problems the fledgling currency has faced. In late March, the Internal Revenue Service (IRS) released a notice which classified bitcoin as property for tax purposes.

The notice demands that users report every purchase made with bitcoin, similar to a purchase bought in gold or silver. Marco Santori, Chairman of the Bitcoin Foundation’s Regulatory Affairs Committee, said in a blog post in late March that these IRS specifications “may make compliance with tax laws unnecessarily cumbersome.”

Santori also said that he had concerns about how the IRS made its determination without consulting the bitcoin community. He criticized the IRS, saying, “the guidance creates a poor framework for innovation… a more open process would have identified the limitations of the statutory language and facilitated a dialogue between [the] IRS and the appropriate legislators to address those limitations.”

References:

Goodin, Dan. “Bitcoin security guarantee shattered by anonymous miner with 51% network power.” Ars Technica. N.p., n.d. Web. 18 June 2014. <http://arstechnica.com/security/2014/06/bitcoin-security-guarantee-shattered-by-anonymous-miner-with-51-network-power/>.

“USMS Asset Forfeiture Sale.” USMS Asset Forfeiture Sale. United States Marshall Service, n.d. Web. 18 June 2014. <http://www.justice.gov/marshals/assets/2014/bitcoins/>.

“Manhattan U.S. Attorney Announces Seizure of Additional $28 Million Worth of Bitcoins Belonging to Ross William Ulbricht, Alleged Owner and Operator of “Silk Road” Website.” FBI. FBI, 25 Oct. 2013. Web. 18 June 2014. <http://www.fbi.gov/newyork/press-releases/2013/manhattan-u.s.-attorney-announces-seizure-of-additional-28-million-worth-of-bitcoins-belonging-to-ross-william-ulbricht-alleged-owner-and-operator-of-silk-road-website>.

Fung, Brian. “Expedia wants you to book your next hotel stay with Bitcoin.” Washington Post. The Washington Post, 11 June 2014. Web. 18 June 2014. <http://www.washingtonpost.com/blogs/the-switch/wp/2014/06/11/expedia-wants-you-to-book-your-next-hotel-stay-with-bitcoin/>.

“DISH to Accept Bitcoin.” . DISH Network, 29 May 2014. Web. 18 June 2014. <http://about.dish.com/press-release/products-and-services/dish-accept-bitcoin>.

Santori, Marco. “Bitcoin Foundation.” Bitcoin Foundation. Bitcoin Foundation, 26 Mar. 2014. Web. 18 June 2014. <https://bitcoinfoundation.org/2014/03/26/irs-guidance-further-legitimizes-bitcoin-and-provides-clarity-but-demands-unrealistic-reporting/>.

“Bitcoin.” Aviathor comments on ELI5: Why is it bad that a mining pool has more than 50%?. http://reddit.com/r/bitcoin, n.d. Web. 18 June 2014. <http://www.reddit.com/r/Bitcoin/comments/288dih/eli5_why_is_it_bad_that_a_mining_pool_has_more/ci8g01k>.