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Bitcoin Takes a Hit

Due to a software upgrade glitch over the weekend, many Bitcoin miners have been generating invalid data blocks, causing some to lose tens of thousands of dollars so far. “Blocks” are essentially records of transactions in the Bitcoin system. A completed data block is rewarded with new Bitcoins, but these invalid transactions result in losses for mining operations.

This has apparently happened because a significant amount of outdated software clients that handle transactions are still accepting these invalid blocks under certain conditions, reported bitcoin.org in an alert posted on July 4.

bitcoin cryptocurrency money (Medium)

The alert was updated today, stating that Bitcoins are safe for those who received them before July 6 00:00 UTC. However, the issue has yet to be resolved, and so miners need to confirm/change the version of software to ensure everything is up to speed.

The notice also points out that most versions of software clients earlier than Bitcoin Core 0.9.5 are at risk of accepting invalid blocks. Once these are confirmed in the Bitcoin network, other clients then build new blocks on top of these invalid ones.

Those most susceptible are the clients that also use Simple Payment Verification (SPV) wallets, which is a less secure method that does not fully validate blocks.

According to the alert:

“Note that the roughly 50% of the network that was SPV mining had explicitly indicated that they would enforce the BIP66 rules. By not doing so, several large miners have lost over $50,000 dollars’ worth of mining income so far.

All software that assumes blocks are valid (because invalid blocks cost miners money) is at risk of showing transactions as confirmed when they really aren’t. This particularly affects lightweight [SPV] wallets and software such as old versions of Bitcoin Core which have been downgraded to SPV-level security by the new BIP66 consensus rules.”

First and foremost, miners need to put a halt to any “SPV mining.” They are also encouraged to increase the number of confirmations needed to ensure a valid transaction—six confirmations is the de facto standard, but 30 is being suggested for the time being.

So, what does an event like this mean for Bitcoin, or cryptocurrencies in general?

While this hiccup has not resulted in any big-time Bitcoin miners or investors jumping off of buildings, it has created the very real risk of turning people off of the very concept of cryptocurrencies, as it shows just how much rides on the reliability of software.

Stories of fraudulent Bitcoin operations have not helped either, but of course with many of these the fault lies with scammers and not failures of the Bitcoin network itself.

Still, the existence of Bitcoin as a prominent, and more importantly, decentralized peer-to-peer currency system simply has too much attraction to lose enough momentum to fail anytime soon. In fact, many in Greece have been buying up Bitcoin amid the recent financial crisis, especially in the last few days due to the cash withdrawal limits at banks. This has played a huge part in the recent price surge of Bitcoin—on July 5 the cryptocurrency hit a four-month high of US$273.

Bitcoin.org will continue to make updates to its alert page, for those that want to keep a close eyes on how this continues to play out.

H/T: bitcoin.org