Entrepreneurs and academics expect digital currency development to break through security bottlenecks

If Bitcoin doesn't always "shoot itself in the foot" like it does now, then its account chain may be "the most important invention of the 21st century."

When the electronic currency Bitcoin was created in January 2009, it attracted little attention outside of a few groups discussing electronic currencies. The origins of Bitcoin have always been murky: it is said to have been created in 2008 by a person or organization with the alias "Satoshi Nakamoto", but the identity of its founder remains a mystery to this day. And its purpose seems to be a quixotic fantasy: as a hypothetical "electronic currency", Bitcoin can innovatively use powerful encryption algorithms to ensure the security of transactions. The identity of users will be protected by pseudonyms, and the relevant transaction records will be completely decentralized. At the same time, the system does not require anyone to manage these transactions - no government, no banks, and not even Satoshi Nakamoto.

     However, electronic money is now a global phenomenon and growing rapidly. Today, there are about 14.6 million units of Bitcoin, a digital currency with a lowercase "b" symbol, in circulation worldwide, with a total market value of about $3.4 billion. The growth in Bitcoin usage is partly due to the fact that some criminals use it to conduct drug smuggling and even more serious crimes in anonymity. But the system has also attracted the interest of financial institutions such as JPMorgan Chase Private Bank, which see electronic money as a way to simplify their internal payment processes and reduce the costs of international financial transactions. In fact, Bitcoin has led to the creation of more than 700 other electronic currencies. In September of this year, with the publication of the Ledger journal (a journal that only reports on cryptocurrencies in the academic world), the era of Bitcoin entering the academic circle officially began.

Problems

     What has fascinated academics and businesses about the system is the core of Bitcoin, the interconnected chain that serves as a formal online ledger of every Bitcoin transaction. Although the chain is replicated across a network of computers using the Bitcoin software, and those computers don’t know or trust each other, the data structure allows the transaction record to be updated in a timely manner, minimizing the risk of it being hacked or destroyed.

     Many see this chain structure as a template for a host of other applications, including self-executing employment contracts and secure systems for conducting online voting and crowdfunding. This is the goal of Ethereum, a system based on this chain structure launched in July by the Ethereum Foundation, a Swedish nonprofit, and the research agenda of the Initiative for Electronic Currency and Protocols (IC3), an academic consortium led by Cornell University in Ithaca, New York, also launched in July.

     Nicolas Courtois, a cryptography expert at University College London, believes that if Bitcoin does not always "shoot itself in the foot" as it does now, then its account chain may be "the most important invention of the 21st century." There are several obvious shortcomings in the implementation of the Bitcoin chain, such as security issues that are far from perfect. So far, there have been more than 40 cases of theft and robbery of Bitcoin, several of which involved more than $1 million.

     Electronic currency companies and researchers are using game theory and advanced electronic currency theory to solve these problems. "Electronic currency is different from many other systems. If there is an extremely subtle mathematical error, it can have catastrophic consequences." IC3 co-executive Ari Juels said, "I think when a weak point appears, you need to seek help from academia because there are many experts there."

Value surge

     In fact, the academic community's interest in electronic currency and its precursors can be traced back at least 20 years ago, when cryptographer David Chaum did a lot of pioneering work. At that time, while working at the National Institute for Mathematics and Computer Science in Amsterdam, the Netherlands, Chaum wanted to protect the privacy of buyers and the security of transactions. Therefore, in 1990, he created the earliest digital currency DigiCash, which allows users to conduct anonymous transactions through the cryptographic protocol he designed.

     However, DigiCash went bankrupt in 1998, partly because it had a centralized organization like traditional banks, but failed to integrate into the financial industry and industry practices of the time. But its theory reappeared in Bitcoin designed by Satoshi Nakamoto 10 years later. This design structure includes crowdsourcing and peer-to-peer networking - both methods help to avoid centralized control. The system is open to anyone: all it requires is Internet access and the use of Bitcoin open source software. User computers will form a network, in which each machine is a folder for the total account version update.

     Satoshi's core challenge in the open source space was to ensure that no one could find a way to rewrite the ledger in such a way that the same amount of bitcoins could be spent twice, or else the bitcoins would be stolen. His solution was to make the amount of new transactions added to the ledger a competition: a practice also known as mining.

     Mining starts with the incoming Bitcoin transaction, which is then continuously broadcast to every computer connected to the network. This information is received by "miners" (i.e., groups or individuals who choose to participate in the transaction), who begin to compete for transaction access rights and generate new transaction modules. The winner is the first user to broadcast the "evidence" of the transaction. The successful transaction module is transmitted in the Bitcoin network and added to the total account chain. Currently, the total account chain has a module length of about 400,000.

     In theory, this competition keeps the block chain secure because it is very difficult for any one miner to decrypt the code at any one time. This means that no one can obtain the encrypted information in the master account chain and therefore cannot rewrite the master account.

     Mining also steadily increases the supply of bitcoins: miners who win each transaction block are rewarded, currently 25 new bitcoins, which is roughly equivalent to $6,000. Satoshi's design also controls the growth of the bitcoin supply by automatically adjusting the difficulty of the questions so that a new block is added about every ten minutes. In addition, every four years, the reward for creating a new block is roughly halved, with the goal of keeping the total bitcoin supply around $21 million.

A promising future

     In fact, the Bitcoin network as a whole does not determine the value of Bitcoin relative to standard currencies, real goods and services. Its value depends on market forces, that is, the exchange rate of the network when people make Bitcoin transactions. One of the phenomena is that the current market price has risen significantly, especially in 2013, when the asking price soared from $13 per Bitcoin in January to $1,200 per Bitcoin at the end of December. This also allows real products to be paid for with electronic money, such as two pizzas made by Papa John's Pizza that cost 100,000 Bitcoins when purchased on May 22, 2010, but are now worth almost $12 million.

     The increasing power of Bitcoin mining has also led to individual miners starting to combine their computer resources. Last year, the largest mining alliance, GHash.IO, controlled more than 50% of the total Bitcoin mining power. This poses a series of problems because anyone who controls more than half of the mining power can beat everyone else when it comes to adding modules. This would give them effective control of transaction accounts, allowing them to use the same Bitcoins over and over again. This is not only theoretically possible, in fact, successfully controlling 51% of mining power has already enabled it to beat smaller cryptocurrencies such as Terracoin and Coiledcoin, the latter of which were so badly damaged that they were taken out of circulation. To reduce the threat from mining alliances, some existing cryptocurrencies, such as Litecoin, have begun to rely more on computer memory power rather than processing power to encode, a shift that would make it very expensive for mining alliances to build specialized computer networks.

     At the same time, other problems include the fact that a lot of electricity is wasted during the Bitcoin mining process. In order to reduce the waste, researchers have proposed a new currency called Permacoin, hoping to save electricity through it. Nevertheless, no matter what the future of Bitcoin is, Arvind Narayanan, a computer scientist at Princeton University, emphasized that the developers and academics of the currency system are unique. "This is a very active body of knowledge. I believe that in the next 20 years, we will teach this technology in computer classes. I am sure of this."