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Bitcoin – An Analysis

Kay Hamacher and Stefan Katzenbeisser presented their analysis of Bitcoin at 28C3. Besides the usual cryptographic analysis, they pointed out some important aspects of the system:

Bitcoin doesn’t scale well, and no update mechanism has been designed!

Bitcoin was created as a total decentralized system. There is also no central authority or update mechanism, that could alter the system. As soon as Bitcoin hits it’s boundaries, all Bitcoin users need to agree on a change of the system and integrate it. Because every user of Bitcoin needs to keep a full log of all transactions, that have ever been executed on the Bitcoin network, it is clear that Bitcoin will hit it’s scaleability boundaries rather soon, if it gets more popular.

Bitcoins can bet lost and the number of Bitcoins that can be generated is fixed!

Bitcoins are a digital currency, that are stored on the current owners computer. If for example the harddisk crashes, or it is encrypted an the password is lost, these Bitcoins cannot be spend anymore. They still exist in the network, and also cannot be regenerated. One could also say, these Bitcoins are lost. Also, the total amount of Bitcoins, that can ever be generated is fixed. So we need to expect, that the total amount of Bitcoins will start to decline, as soon as all Bitcoins have been generated. Just assume, that 1% of all Bitcoins are lost per year, then after  \log_{0.99} (0.5) \approx 69  years, only 50% of the Bitcoins will still be there.

Bitcoin is not untraceable and anonymous!

Because Bitcoin keeps a log of all transactions, and this log is available to the public, one can trace which address has received how much money, and where it went. Bitcoin allows a user to have more than one identity, but as soon as money from more than one address is used in a single transaction, one can assume that these addresses belong to the same user. One can for example see, who spend money to Wikileaks, and where Wikileaks transferred that money. Also if you assume, that a person ears money only from Bitcoin, you know his total income. You also know when he transfers money on Bitcoin and when not, so you might find out when he sleeps and in which time zone he lives in.

What has not been found…

As mentioned at the beginning of the post, there is no central update mechanism. So if somebody would find a bug in the design of the system, that allows him to steal money from it, it cannot easily be fixed. So far, no attack one the basics of the bitcoin system has been found and bitcoin is running and getting more and more popular.

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