Mt. Gox's demise rocked the bitcoin community, but, like San Francisco's occasional earthquakes, it was not entirely unexpected.
E&T reported on the bitcoin exchange's unexpected shutdown last month. Since then, the exchange, which admitted to losing 850,000 bitcoins, has declared bankruptcy with an outstanding debt of $63.6m (£37.9m).
Mt. Gox never really passed muster as a grown-up financial exchange. Developed (and then sold) by software expert Jed McCaleb, it was originally a trading card exchange for a card game called ‘Magic: The Gathering’, which is where it got its name.
It had long been plagued by slow withdrawals and denial of service attacks. Even its legal paperwork wasn’t in order for a while, as was discovered last year when the US government froze its US accounts for regulatory reasons.
The exchange’s demise stemmed from a well-known flaw in technologies used by the bitcoin protocol, known as transaction malleability. This enabled people to alter a transaction, making it look as if it had not been sent. The software maintained by bitcoin's core developers had long since been changed to compensate, but Mt. Gox used its own implementation.
The company is said to have repeatedly reissued bitcoins when people complained of not receiving them, over long periods of time. This is what caused it to lose so many bitcoins, and yet it is a problem that many other exchanges had solved through basic bookkeeping practices.
Not that other bitcoin exchanges haven't had their fair share of trouble, though. In November, Czech bitcoin exchange Bitcash.cz was hacked, and up to 4,000 customers' wallets emptied. That same month, Polish exchange Bidextreme.pl was similarly compromised.
A year ago, things were worse still. A study by academics from Carnegie Mellon and Southern Methodist University in the USA found that 45 per cent of bitcoin exchanges failed, with customers’ balances often wiped out.
But things are changing. If anything, the demise of Mt. Gox was probably a good thing. Bitcoin has been undergoing a rapid transformation in the last year. Originally a conceptual plaything for software engineers and then a welcome hangout for libertarians, it has recently begun gathering a more mature following, as business people begin realising its potential.
That potential, incidentally, lies not in bitcoin itself, which is merely an instantiation of a more interesting underlying concept. Satoshi Nakamoto, the coin's creator, devised a means of operating an autonomous, decentralised network in which the various nodes were able to maintain a consensus about an overall operating state.
It is that underlying model, rather than any one crypto currency, which has long-term staying power. And companies are building on it with farther-reaching concepts. One such example is coloured coins, a concept that would enable people to ‘tag’ units of crypto currency with other properties. Instead of purely money, coloured coins could be used to represent stocks, bonds, or physical property.
Another emerging initiative, called Ethereum, will be a framework for building contractual relationships using decentralised networks. These contracts will include scriptable instructions, which could be used to create currency exchanges, decentralised organisations, or entirely new classes of cryptocurrencies with their own rules, say the founders.
While all this happens, venture capital money is piling into the bitcoin community, with tens of millions now invested in companies that are building a layer of services atop the raw protocol that makes the network function.
As this layer of services grows, the level of sophistication in the exchange community, and in other businesses, will grow. Poor management and software bugs may never entirely disappear, but one thing’s for sure: the Mt. Gox travesty will be an unfortunate but necessary comma in the cryptocurrency story, rather than a full stop.