Bitfinex Heist Rings the Alarm of Bitcoin Centralization
Nozomi Hayase - Coindesk
August 15, 2016
In this opinion piece, Hayase discusses the recent hack at a major bitcoin exchange and why she believes this should serve as a call to action for those who believe in decentralized solutions and their virtues.
The problems associated with operating a bitcoin exchange are not going away.
On 2nd August, Bitfinex, one of the largest bitcoin exchanges by volume, became the latest to declare itself the victim of a major security breach. Accounts were hacked and consumer funds stolen. The ghost of Mt Gox stirred again.
Yet despite the issues, exchanges still serve as gateways into bitcoin, the interfaces with the world of central banking. With large exchanges like Coinbase and Bitfinex dominating the trading scene, commercialization has come to the fore of what was once a grassroots movement spurred by anarchists and technologists.
These fast-growing companies provide convenience to users, while at the same time, funds accumulated in a handful of exchanges tend to concentrate risk and create single points of failure.
The Bitfinex theft represents another failure of centralized systems. While some call for more regulation, it appears that new solutions are already emerging within the ecosystem.
Promise from the future
As Bitfinex works to restore its services, interruption from the hack has encouraged community members to examine what has become the familiar landscape of centralized exchanges.
It may be helpful here to look back at the genesis of cryptocurrency.
The message embedded in the first block of the blockchain reads: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks". This can be seen as a warning about an alarming future, locked in a trajectory from the past.
Bitcoin presented a choice that has never existed before. Its mysterious creator Satoshi Nakamoto described it as "a distributed system with no single point of failure…" where "users hold the crypto-keys to their own money and transact directly with one another, with the help of the P2P network to check for double-spending".
The white paper published under pseudonym was a promise. Bitcoin, which became operational in 2009, was its fulfillment. The promise was to build security through cryptographic proof, replacing third-party trust and creating networks resilient to counter-party risk.
The 2008 financial crisis coupled with unprecedented institutional corruption began to unveil adversarial forces that the creator of this technology had recognized.
Assumptions about governments, namely that they are "there to protect us", have increasingly been challenged. Trusted third parties that are meant to serve the people are actually often doing the opposite.
The high interest rates of many credit companies are verging on predatory. Corporations skim massive profits through service fees and chargebacks. They target the poor and migrant workers with remittances and usurious loans, and are now even going after the middle class. Central banks debase currency, while governments using media propaganda divert taxpayer money to fund resource wars.
New vision of security
This force of control is found not only in monetary transactions.
The centralization that was implemented for efficiency has now planted the seed for data mining, making systems vulnerable to censorship and spying. Edward Snowden's disclosure of NSA mass surveillance revealed the degree of its egregiousness.
In response to the demand for reform that came after the revelation, US President Barack Obama swiftly moved to defend the secret surveillance program. At that time, he told the American people, "You can’t have 100-percent security and also have 100-percent privacy." Then he noted that people have to make choices as a society. His solution was for the public to simply trust the government.
As most money now has become digital, central servers that collect information have devastating consequences when personal data is breached. Contrary to Obama's expressed claim of security, the truth is that people under indiscriminate surveillance no longer have privacy, nor do they have the security to protect themselves against governments that operate in secret and erode their basic rights.
Unlike the security promised by politicians entrenched in power, bitcoin is built on a different vision of security. The Cypherpunks who advocate use of strong cryptography as a means for social change held the idea that "we cannot expect governments, corporations or other large, faceless organizations to grant us privacy out of their beneficence."
They saw that people must come together to build new systems.
Bitcoin developers, who are inspired by this same vision, strive to build a new model of security that does not make anyone compromise their civil liberty. Carried by a passionate network of peers around the world, in these last seven years, this security has never been broken.
Despite recent setbacks with Bitfinex, Bitcoin’s hashrate right after the hack was at an all-time high.
Bitcoin is a community-driven free software project.
Its network immutability is supported through decentralization. Satoshi's anonymity represents the core of this technology. By keeping the network horizontal, from its origins to its development, it maintains an unprecedented model of security and the ecosystem grows organically.
In this, decentralized exchanges could become a vital link that connects many users to bitcoin’s network, yet there is a shortage of these exchanges.
Bitsquare is one of the few fully decentralized and censorship-resistant exchanges that is attempting to fill this gap. Launched in late April this year, it aimed to creatively tackle issues intrinsic to centralized exchanges.
After the Bitfinex incident, an account that belongs to the exchange tweeted:
Time to extend Bitcoins model of "Be your own bank" to "Be your own exchange".@aantonop
— Bitsquare (@bitsquare_) August 3, 2016
Founder Manfred Karrer explained how Bitsquare is decentralized by removing trusted third parties from exchange transactions, allowing anyone to buy and sell Bitcoin with national currencies and alternative cryptocurrencies.
Using Tor Hidden Service for the server, the project tries to bring stronger privacy protection that could address bitcoin's weak anonymity. What is unique here is that Bitsquare is not just a decentralized exchange, but it is a protocol aimed at keeping the network open. Bitsquare is not a registered company. It is an open-source project that can be studied, modified and freely shared.
Bitsquare’s commitment to decentralization is practiced through its choice of prioritizing security over convenience, manifested in their act of not holding users funds or collecting data. This priority also extends to how they bootstrap the organization, valuing community-oriented development, rather than top down management driven by rapid growth and profits.
After Bitfinex’s security breach, Bitsquare is now gaining more traction, with clients currently supporting 73 different altcoins. In this early stage of the project, it has some limits, so there is room for improvement.
Solution from below
Centralization has been a dominant paradigm of the society we live in today.
Corporate structures are organized hierarchically, divorcing CEOs from the needs of their own employees and customers – often turning people into cogs in a machine. This style of organizing not only dominates markets, but greatly influences political systems. As a consequence, governments are increasingly becoming foreign to the people they are supposed to represent, creating a vast divide between those who govern and the governed.
In the world of trusted third parties, we have become "consumers" who are meant to passively accept programs and apps that are designed without much consideration for our best interests. On the other hand, distributed systems empower individuals and increase the role that users play in the network.
One lesson from this Bitfinex heist may be to realize our own power and the responsibility that comes with it. This can become a collective wisdom that makes the community stronger.
Decentralization creates a fertile ground that nurtures diversity. Platforms like BitMarkets and OpenBazaar that enable fully P2P markets bring a space for people to directly engage in trade without anyone in the middle. The more decentralized exchanges and projects there are, the more that both risk and opportunity are distributed.
Problems of centralization cannot be solved through the same modes of thinking that created them. Instead, solutions require innovation from below.
Security through cryptographic proof was a promise.
Our network effect of participation can fulfill this promise, making the system bulletproof; one that cannot be hacked, Goxed or Bitfinexed and that leaves the tyranny of the past behind.
Nozomi Hayase, PhD, is a writer who has been covering issues of freedom of speech, transparency and decentralized movements.