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Bitcoin Bitfinex exchange hacked: the unanswered questions. 6 Aug 2016, midnight

Read time: 6 minutes

What happened?

The exchange Bitfinex based in Hong Kong was hacked this week in a security breach which drains 119.756 bitcoins from their customer accounts. The sum is believed to represent a significant proportion of the assets bitcoin bag with coins stolen by a total of 0.8 percent of all bitcoins in circulation. Change is in the process of investigating the incident. Both trade and accounts remain suspended. Bitcoin prices had fallen sharply in the days before the incident on Tuesday of $ 650 per Bitcoin to about $ 600 suspect caused the knowledge of an upcoming attack could have been leaked to the market soon. Upon confirmation of a court Bitfinex, bitcoin prices they fell 20 percent.

Is it not supposed to be unhackable Bitcoin?

The Bitcoin blockchain has proved extremely robust regarding preventing attacks double spending or counterfeiting. Unfortunately, the same can not be said of the broader Bitcoin economy, where piracy is commonplace. This is the second time the exchange Bitfinex has been hacked in less than two years, with the last in May 2015 and involves the loss of 1,500 coins.

Most significant recent theft of trade Bitcoin

  • January 2015 - Bitstamp - 20,000 Bitcoins worth $5m
  • March 2015 - Coinapult - 150 worth $43,000
  • May 2015 - Bitfinex - 1,500 worth $330,000
  • June 2015 - Scrypt.CC undisclosed sum stolen
  • August 2016 - Bitfinex 119,756 worth $70m

Online lists curated by community members suggest Bitcoin Bitcoin exchanges have been involved in incidents of piracy to 60 high-profile as the digital asset class was created in 2009. The real magnitude of the problem of piracy, however, it 's hard to estimate. As it is common with financial institutions, many bags reluctant to publicise incidents of theft for fear of losing the client's business or reputation reasons. They do so only if the attacks are too obvious to hide from the public. For the same reason that public audit or the exchange of information on the size and scope of their bitcoin reserves, making sure no one can be sure whether the losses were caused by external or severe cuts mismanagement resist internal risks.

Why the system in an unsafe manner?

Bitcoin balances are as safe as private keys that control them. Since these keys take the form of complex strings of numbers that can be forgotten or lost if not stored securely with ease. For convenience, many users of Bitcoin store keys on computer hard drives readily available or Internet-connected devices.

Bitcoin: Identity Crisis

Despite the revelations of this week, the creator of the cryptocurrency still does not reach the treasure hunters.Security experts say the safest way to store keys in Bitcoin is something known as cold storage. This is equivalent to holding private keys in hard drives offline or inscribed on pieces of paper, often stored in boxes or vaults for safety further conventional security deposit. But while cold storage defends against piracy but also hinders accessibility, so bitcoin harder to use and limiting it is a commercial appeal and retail.

But how is it that so many retail customers say Bitcoin is so easy to use?

In an attempt to make it more accessible to bitcoin-not technically minded users, many third-party services - including exchanges - offer services that manage the keys on behalf of users. In such arrangements are customers instead provided with accounts that track their balances Bitcoin Bitcoin, but in which the underlying is controlled and managed by the third party in question? In fact, customers of such services are not direct but bitcoins liabilities agents three-way.

Is not it ironic for a system without hope?

There seems to be a balance between accessibility and security in bitcoin. The trusting third allows users to benefit from their greater experience in obtaining the key. If and when the passwords that can, for example, are lost, they can restore corporations.



  Bitcoin is losing the Midas touch

At the same time, having to rely on third also wins the point of using a currency that was supposed to solve the problem of trust. Moreover, since the asset class is still cutting their teeth on legal precedent, obligations and responsibilities of these companies to their users in case of lost funds are still unclear. To mitigate the risk that third parties many bitcoin pool large portions of customer funds in cold storage that control, although this again hinders user accessibility structure. To manage daily liquidity needs, exchanges often keep an individual part of the reserves of liquid reserves online known as "hot portfolios." However, although this may improve accessibility, also it increases the risk of hacking. The distinction between readily available balances increased risk and those requiring warnings refund cold storage is no different than the difference between current accounts and traditional savings accounts.

It was hot Bitfinex portfolio that was attacked?

No. Bitfinex left the hot and cold portfolio tune in 2015 after its original cut and replaced by something known as a multi-system firm. In the new set-up - similar to a conventionally segregated account - customers maintain control of their private keys and therefore can keep track of the funds at all times by collating bitcoin balances against the ledger bitcoin public. Multiple accounts firms have been growing in popularity since Mt. Gox based in Japan collapsed in February 2014 due to mismanagement of client funds. The incident has been dubbed own moment of MF Global Bitcoin and until now was the largest security breach high-profile sector.

How does a multi-signature work?

In a multi-firm, at least two out of three parties must sign any transfer system by reducing dependence reliance on a single institution. The keys are usually split between the user, exchange and a neutral third party - in this case, a co-signer specialist called BitGo. The system is supposed to guarantee customer funds control at all times, without reducing accessibility, since no one can transfer funds without at least one other corresponding logoff. In June, however, the CFTC fined $ 75,000 for Bitfinex inadequate segregation of customer account.


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