Every day, there’s a new Bitcoin fire to be put out.
Whether it’s a national government rejecting Bitcoin, a household-name business adopting it, or a new malfunction in a Bitcoin exchange or wallet, there’s always breaking Bitcoin news. And at this rate, the continual rollercoaster ride is less exciting than it is predictable.
Right now, it’s easy to see why so many governmental agencies, big businesses, economists and finance experts don’t take Bitcoin seriously. As long as Bitcoin’s value continues to violently rise and fall with each news story, they can afford to ignore the currency entirely.
Will Bitcoin overcome, or will it fizzle out in its own drama? I’ve pinpointed three areas where the Bitcoin economy needs to improve in order to shift out of its theatrical adolescence and mature into a currency that demands to be taken seriously.
Bitcoin transactions are final and irreversible for a reason. It helps ensure that only one person owns the currency at a time, and verifies who that (pseudonymous) owner is.
But when you get into disputes, things get tricky. If you’re selling products to customers with Bitcoin, you need to be able to allow returns. And if you’re sending somebody a loan with Bitcoin, you need some way to arbitrate that they’ll pay you back.
If you use a credit card, you can call Visa or Mastercard if you don’t receive the goods you paid for. Who do you call with Bitcoin?
Since Bitcoin’s fixed transaction style cannot be changed, companies are innovating around it. An initial step is Bitrated, a company that is pioneering consumer protection for Bitcoin.
Bitrated works using escrow, which is basically the use of a third party to pay on your behalf. Instead of a customer sending her money directly to the merchant, it goes to Bitrated and is only released when the customer confirms she received the product.
Bitrated takes this concept one step further: Instead of sending the money directly to an escrow agent, the customer sends money to a multi-signature address, using the private keys for the agent, the customer, and the merchant. The money can only be spent if two out of the three parties approve.
Bitrated lets the merchant or customer who initiates the transaction select an escrow agent of their choice, and the agent’s fee is usually something like 0.1%. So even with consumer protection, Bitcoin wouldn’t lose the low fees that make it appealing.
“The groundwork for third party arbitration has existed for a long time, since [Bitcoin founder] Satoshi's days,” said Nadav Ivgi, cofounder at Bitrated. “It just required someone to step up and build a system that implements it and is usable to the general public.”
The issue so far is that Bitrated is still very small. For Bitcoin to grow up, Bitcoin’s most prosperous merchants would need to begin advocating for consumer protection.
Fix The Glitch
Mt. Gox made a lot of Bitcoin users very angry this week—and tried to bring the entire cryptocurrency down with it.
See more: How To Sell Bitcoin—Legally
The Bitcoin economy’s first and oldest exchange raised eyebrows and tempers when it made the decision to stop allowing customers to withdraw their own funds until further notice. Faced with bad publicity, it elaborated—it’s because of a fundamental bug in Bitcoin itself.
Transaction malleability, the bug in question, means that it’s possible to alter the details of a transaction to make it appear as if one occurred when it really did not. One anonymous redditor shared how he used the glitch and a little luck to steal 100 BTC (about $60,000) from an exchange. The redditor returned the money, but warned the glitch was still around at the “top exchange” he stole from. Since no other exchange has been experiencing issues with transaction malleability, other redditors are guessing he’s talking about Mt. Gox.
Gavin Andresen of the Bitcoin Foundation boldly responded that transaction malleability has been a known design flaw “since 2011,” and the problem was with Mt. Gox’s software, not with Bitcoin itself.
True enough, most other Bitcoin services, like popular wallet Blockchain and the aforementioned Bitrated, have designed their software to be invulnerable to the glitch. But that doesn’t mean the Bitcoin Foundation shouldn’t make an effort to fix it.
“The Bitcoin core development team has worked to limit transaction malleability," Andresen wrote. "There is broad agreement in the community that this needs to be eliminated. Finding the best and most responsible solution will take time."
It may have not been the smartest thing for Mt. Gox to blame a three-year-old glitch for its current problems, especially when nobody else is experiencing the issue. But “we’re working on it” isn’t an acceptable response from the Bitcoin Foundation, either. For Bitcoin to be taken seriously, it can’t just leave vulnerabilities exposed and expect people to work around them.
Lower Volatility, Higher Adoption
If you’re only reading the headlines, it would seem like Bitcoin drama is peaking. But whatever it may look like on a day-to-day basis, Andreas Antonopolous, Bitcoin expert and entrepreneur, says there is statistical data to prove Bitcoin is actually becoming less volatile all the time.
“Volatility as a metric, on a rolling average basis has been declining continuously for five years,” he said. “Each year, Bitcoin has less volatility as the volume and liquidity pool increase. The fact that media drama causes price fluctuations is not an objective measure of Bitcoin fundamentals.”
Even if it’s slowly improving, Bitcoin is still volatile enough that if you have $20 in Bitcoin today, it might be worth only $18 (or perhaps $25) tomorrow. This might hinder people from using Bitcoin to do things like pay their rent. Imagine if you received your paycheck in Bitcoin—you’d never know if it was enough to buy everything you need this month until you looked at the exchange.
Nearly everyone agrees on one thing that could accelerate Bitcoin’s stability: Higher adoption. Since Bitcoin is an opt-in currency, not one you have to use to pay your government taxes, it needs to make itself especially compelling, even essential, to consumers. Bitcoin could achieve this by solving problems no existing currency can solve.
We can already see seedlings of this in the way that Bitcoin lets users make donations to causes, no matter how controversial, without concern for a government’s watchful eye. Bitcoin also solves problems no other currency solves by allowing people to transfer money with minuscule fees. And God forbid you want to transfer money from your bank account on a Sunday with traditional currency. With Bitcoin, that’s A-OK.
But what really makes Bitcoin unique is the technology it’s built on. Even if Bitcoin doesn’t survive, the blockchain will. Before the blockchain, we could only transfer copies of digital data online. I could send you a file, but I’d have the same file myself. With the blockchain ledger, I send you the bona fide original, but I can even prove beyond a shadow of a doubt that I no longer own it myself.
Like the Internet, consumer PCs, tabletop copiers, and other disruptive technologies, it’ll be impossible to imagine our reliance on something like Bitcoin until it actually happens. The potential is there, but for Bitcoin to thrive, we’ll need to watch it occur.
Lead image by Jason Benjamin on Flickr