None of Bitcoin's recent troubles -- technological glitches and the collapse of the biggest cryptocurrency exchange, MtGox, the departure of key figures from the Bitcoin Foundation -- have struck me as terminal. Now, though, I'm starting to think Bitcoin needs trust to survive -- a potentially fatal flaw for the virtual currency.
To cryptocurrency enthusiasts, "trust" is a dirty word. "We have proposed a system for electronic transactions without relying on trust," Satoshi Nakamoto wrote in the original manifesto proposing the decentralized currency. That's what made the system better than traditional fiat money: It purported to make sure, as a matter of technology, that transactions would be carried out as intended and without the costs associated with the presence of a trusted middleman, such as a bank, in any traditional payment system.
Then, last month, a mining pool -- an association of people who own specialized hardware that produces Bitcoins by running specific mathematical operations -- gained a 51 percent share of computing power used in currency production. That gave it the power to reverse transactions, to pay twice with the same Bitcoins, and to delay or even cancel other people's transactions. The pool was GHash.io, run by a secretive U.K.-incorporated outfit called CEX.io, which came close to topping the 51 percent mark in January. Back then, it promised not to do that: "GHash.io will take all necessary precautions to prevent reaching 51% of all hashing power, in order to maintain stability of the Bitcoin network," the pool said in a statement.
Bitcoin transactions are recorded in the block chain, a kind of public register. Transactions are broadcast and validated by other users. A group with more than half of the system's mining power can change, duplicate and stop transactions; even if every other user joined forces, they'd have insufficient resources to prevent the abuses.
Now, weeks after that promise was shattered, GHash is making new ones. "If GHash.io approaches the respective border, it will be actively asking miners to take their hardware away from Ghash.io and mine on other pools," it said in a fresh communication.
In other words, the stability of the electronic currency and all the infrastructure that has grown around it in the past five years -- at least $240 million worth of it in venture capital investment alone, most of it made last year -- now depends on the goodwill of a few people whose names nobody knows. "Jeffrey Smith" -- the name used by GHash.io's only spokesman -- is likely a pseudonym.
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