Bitcoin, an online peer-to-peer payment network, has grown dramatically in popularity since its introduced as open-source software in 2009. The aim of its inventor, Satoshi Nakamoto, was to cut out the middle man – the credit card company or bank – in online payments, meaning that no one institution, government or person could place a fee on the transactions, or control the flow of the Bitcoin currency. Instead of one organisation holding all the information on the state of the transactions they mediate in a centralised ledger, it was intended that each user of the Bitcoin currency would record the transactions made together.
However, Bitcoin’s lack of regulation, which has allowed it to be used as a currency for financing illicit activities as well as making it liable to fraud, has led to some criticism of the system. A group of Trinity students are currently looking at ways to improve the security of transactions in Bitcoin through a “credit cheque” system, where potential partners in a transaction have the ability to scope each other out before deciding to do business.
How does the system work?
So how does the system currently work? Imagine going to a London pub, some of which now sell drinks for Bitcoin. You might have enough Bitcoin in your digital wallet to buy drinks for the entire bar, but how do you convince the bartender that you actually do? This is where the system of public and private keys, and a group of the Bitcoin community known as Miners come in. To pay for something in Bitcoin, or to transfer money from one wallet to another, you need to public key or public ID of the person you want to pay, as well as your own private key. Only if these two things are present to “sign” a transaction will it be allowed to proceed. The public key serves to identify the person or business you wish to pay, while your private key acts something like a pin code, ensuring that the owner of the wallet has given permission for the payment to take place. This is a minor drawback of the system, in that the community will not accept any other form of identification of ownership of a particular wallet except the private key associated with the wallets public key. This means that if the private key is lost, the wallet is no longer useable and the Bitcoins contained within it cannot be recovered, as happened in 2013 when a user threw out a hard drive containing his private key to a wallet containing 7500 Bitcoin, worth approximately $7.5 million at the time.
Following a transaction being signed by both parties, it is broadcast as a proposed entry to the ledger. The mining community of Bitcoin then take over, and ensure that the central ledger of all Bitcoin transactions, also known as the block chain, is kept consistent and complete by collecting and verifying new transactions into blocks, or pages of a ledger. This also verifies that the account which is paying contains enough Bitcoin to do so. The miners compute a cryptographic hash function of a pair of transactions to give a digest, a single output, from this pair. A second hash function of the digests is then computed, effectively reducing the number of elements from the original four down to one. This happens across all transactions on the ledger page, or block, until a single digest incorporating all the transactions with the block is given. This new digest is then incorporated, or “chained” to, the digest of the block previous to it, meaning that each block can be traced back to the beginning of the Bitcoin system and giving the central ledger its “block chain” name. This is what affords the system its security, as to change a historical transaction, not only must a particular block be modified, but all blocks since it must also be modified, as they incorporate the information of that particular transaction.
Despite the security of the system, one of the key issues surrounding the Bitcoin currency is the legality of it. The Baggot Inn, which for a period last year allowed drinks to be bought with Bitcoin, at a rate of BTC 0.0093 (€4.40) a pint, has since dropped the scheme, citing the legal position of Bitcoin, and in particular Bitcoin ATMs, within Ireland as the reason behind the move as the Central Bank does not currently recognise Bitcoin as a currency. A number of reasons are associated with this, mainly that the system has little regulation, meaning that if theft or fraudulent transactions occur, for example if goods are bought online using Bitcoin and are not as described or don’t arrive at all, users are not protected by refund rights.
This is where a group of Trinity students, in particular Cian Burns, step in. Burns was originally involved in a group looking into creating a Bitcoin “regulator” – led by Professor Donal O’Mahoney of the School of Computer Science and Statistics – before he went on to create a database of linked accounts by trawling the transaction ledger and grouping linked Bitcoin addresses as part of his dissertation. “What I was doing was effectively going back through the ledger looking for linked activity and by doing so, creating a record of interacting accounts,” Burns tells Trinity News. “If I see a transaction with many accounts going into it, I know that each of these addresses is owned by the same person, similar to paying a €25 bill with a €20 note and a €5 note.”
The system might involve users reviewing their experience of dealing with a particular address, and on top of that, it could incorporate the proximity of the potential partners’ address to a malicious address.
After creating this grouping of accounts, and linking accounts to each other using transactions, Burns looked at building on his work to create a credit-check system that would allow potential transactions partners to scope each other out before deciding to participate in a transaction. ”The system might involve users reviewing their experience of dealing with a particular address, and on top of that, it could incorporate the proximity of the potential partners’ address to a malicious address,” Burns says. For example, if the account a user is looking at doing business with is linked to an address known for fraudulent behaviour or an account that interacts a lot with black market addresses, a user might reconsider whether they want to proceed. This address reviewing system should prevent a few of the problems associated with Bitcoin at present. Future projects by the team are looking into how Bitcoin might be regulated to an extent, while still maintaining the attractions the system currently possesses. A future Bitcoin regulator, according to the group, would want to know the distribution of Bitcoin among address and to be able to recognise patterns in the transaction history that the community of users ought to be concerned about, and which could, for example, indicate fraudulent activity.
While not yet perfect, Bitcoin deals with some of the grumbles that users have with the current system, in that it does away with transaction fees and allows a degree of anonymity. Some regulation of the system, such as that proposed by the Trinity group, would likely improve the user experience and protect against exploitation of users, though.