With all the hype on bitcoin, I wanted to capture some thoughts on the downside risk to bitcoin from my research and highlight potential problems to be solved now and in the future.

Bitcoin Risks/Problems:

  • Proof of work algorithm
    • Expensive, costs electricity
    • Mining pools centralizing and gaining power over network 
  • Sybil attacks
    • Man in the middle on network could simulate bitcoin network in order to steal
    • Potential resolutions: (Mike Hearn discussion in London)
      • Force traffic through Tor though this is insufficient because you couldn't ensure you are correct to the right node on the Tor network
      • Create anonymous identity verification through a type of zero knowledge proof using your passport or something hard to fake
  • Fungibility
    • Coins are not anonymous or fungible at the moment
    • Potential to have legislation to try and create coin blacklists
  • Alt coin competition (Per Adam Black)
    • Increased competition from alternative currencies could decrease public perception of a scarce digital resource in general
  • Risk management for adding features to the currency/protocol
    • As currency market size grows, becomes more and more risky to add features
      • Potential model to use a Fedora/Red hat approach (Per Adam Black)
        • Create a bitcoin 2.0 market that implements and tests new features and slowly migrate over with one way transaction of old bitcoins into the new network
  • And of course, legislation