NEW YORK (InsideBitcoins) – Mere hours into the New Year and bitcoin took it on the chin again, as one of its major exchanges suddenly went dark, if only temporarily. On the evening of January 4th, Bitstamp’s liquid, operational assets – called hot wallets — were hacked, resulting in a reported loss of more than $5 million. Company officials have said nearly 19,000 bitcoins were stolen, reminiscent of past issues with other centralized exchanges such as Mt. Gox and Mintpal.
“This is an unfortunate development although it was predictable,” Houri said. “When you have so much value concentrated in one single exchange, a lot of people are going to try to hack into it, whether it be from the inside or the outside. It is very difficult to win against an army of hackers.”
Defeating the initial purpose of bitcoin
Brawker is a decentralized platform that allows users to buy products online with bitcoin – from merchants who don’t even accept the cryptocurrency. Once customers place an order, another user who wants to buy bitcoins fills the order with their traditional currency. Using multi-signature technology, the order is completed and a bitcoin exchange occurs; all without Brawker’s involvement.
“We believe that decentralization is very important in the bitcoin economy. Satoshi Nakamoto created the Bitcoin protocol to offer a decentralized way of exchanging value.”
According to Houri, centralized bitcoin exchanges are damaging the bitcoin industry. Noting Mt.Gox, he expressed how detrimental their hack was to the entire bitcoin infrastructure.
“We believe that decentralization is very important in the bitcoin economy. Satoshi Nakamoto created the Bitcoin protocol to offer a decentralized way of exchanging value,” Houri explained. “If we now have to rely on centralized exchanges, we completely defeat the initial purpose.”
The choice: government regulation or decentralization
Alberto Gomez Toribio, CEO of a decentralized exchange called Coinffeine, thinks that the types of problems centralized exchanges produce offer only two solutions. In his opinion, either world governments can provide regulation for companies like Bitstamp or users can avoid a central point of failure altogether by creating and utilizing decentralized technology.
“Without regulation to provide clear rules for the bitcoin exchanges, we can only rely on trust,” he told Inside Bitcoins. “If you are using bitcoin, you probably don’t like this choice.”
Coinffeine is entering beta testing this year and plans to focus on the day-trader experience that centralized exchanges like Bitstamp and Mt.Gox attract.
“We want to offer the same user experience that is in Bitstamp, with an automatic process,” Toribio said. “In probably two or three months, we will offer an open version working with fake bitcoins and fake euros to try, but using it with real money is up to you. We need more resources to have the work done as soon as possible.”
Decentralized exchange alternatives
For people who aren’t day traders, acquiring bitcoin in a secure, decentralized manner is still not quite easy. The difficulty in trading locally and securely is one of the main reasons the BitSquare team is working to release a finalized version of its decentralized bitcoin exchange.
Currently, volunteer developers and testers are working on their own time to make the BitSquare platform as functional as possible. It is not really for day traders, but for local users who want to buy casually on a global scale.
“They [centralized exchanges] do serve a purpose; it’s a very easy way to onboard people. But it certainly is not the final future for how bitcoins will be exchanged,” Richard Myers, a volunteer for BitSquare, said in an interview with Inside Bitcoins. Myers is a former Los Angeles-based software developer now living in southern Sweden. “I would see it [centralized exchanges] as more of a stepping stone to decentralized exchanges.”
Currently, Bitsquare is in alpha, running tests. The core team schedules IRC chats and meet-ups for other volunteers to trade on their platform, monitoring the results and ease-of-use without focusing on the day-trader aspects of exchanges.
“If, God forbid, something would happen to Bitstamp, it is my opinion that decentralized multi-signature systems will be the new norm in the industry.”
“Your typical day trader is not going to find the ability to get in-and-out in the same way or rapid trading that you can do in a centralized exchange,” Myers said. “It’s more for people who want to make purchases that you can’t buy with bitcoin or somebody who wants to buy and hold bitcoin. If you’re trading, you’re not trading on a day basis; you’re buying and holding for weeks and selling.”
Bitsquare is a platform with similar interests in decentralization as Brawker. Both platforms allow the purchase of products that don’t conventionally accept bitcoin, but they approach it differently. In Brawker’s case, they utilize multi-signature technology to complete transactions.
“It may be a little bit cumbersome at this stage to set up a multi-signature transaction, but like everything that is programmable, it will get better and more efficient,” Houri said. “If, God forbid, something would happen to Bitstamp, it is my opinion that decentralized multi-signature systems will be the new norm in the industry.”