Flaw in the Bitcoin Protocol, or Internal Technical Glitch? MtGox Withdrawals Still On Hold

MtGox has issued its most thorough explanation for customers of its ongoing delays effecting bitcoin withdrawals.  Explaining the situation, MtGox

MtGox has issued its most thorough explanation for customers of its ongoing delays effecting bitcoin withdrawals.  Explaining the situation, MtGox provided both a simplified and technical details.  According to MtGox, a flaw in the way bitcoin transactions are recorded have created a problem that affects ‘all’ transactions to third-party wallets and they are currently working with members of the bitcoin core development team to address the issued.  Among the problem is flaw where transaction identification can be altered after a request for transfer was generated.  As such, MtGox found that users could make a request for funds, alter the transaction to appear that the transfer wasn’t made, and then proceed with another request; thus receiving double payments.

In their ‘Non-Technical Explanation’ they stated:

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“A bug in the bitcoin software makes it possible for someone to use the Bitcoin network to alter transaction details to make it seem like a sending of bitcoins to a bitcoin wallet did not occur when in fact it did occur. Since the transaction appears as if it has not proceeded correctly, the bitcoins may be resent. MtGox is working with the Bitcoin core development team and others to mitigate this issue.”

Flaw in the bitcoin protocol?

In the run up to the current statement, there has been speculation as to whether the technical glitches are the result of deficient coding on the part of MtGox which had caught up to them, or a larger problem with bitcoin technology which could affect all users.  For its part, MtGox concluded its update by stating “To put things in perspective, it’s important to remember that Bitcoin is a very new technology and still very much in its early stages. What MtGox and the Bitcoin community have experienced in the past year has been an incredible and exciting challenge, and there is still much to do to further improve.”

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In terms of this statement, according to MtGox, the problems are applicable to more than just MtGox but are a flaw in the overall bitcoin protocol.  As such, if exploited, such a problem could create transaction errors and double spending to occur at other exchanges.

Looking ahead, it will be interesting to see response about this problem from other exchanges and hosted wallet venues and whether they contradict MtGox’s opinion.   Also, as MtGox is pinning its problems on the bitcoin protocol, they appear to be aiming to distribute the blame of their problem beyond their company.

Withdrawals still on hold

In terms of withdrawals, MtGox didn’t provide an update of when they would take place other that stating “MtGox will resume bitcoin withdrawals to outside wallets once the issue outlined above has been properly addressed in a manner that will best serve our customers.”  As such, for the time being, until MtGox has fully resolved the transactional issue, bitcoin withdrawals are slated to be halted indefinitely.

In early reaction to the news, prices of MtGox have fallen below $600 to a current low of $580. Liquidity appears to be limited on the exchange as spreads have widened to around $5 compared to $1 to $2 on BTC-e and Bitstamp.  The selling though has also affected other exchanges, as prices of bitcoins on BTC-e have dropped about $30 to $665 since update and declines began at MtGox (for current prices).

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