Bitcoin—Security Issues and Design

Bitcoin security issues

Bitcoin is built on hash functions, so the entire Bitcoin system relies on these hash functions being secure. Fortunately, the choices of the hash function in Bitcoin are currently highly regarded. Bitcoin also relies on ECDSA being regarded as a secure digital signature scheme.

The main security issues with Bitcoin are more likely to arise from logistics. There are, for example, potential issues with mining security if a large fraction of mining activity becomes controlled by a single (malicious) party. Since a small set of mining pools conducts much mining, this could materialize.

Perhaps the greatest threat to an individual Bitcoin user’s security is poor key management, leading to loss or compromise of critical signing keys. The decentralized architecture of Bitcoin means there is no automatic backup provision for coping with mishandled key material. Every Bitcoin user is responsible for managing their keys.

Lastly, it is worth reinforcing that Bitcoin is not as anonymous as cash (and does not claim to be). Bitcoin transactions are conducted under pseudonyms. These do not directly identify who holds a particular Bitcoin address, but neither are they explicitly designed to protect against leakage of information about the address holders. It is, after all, possible to have vanity Bitcoin addresses that explicitly identify address holders. It is also possible to identify different transactions associated with the same Bitcoin address.

Bitcoin design considerations

Several design considerations concerning Bitcoin are worth reflecting on:

• Use of hash functions: Bitcoin uses hash functions for several purposes, including providing data integrity, generating pseudorandomness, and as sources of hard computational problems.

• Lack of need for confidentiality: Bitcoin, interestingly, does not need confidentiality. It shows us that sometimes a need for confidentiality only arises when we have a centralized architecture which relies on secrets that must be protected.

• An open approach to data integrity: The distributed architecture of Bitcoin also helps highlight an alternative approach to providing data integrity. Bitcoin allows a notion of correctness of data to emerge through a public consensus on a set of openly published data. This again contrasts with centralized approaches, which, as we have seen elsewhere, commonly deploy cryptography based on secrets to achieve this. That is part of the appeal of distributed ledgers and one reason why they are attracting wider interest.

• Flexibility and trade-offs: Bitcoin features several interesting points of flexibility. Perhaps most intriguing is the parameter controlling the difficulty of mining. This is constantly adjusted to keep the average time of mining a new block to around 10 minutes. The timing of 10 minutes is in itself a trade-off between the speed of new block acceptance and the risks of forking.

• Environmental impact: There are few uses of cryptography that lead to environmental concerns, but Bitcoin is one of them. It should be apparent that mining involves computers worldwide constantly running SHA-256 computations in an attempt to find nonces that complete valid blocks. This is an extremely expensive process and has been criticized by many for its waste of energy resources.

While there is no doubt that Bitcoin is very cleverly designed, it is in some senses a victim of its own success. Apart from raising concerns with governments worldwide (some have outlawed it), the incentives to mine bitcoins have also led to a degree of centralization of mining, somewhat defeating its original intentions. Whatever the future of Bitcoin itself, its greatest significance is perhaps to demonstrate that distributed ledgers can be constructed in practice and do work. We are already seeing other distributed ledger applications emerging, only some of which are alternative digital currencies. While a few of these run on the back of the Bitcoin blockchain, the environmental inefficiency of mining is leading to innovation as alternative ideas for instantiating distributed ledgers are explored.