What’s Going On With Bitcoin Exchange Mt. Gox?

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Mt. Gox, one of the original Bitcoin trading sites, has shut down its withdrawals system, citing problems related to transaction malleability (more on that shortly).

Mt. Gox wrote on their site that this problem has forced them to shut down their withdrawal services:

“We apologize for the sudden short notice. All bitcoin withdrawal requests will be on pause, and the withdrawals in the system will be returned to your Mt Gox wallet, and can be reinitiated once the issue is resolved.”

So what happened?

Put simply, Mt. Gox has been suffering from a sort of hack that makes its transactions vanish, allowing aggrieved customers to come back and ask for their money again. In fact, however, these vanished transactions are properly processed and the customer is paid twice.

To explain it without going into too much detail, transaction malleability means that transaction – 1 bitcoin sent from Mt. Gox to User A, for example – could be changed so that Mt. Gox wouldn’t be able to track that the transfer ever happened. The transfer as it stands is added to the blockchain, the ledger of all bitcoin transactions, and User A gets the BTC. BTC transfers are actually chains of data leading back to the original coin in question’s “birth.” Each transaction has its own ID or hash which is based on the data inside the transaction – the recipient and the sender in most cases. These IDs are unique.

A renegade node can modify the transaction, whenever it sees certain data pass through the network. This modified transaction still says Mt. Gox sent User A 1 BTC, is still a valid transfer, but has a completely different hash. This new, modified transaction essentially cancels out the previous transaction (if the renegade node is fast enough to spread its data to the confirming nodes) and Mt. Gox doesn’t have any way of proving that the transaction occurred because it records transactions based on the hash. User A goes back to Mt. Gox complaining they didn’t get their cash and the exchange has no recourse but to send another payment… and another… and another. At least that’s how this would work in theory.

In practice there is no absolute way to tell if this is widespread abuse. Mt. Gox is definitely losing money — you don’t just shut down your customer’s accounts on a whim — but the bitcoin community is up in arms saying that Gox is foolish for not maintaining its own unique method for identifying its own transfers. Writes one Reddit user, “All these dipshits needed to do was to write their gox-specific tx id as a message on the transaction. They already know the recipient address, so if someone tried to say that they didn’t receive their funds, it would be completely trivial to look at the recipient address, and find the transaction with the gox-specific tx id attached at the time their system said that they sent the tx.” In short, Mt. Gox should have a better accounting system. Many major players are calling Mt. Gox’s claims bogus at best and alarmist at worst.

As a result of this shutdown, exchange trackers have removed Mt. Gox from their listings citing the spread of fear, uncertainty, and doubt by Mt. Gox admins. Bitcoin fell to a low of $572 and rebounded to about $670 today.

No one is happy with Mt. Gox.

“Bitcoin is in a period of transition, and Mt.Gox represents the sort of boot-strapped legacy infrastructure the market has left behind. Unnecessary and confusing panics like this are yearly occurrences, the one thing Mt.Gox has going for it is momentum and name recognition,” said Adam Levine, Editor-in-Chief at LetsTalkBitcoin.com. “How much value remains in that name recognition is dubious at best, that’s been the case now for over a year.”

Whether the exchange returns to full capacity at this point is in question. One of the oldest and strangest bitcoin exchanges may have just pulled its own plug.

Further Reading
Why nobody can withdraw bitcoins from one of the currency’s largest exchanges/Quartz
Mt. Gox Blames Bitcoin – Core Developer Greg Maxwell Responds/ CryptocoinsNews