2012 has been an exciting year for Bitcoin. We have seen BitPay grow from near-irrelevance to processing transactions for over 2000 merchants around the world, Coinabul expand its gold-selling business from nothing in October 2011 to over 120,000 BTC of gold sold this year, entirely new Bitcoin-accepting businesses like Coindl and the Bitcoin Store open their doors, and hundreds more innovative services, of which there are unfortunately far too many to mention. Of course, life in the Bitcoin world has been far from perfect. We saw the margin trading service Bitcoinica come crashing down after a series of hacks, all in the tens of thousands of BTC in size, a Ponzi scheme grow to a size of $5 million at its peak before collapsing in August, and Bitcoin exchange Bitfloor lose $250,000 to another thief in September. However, after these events, the Bitcoin community has begun to take security much more seriously and, among other security upgrades, policies of keeping at least 85% of customers’ assets in offline cold storage have become an industry standard for Bitcoin exchanges. Scams too have become much more difficult to pull off. Also, in the last two months alone, Bitcoin has gained a large amount of public legitimacy, as popular services like WordPress and 4Chan began accepting it, and Bitcoin Central partnered with a licensed payment services provider in France to integrate its exchange accounts directly into the traditional banking system. And, last but not least, the Bitcoin price itself increased from $4.72 on Jan 1 to $13.51 on Dec 31, a 186% increase.
Now that 2012 is behind us, it’s time to start looking forward to what the Bitcoin community will bring in 2013. There are a considerable number of projects scheduled for release this year. A few of the projects, like ASIC mining computers, have simply been delayed from last year, some are services that accept Bitcoin, several provide ways to use Bitcoin more securely, and still others are new projects entirely. Here is a short list of what 2013 has in store.
- ASICs – Butterfly Labs first opened preordering for its upcoming line of application-specific integrated circuit-based mining hardware in June, originally planning to release them in fall 2012. The mining chips use hardware optimized to perform the sole task of carrying out the SHA256 calculations that make up the bulk of Bitcoin mining, and will thus be able to crank out ten times as much hash power per dollar of hardware and per dollar of electricity compared to FPGA or GPU-based solutions. However, a series of delays has pushed the shipping of these devices to the first quarter of this year. Other companies are rapidly catching up; Avalon ASIC has boldly put down a countdown on their website until the time that they ship, which they have scheduled for January 19, and DeepBit’s own ASICs are still scheduled for March. Once these devices are released, the Bitcoin network’s hashpower is projected to increase by a factor of ten, making the network extremely robust against attacks from traditional, general-purpose supercomputing networks.
- Bitcoin Wireless – This BitInstant project intends to provide a way of buying credits for prepaid cellphone and data plans from over 300 carriers around the world at competitive prices. The project was announced months ago and has been followed by near-silence since then, but it is still under development and will likely come out soon.
- The Bitcoin Debit Card – Although BitInstant’s plan for a Bitcoin-backed debit card originally announced in August has been delayed by months after its original scheduled release date in October, the project is still in the works. And if BitInstant’s card takes too long, the Bitcoin Central exchange in France, armed with many of the powers of a bank through their recent partnership with the licensed payment services provider Aqoba, is planning to release one of their own as well.
- Ripple – This project is another bank-free payment network that operates on principles somewhat different from Bitcoin. Ripple seeks to exploit the concept of six degrees of separation: that any two people in the world are connected through a chain of relationships that is, on average, only six links long. When one person wants to pay a given amount of money to another, the system finds such a chain between the two people, and registers a debt owed by each person in the chain to the one after them. Thus, everyone gains a credit and a debt within the system, except for the sender and receiver, who are the only ones who see a net increase or reduction to their balance. Friends and colleagues can always settle debts between each other, and Ripple seeks to leverage these relationships to enable payments between any two people in the network without ever moving any actual money. The project has been around for years, but recently there have been telltale signs that something is brewing. It looks like the Bitcoin community will have to wait and see to find out what Ripple has in store.
- BitMessage - This project by Jonathan Warren aims to use many of Bitcoin’s ideas to create a secure, decentralized protocol for sending messages. Like Bitcoin, BitMessage uses a peer-to-peer network to propagate information, but unlike Bitcoin, messages only stay in the system to be downloaded by the receiver for two days, limiting the Bitcoin issue of “blockchain bloat”. Version 1.0 turned out to be a flop due to serious security issues, but version 2.0 will switch to a much more secure design based on Bitcoin-like elliptic curve cryptography, as well as being subject to a much more stringent security audit. If BitMessage succeeds, it may well provide a compelling, security and privacy-friendly alternative to the notoriously insecure email system that we use today.
- Slush’s USB Hardware Wallet – In November, Marek Palatinus, operator of the Slush mining pool, announced a project to develop a physical Bitcoin wallet device that would take the form of a USB key. Wallet security has been a significant problem for Bitcoin; at one point, a Bitcoin user lost $500,000 when an online attacker managed to gain access to his computer. Since then, Bitcoin clients have added wallet encryption to increase security, which would have prevented the $500,000 loss, but Palatinus intends to go further. With his USB wallet, no private information will ever leave the device; the device outputs transactions signed with its internal private key directly. This, combined with a physical button and display on the wallet that can be configured to be required to press to sign a transaction, ensures that computer intruders or viruses have no way of stealing or emptying the wallet without the user’s express permission. Physical theft will not be a problem either; the wallet will have an option to require a PIN to sign transactions, and the user himself is asked to write the device’s randomly generated root private key down during initialization. Upon losing the device, one can quickly use the key to move all of the stored bitcoins to a temporary location before buying a new one.
- Multisignature Transactions – This is a technology that has been available for nearly a year and in the works since 2011, but which has still seen no significant real-world application. While bitcoins sent to a normal Bitcoin address can only be spent by transactions signed by the one specific private key associated with that address, a multisignature address is associated with N private keys, of which M must be used to sign a transaction spending from that address. N and M can be set to whatever values are necessary. A simple use case is a 2-of-3 wallet for an escrow transaction. For example, suppose Alice wants to buy an expensive product from Bob, but the two do not trust each other. Alice can send the money to a 2-of-3 address with keys controlled by Alice, Bob and a third-party mediator, who is also potentially untrustworthy. Bob sees that the money is in the address and sends off the product. If all goes well and the product arrives, Alice and Bob sign a transaction to send the money locked in the 2-of-3 address to Bob. If the product does not arrive and Bob is unresponsive, Alice can ask the mediator to sign a transaction with her to give her the money back. If the product does arrive and Alice refuses to release the payment, Bob can do the same thing. Finally, if Alice and Bob lose trust in the mediator, they can sign a transaction to send the money to another 2-of-3 address with another mediator. No other mechanism in Bitcoin – indeed, no other payment system in history – has the potential to allow this kind of minimal-trust long distance arrangement to take place. The technology also has applications in secure wallets, as one can create 2-of-2 wallets with one key on your machine and the other under the control of a third party, ensuring that anyone wishing to steal your bitcoins must compromise both the provider and your own machine. If the adoption of deterministic wallets was the main breakthrough in Bitcoin cryptographic technology in 2012, multisignature transactions may well be the defining development of 2013.
- Bitcoin Conference – This year’s Bitcoin conference will take place in May in San Jose, California, and will be hosted by the Bitcoin Foundation. This will be the third Bitcoin conference to take place, following one in Prague in November 2011 and another in London in September 2012. The topics that will be covered include Bitcoin tech, Bitcoin mining, Bitcoin business and regulatory issues. Hopefully we will be able to see speakers from outside the Bitcoin community too, even if not as many as we had in 2012; the previous two conferences have turned out to be a great opportunity for fostering dialogue between the Bitcoin community and the internet civil liberties community as a whole.