Six years after their first use, there are nearly 14.5 million bitcoins in circulation — a fortune worth more than $3 billion.
But unlike minted money, the online currency is not backed by the faith and credit of any nation, nor does any central authority police its use. Instead, it depends on its thousands of users to review its exchange, and to give bitcoins any value at all.
While bitcoin advocates say the cryptocurrency is here to stay, its relative youth and rapidly evolving marketplace mean there are many questions about its future, including how safe it really is from hacking and other manipulation. Scientists also are eyeing how “smart” contracts written in computer code could one day employ cryptocurrency and make it ubiquitous.
A group of researchers at the University of Maryland, College Park are among a small number of scientists working to erase a lag between the growing adoption of bitcoin and other cryptocurrencies and the understanding of them.
“This is only the sort of thing academics do,” Andrew Miller, a College Park computer science doctoral student who is among the researchers, said of research testing the security underlying bitcoin. “There are tons of startups, but only an academic research lab is going to take on that sort of challenge.”
The College Park team is funded by a National Science Foundation grant, which has paid out nearly $600,000 so far. The grant acknowledges that “usage of crypto-currencies outstrips our understanding.”
The foundation’s grant program seeks to “establish a rigorous scientific foundation” to cryptocurrency based in cryptography, game theory, programming languages and systems security.
Other institutions receiving the federal grants include Cornell University and the University of California, Berkeley.
Created as an open-source payment system, bitcoin allows users to conduct transactions with each other that are verified and recorded in a public ledger known as the block chain. The block chain is essentially a database hosted across a network of computers running the bitcoin software. When you pay for something with bitcoin, one of these computers notes it and adds it to a block.
Use of bitcoin has grown steadily since its first transaction in 2009, with daily transactions briefly spiking to 215,000, but subsequently returning to more common levels around 100,000 to 120,000 transactions per day.
The market remains small, with the daily transaction value ranging from as little as $500,000 to as much as $20 million this year, according to the website Blockchain.info, which tracks the market.
Bitcoin’s growth is causing upheaval already. The community is in the midst of an ideological crisis of sorts over the size of blocks, the chunks of bitcoin transactions that are grouped together to the block chain.
Blocks are capped at 1 megabyte, and as more transactions occur, blocks are getting larger and closer to that limit. That has prompted some to suggest raising the cap, a decision that could make more bitcoin transactions possible but also might expose the system to problems such as someone trying to use the same bitcoin to make two different purchases at the same time.
While the researchers are not exploring the block size question itself, the debate illustrates the lack of a scientific foundation to cryptocurrency, they said.
“[Bitcoin] came sort of out of nowhere and was adopted before there was any kind of serious analysis,” said Jonathan Katz, a computer science professor who is among the Maryland investigators working on the NSF grant. “It mushroomed into this thing where thousands of people are using it and still people don’t understand the precise security properties of it.”
For example, it’s unclear whether a bad actor could capture enough power across a bitcoin mining platform to somehow manipulate the process of approving transactions. There could be unforeseen vulnerabilities, too, Miller said.
“You’re just sitting there waiting for an attack to occur,” he said. “That doesn’t inspire that much confidence. That’s not the best way to do security planning.”
Security threats have already created problems for bitcoin. In one high-profile breach in January, hackers stole $5 million in bitcoin from Bitstamp, an online exchange, sending bitcoin’s value to its lowest level this year, about $177 per bitcoin. After trading for a few dollars per bitcoin in 2011 and 2012, the currency’s value peaked at $979 in November 2013 and has more recently settled around $200 to $250.
The researchers also plan to explore how bitcoin payments can be written into computer coded contracts, allowing for automatic payments if the terms are achieved or are violated. Applications could include safe processing of micro payments over peer-to-peer computer networks or giving investors more nuanced control to hedge financial portfolios, Miller said.
The goal isn’t necessarily to promote use of bitcoin but just to give people more information about the risks and benefits of cryptocurrency, Katz said.
“We want to allow people to understand what bitcoin provides,” he said, “and it’s up to people’s own personal preferences whether they choose to use it.”
The grant is slated to fund the research through July 2018 and also includes plans for a speaker series that “will bring together technologists, economists, social scientists, and policymakers to foster collaborations that will shape the future of digital currencies.”
But most important for the future of bitcoin and other cryptocurrencies could be the theoretical analysis and simulations that could sort out problems before they arise, said Matthew Green, an assistant professor of computer science at the Johns Hopkins University who has researched bitcoin but is not involved with the University of Maryland grant.
“That work on the academic side hasn’t been funded much,” Green said. “Not enough when you think about how much money is at stake.”