Bitcoin Has A Kill Switch; And How To Disconnect It.

 “There are three classes of people: Those who see. Those who see when they are shown. Those who do not see.”  (Attributed to Leonardo da Vinci.)

It is widely understood that early adopters of Bitcoin, who showed up on the scene in the days when mining difficulty was low, are sitting pretty, and will continue sitting pretty without ever having to do much of anything ever again. And so, skeptics often describe the system as a Ponzi scheme. The Bitcoin FAQ addresses this accusation thus:

“In a Ponzi Scheme, the founders persuade investors that they’ll profit. Bitcoin does not make such a guarantee. There is no central entity, just individuals building an economy. A ponzi scheme is a zero sum game. Early adopters can only profit at the expense of late adopters. Bitcoin has possible win-win outcomes. Early adopters profit from the rise in value. Late adopters, and indeed, society as a whole, benefit from the usefulness of a stable, fast, inexpensive, and widely accepted p2p currency. The fact that early adopters benefit more doesn’t alone make anything a Ponzi scheme. All good investments in successful companies have this quality….
Early adopters have a large number of bitcoins now because they took a risk and invested resources in an unproven technology. By so doing, they have helped Bitcoin become what it is now and what it will be in the future (hopefully, a ubiquitous decentralized digital currency). It is only fair they will reap the benefits of their successful investment. In any case, any bitcoin generated will probably change hands dozens of time as a medium of exchange, so the profit made from the initial distribution will be insignificant compared to the total commerce enabled by Bitcoin. Since the pricing of Bitcoins has fallen greatly from its June 2011 peak, prices today are much more similar to those enjoyed by many early adopters. Those who are buying Bitcoins today likely believe that Bitcoin will grow significantly in the future. Setting aside the brief opportunity to have sold Bitcoins at the June 2011 peak enjoyed by few, the early-adopter window is arguably still open.”

Bitcoin FAQ. “Is Bitcoin a Ponzi scheme?” “Doesn’t Bitcoin unfairly benefit early adopters?”

I do not deny that the creators of Bitcoin deserve some reward for taking the trouble to create an elegant and, for the most part, mathematically-sound decentralized cryptocurrency. Yes, they “bought Manhattan for a quarter.” And some people find this off-putting. But such objections are rooted mainly in envy. Everyone wishes that they, rather than the founders, had pulled off the early land grab. Debates about how much the founders “deserve” to profit from their foresight are largely an exercise in pointless bickering. Count me out.

But the real problem with Ponzi schemes – and the reason why they are considered a legally-actionable type of fraud in every civilized country – is not the abstract unfairness of some clever fellow getting “something for nothing.” Rather, it is the fact that such schemes come with a built-in self-destruct mechanism, whereby at a certain point, those who sit on the apex of the pyramid decide to cash out, pocketing nearly all of the meatspace wealth previously invested into the system.

A Ponzi scheme is generally agreed to be a Bad Thing, and most Bitcoin enthusiasts do not like the idea of being involved in one. They vigorously deny the possibility that Bitcoin has a removable “floor,” which might one day “fall out” and permanently transfer ever penny’s worth of traditional money, precious metal, alpaca socks, cocaine – and everything else which has been exchanged for bitcoins – into a handful of pockets.

Unfortunately, the facts speak for themselves. One of the world’s greatest cryptographers published the following analysis:

“We use the fact that all the transactions ever carried out in the Bitcoin system are available on the internet (in an anonymous way). On May 13th 2012 we downloaded the full public record of this system, which consisted of about 180,000 HTML files. After parsing and processing these files, we built a graph of all the Bitcoin addresses and transactions up to that date. We then used the intrinsic properties of the scheme in order to identify many cases in which we can show that different addresses must belong to the same owner, and used this information to contract the transaction graph by merging such addresses, in order to get a more accurate picture of the full financial activity of all the owners. After obtaining this new graph, we analyzed many of its statistical properties. In this paper we describe the most interesting and informative distributions we found in a series of tables. In addition, we isolated all the large (≥ 50,000 Bitcoins) transactions which were ever recorded in the system, and analyzed how these amounts were accumulated and then spent. We discovered that almost all these large transactions were the descendants of a single large transaction involving 90,000 Bitcoins which took place on November 8th 2010, and that the subgraph of these transactions contains many strange looking chains and fork-merge structures, in which a large balance is either transferred within a few hours through hundreds of temporary intermediate accounts, or split into many small amounts which are sent to different accounts only in order to be recombined shortly afterwards into essentially the same amount in a new account.”

Dorit Ron and Adi Shamir, Quantitative Analysis of the Full Bitcoin Transaction Graph. (Mirror)

By the nature of the system, the ownership history of every bitcoin in existence is public. Ron and Shamir found that a sizeable bulk of the Bitcoin transaction history to date consisted of shell game switcheroos, designed to conceal certain inconvenient facts. And it should surprise no one that, once the fog of deliberate obfuscation clears, we see the following distribution of ownership:

Most bitcoins are, in fact, in the hands of a very few people. Are you surprised? I’m not.

We also learn that, of the approximately 9 million bitcoins which currently exist, less than 2 million actually circulate – that is, change hands with any appreciable frequency:

“It is remarkable that 97% of all owners had fewer than 10 transactions each, while 75 owners use the network very often and are affiliated with at least 5,000 transactions.”

And it would appear that most of the non-circulating coins are in the hands of a very small number of people – who, one may reasonably suspect, were involved from with building and propagandising Bitcoin from its very beginning. So, who are the lords of Bitcoin?

Who, one might wonder, is “A” ? Satoshi Nakamoto? I doubt that we’ll ever know for sure. And I’d bet serious money that “R” and “S,” with their astronomical transaction frequencies, are botnets specializing in the theft of CPU/GPU cycles for mining (and unguarded Bitcoin wallets.) These are known to exist.

But the most damning fact revealed in the paper is not the extreme top-heaviness of the Bitcoin ownership pyramid, but rather the elaborate lengths to which the hoarders went in order to conceal their existence from “rank and file” users. Think of it! Hundreds of thousands of shill accounts, with vast rivers of wealth moving back and forth – for one purpose only: to deceive. None of it was done by accident.

And perhaps the most interesting thing to be learned here is not in the paper itself, but rather in the reaction of the Bitcoin user community. This, in short, is summed up by the reply of a suspect in a stereotypical “whodunit” story, who, when confronted with an accusation of murder, often says: “He ain’t dead, and if he is, I didn’t kill him, and if I had, the bastard had it coming.”

Hundreds of people are busy pointing out largely-imaginary flaws in Ron and Shamir’s paper. They conveniently ignore the fact that the data set is entirely public, and if they disagree with the stated conclusions, they are welcome to perform a similar analysis and try to produce different ones. But no one has done so, and I dare to predict that no one will. On the other hand, those who acknowledge the revealed facts are busy insisting that the hoarders could not possibly harm other users by dumping their coins on the market in the future. All right, maybe you can’t do arithmetic. Brain damage happens, and we should feel sympathy for you. But some of us can. And arithmetic doesn’t lie.

Some people are incensed by “hoarders” – not I. I don’t give a damn. At least Bitcoin hoarders never had to kill anyone to obtain their wealth, unlike those who control land and other natural resources. The problem here is a much more concrete one: Bitcoin turns out to be something other than the fully-decentralized, unkillable network which so many imagined it to be.

People who have invested serious time and wealth in Bitcoin ought to feel angry. Not from any abstract sense of fair play, but from the simple fact that Ron and Shamir’s findings reveal a serious – and quite mathematically-certain – flaw in the sytem. The total number of bitcoins in actual circulation is much smaller than previously believed. If the early adopters were to cash out and place their hoards on the market, the exchange rates (as denominated in anything) would dive through the floor, never to recover. The hoarders, in effect, possess an off switch for Bitcoin.

Whether and under what circumstances they would press the switch, I cannot say. But the Bitcoin kill switch exists.

So, what, if anything, could be done about it? Unfortunately, the one solution which I can think of (other than the idiotic head-in-the-sand solution of not giving a damn, which the Bitcoin user community seems to favour) is a rather unlikely one, and would be quite distasteful – on a gut level – to most users. I am speaking, of course, of proscription. If the Bitcoin community – or a reasonable subset thereof – agreed that the kill switch ought to be neutralized by any means possible, it would be a fairly straightforward matter to declare the hoarders persona non grata and collectively agree to use modified Bitcoin clients (let’s call them Bitcoin-P) which act as if the particular coins currently held by A, C-F, H-K, and M-S were not bitcoins at all. And that such pseudo-coins will never be accepted as genuine in trade for any good or service. In effect, they would be retroactively shitcoined for all time.

This act would not require cooperation from every single Bitcoin user, or the imposition of any kind of governing authority. If even a minority of users were to move to Bitcoin-P, operating separate exchanges and the like, said users would be forever immune to the effects of a future market glut resulting from hoarders cashing out. Users of conventional Bitcoin would feel the effects in full, suffering the loss of most if not all of their purchasing power.

But I am under no illusions that Bitcoin-P will ever happen, given the libertarian bent of most Bitcoin users. They will mutter of dekulakization and the like. Fine, lose your hard-earned wealth to a pyramid scheme operator at some unspecified future date. But if you like the idea of decentralized cryptocurrencies without built-in kill switches, think hard about Bitcoin-P. Anyone who wants to can start using Bitcoin-P right now, without having to wait for others to be convinced of its merits. Just compile a list of the Satoshi gang’s bitcoins, and start pretending that they aren’t coins at all. It really is that simple.

Or better yet, consider the possibility of entirely novel mathematical schemes for “digital gold,” which have yet to be discovered. The field has a delightfully rich history, and perhaps great things await the honest and enthusiastic amateur cryptographers willing to take on the challenge.


And in the interest of full disclosure, I presently own a total of ~0.1 BTC. (If you’re willing to take my word for it.) I mined the damn stuff with a Xilinx “Virtex 5″ FPGA. It was a total waste of time, but writing the miner made for good Verilog / general logic layout skills practice.

  • Hasborogh

    Your assumptions are wrong.

    A. The paper made some critical misstakes.
    Several of the biggest exchanges uses one big adress and cashes out from that one. This makes it look like they are hoarding when its not.

    Some of those can be lost coins.

    B. The fact that people hoard Bitcoins, shows they give them value and believe in them longterm.
    They keep them for the future.
    This means they have longterm value.

    If everyone used their coins, it would be a symptom that everyone wanted to get rid of them as soon as possible.

    That would be a negative thing.

    Noone wanted to save them thus they would have no belief in the future value of them.

    And its not a threat, ask yourself this.
    If you had one million coins, would you simply dump one million of all your coins at once, getting maybe 1/1000 of the value or would you slowly sell of your coins? 10.000 a day for 100 days?

    Keeping their value and maybe even increasing in value while you sell?

    And what if they continue to increase in value after you have sold most?

    Unless you were really utterly stupid, which the early adopters are not, they would sell them of at a slow rate.

    Its allmost paranoid to belive that Bitcoin would be crashed by the early adopters, those who created it or anyone who owns lots of coins. Those who do, are the ones who believe in Bitcoin.

    It would be like believing that Mark Zuckerberg would insta sell all his stocks in Facebook.

    It far more logical to expect them to be working on projects that increase the value of the Bitcoins they own and thus everyone elses Bitcoins while at the same time paying the development with some of the Bitcoins they have.
    And this is probably what is happening right now.

    The more coins they have, the more motivated they are.

    If you study what Bitcoin can do, you will se that it has real market value that do not go away.

    Private transactions.
    No government inflation.
    No freezing, you own your own money.
    Superlow transaction fees.
    No cost of holding the coins or getting an adress.

    No fractional reserve lending possible.
    You need to own a Bitcoin to lend a Bitcoin. Which makes it the most real digital currency in the world.

    Those are unique properties that caters to real needs that dont go away, this gives the currency real longterm value.

    Bitcoin or any other kryptocurrency is here to stay.

  • MoonShadow

    Failure of imagination…
    A is the coin mixer for Silk Road.
    R & S are almost certainly smaller and less well known coin mixers. They exist for the exact purpose of further hiding the origin and destination of payments from technical analysis such as this paper employs. Adi Shamir is a great cryptologist, no objection there; but he proves himself a poor student of Praxeology, and completely fails to account for the behavior of smaller bitcoin users who desire to increase their own anonimity, and are willing to pay an additional transaction cost towards that end. He assumes that these groupable addresses represent a single controlling entity, and thus fails.

  • MoonShadow

    Failure of imagination….
    A is the coin mixer for Silk Road. R & S are likely also lesser known coin mixers. These are hidden services that exist for the purpose of obscuring the origin and destination of bitcoin payments from the very kind of technical analysis that Mr Shamir utilizes. The bitcoin community calls such activity, that can be grouped together by technical analysis, as ‘tainted’ coins. This has long been a known issue for anonimity, and long has a solution existed. Namely these coin mixers, or “coin laundrys”, wherein users pool their transactions, add an additional fee for the service, specify a final receiver, and a payment time frame; and the automated bitcoin client then jumbles those transactions up in curious ways to make such technical analysis very difficult. Those funds almost certainly do not belong to any single entity.

    • goatonastick

      “These are hidden services that exist for the purpose of obscuring the origin and destination of bitcoin payments from the very kind of technical analysis that Mr Shamir utilizes.”

      Shot down in a single sentence. Well said, sir.

  • Luke Dashjr

    This article is complete nonsense.

  • William_C_Diaz

    Its funny reading the posts of pseudo philosophers arguing against ‘hard’ mathematicians, when the datasets are all available for individual and personal analysis. It would probably make a good doctoral thesis for someone to do a full on analysis of ‘cryptocurrencies’ and the dangers thereupon.

    I cant do the chunky math, but know enough to give it a ‘rough and dirty’ once over and it confirms my initial beliefs based on the knowledge of economics and transactional analysis I have acquired over a lifetime.

    Bitcoin supporters are either thieves or fools and if you arent planning on robbing someone, you are the mark.

    Have a great day!

  • Adam Merat

    There’s a new service out called http://bitcoinbath.com that will be interesting to see how well it integrates into the bitcoin world.

  • http://www.pdxcurrency.net/ Carl Mullan

    When you are sitting at the business table completing the deal and you look around at the other players….if you can’t figure out who the ‘sucker’ is…guess what? It’s you.