Here's the lay person version of what happened this afternoon:
In essence, Mt. Gox says it identified a bug in the Bitcoin software that makes it possible for someone to use the network to alter transaction details, making it seem like bitcoins had not been sent to a bitcoin wallet, when in fact they had.
‘Since the transaction appears as if it has not proceeded correctly, the bitcoins may be re-sent. Mt. Gox is working with the Bitcoin core development team and others to mitigate this issue,’ Mt. Gox said.
The technical explanation is a lot more detailed.
It points out that bitcoin transactions are subject to a design flaw that has been largely ignored, although it was known to ‘at least a part’ of the Bitcoin core development community. The defect is known as ‘transaction malleability’ and it allows third parties to alter the hash of a fresh transaction without invalidating the signature. Mt. Gox further explains:
‘Of course only one of the two transactions can be validated. However, if the party who altered the transaction is fast enough, for example with a direct connection to different mining pools, or has even a small amount of mining power, it can easily cause the transaction hash alteration to be committed to the blockchain.’
At least one exchange proved itself immune to the attack: Kraken, which is one of the only Bitcoin exchanges based in the U.S., though its volumes are dwarfed by exchanges like Bitstamp. In an email, site founder Jesse Powell explained that Kraken's wallets were already constructed to avoid precisely the outcome that befell the other exchanges. ‘We read the manual’ he said.
And he says there is still no reason to doubt the currency.
‘This problem has to do with poor design around Bitcoin, not Bitcoin itself. You don't blame gravity when your plane fails to fly--you understand gravity and design around it. There's a tremendous buying opportunity right now. I'm recommending everyone I know to jump in.’
Oleg Andreev, a France-based software developer and commentator, offered a bit more caution. While he agreed Bitcoin will overcome this event, he admitted it's a sign the digital currency remains in its infancy. He explained that if it were developed in all areas of exchanges, personal wallet, education in all areas of use then investment amount and the number of investors of Bitcoin would be a larger amount around the world.
JPMorgan forex analyst John Normand released a note after hours casting doubt on the digital currency's utility. ‘Ironically the lack of external oversight may prove an obstacle to significant market deepening, since many market participants would prefer the accountability of known but fallible entities to one based on a mathematical code.’
The price of Bitcoin as of 5 p.m. Eastern was $637, according to Coindesk.
To read more articles on Bitcoin see the list below in Author's suggestions and view the video atop this article of the Mt. Gox trading stop.