Researchers at Trinity College Dublin are looking to make Bitcoin more transparent in an effort to understand more about how the cryptocurrency works and make businesses more confident in accepting it.
The open source currency is not regulated but has an international following as it is outside the reach of central banks. Bitcoin can be held either on individuals’ PCs or on an exchange, where it can be vulnerable to theft. The Mt. Gox exchange collapsed last year after it was revealed that poor security had allowed thieves to siphon off millions with no way to being traced.
To minimise such risks, the Trinity determined that a ‘Bitcoin regulator’ would be desireable as it would show how much currency is in circulation, how it was distributed and whether anyone was stockpiling it, and whether there were any patterns in the transactions that people should be concerned about.
A regulator could also be used to perform ‘credit checks’ to gauge user reliability.
Prof of Computer Science in the School of Computer Science and Statistics at Trinity Donal O’Mahony is overseeing the team’s investigations. He said: “We wanted to develop systems that would give a ‘regulator’ a degree of visibility on the flows of bitcoin in the same way that central banks have this visibility over normal currencies.”
It turns out that for all Bitcoin’s reputed anonymity, looking under the bonnet is not that difficult – Bitcoin’s system is much like that used by Swiss Numbered Bank Accounts. The difference is that every time someone makes a transfer from one numbered Bitcoin account to another, it gets written into a giant ledger that is open for the world to see. Using this giant ledger (called the ‘Bitcoin Blockchain’), Prof O’Mahony’s students were able to trawl through every bitcoin transaction to date to look for patterns.
While studying at Trinity as a Masters student, Cian Burns initially looked to find out how much each person was holding in currency and to ascertain how much was in each account. There are many millions of accounts but probably far fewer owners, as any one person can hold several bitcoin accounts.
Using a variety of helper websites and by auto-trawling the blockchain on his personal laptop for 24 hours a day, he built a database of all accounts before he set about linking them together to try to understand how some were connected. Once someone goes public with a bitcoin address – say in an e-mail asking for payment – all related addresses can be found to help paint a picture of their activity over time.
Burns said: “The big benefit of such a picture is that if an address is involved in fraudulent activity, tracing related addresses could protect other users from further fraud. Our trawl gave us a unique insight into some very high-profile Bitcoin fraud cases that were being conducted across the world. Regulation is further down the line, but a database of accounts could certainly protect people and raise the appeal of Bitcoin for legitimate businesses.”
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