Bitcoin flaw could allow group to wrest control of currency

University researchers say they've found an unnoticed defect in Bitcoin that could undermine the whole system, turning the decentralized currency into a centralized one.

NEW YORK (CNNMoney) Bitcoin has an inherent flaw that could allow a powerful few to wrest control of the now-decentralized currency. All it would take is a group of cheaters.

That's according to a research paper released Monday by Cornell University post-doctoral fellow Ittay Eyal and Professor Emin Gün Sirer.

The flaw is due to the nature of how bitcoins are created -- people "mine" them by solving a complex puzzle with their computers. If used correctly,the system is set up so that someone guesses correctly every 10 minutes, and the winner gets 25 bitcoins. Because people compete against one another for the digital currency, bitcoins are mostly evenly distributed.

But bitcoin miners could exploit a weakness in the system that would give them a greater chance of getting bitcoins than rival miners: Solving a puzzle gives miners a much higher chance of solving the next one, and those solutions are typically stored in a public log called a "blockchain."

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But solutions don't have to be publicized. If you solve a puzzle and keep it secret, you can start working on the next one and let everyone else keep mining in the wrong spot.

That unfair advantage becomes even more apparent when selfish, secretive miners group together and pool computing resources to solve puzzles. The bigger the group, the more frequently they win. If a group gets large enough, it could take control of the currency.

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If that happens, bitcoins wouldn't be any different than dollars, yen and yuan -- currency whose supply is controlled by a powerful, central bank. The bitcoin control group could easily drive the value of the digital currency up or down by adding or withholding bitcoins from the system.

That could disrupt the very reason many have decided to use the four-year old currency, which represented a $2.6 billion market as of Monday morning. Many libertarians like the idea of a currency that has no government backing or centralized authority.

"No one wants to bring down Bitcoin," Eyal said. "But if you know you can increase your revenue by a bit, you're go! ing to join the selfish pool."

Despite rampant fluctuations in in valuation, the price of bitcoins barely budged after the report was made public.

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In the report, Eyal and Sirer say there already exist groups of miners that are big enough to take advantage of their selfish mining theory. And while they haven't seen anyone engage in that kind of strategy yet, it could be happening in the shadows.

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As a solution, Eyal and Sirer suggest a bitcoin mining rule change: The total mining power of one group shouldn't be able to exceed one-quarter of the mining power of the bitcoin mining community as a whole. That tweak, which could be implemented with a simple software update, would prevent any one group from taking total control of the currency.

There are currently 11.9 billion bitcoins in circulation. Some bitcoin users tend to get more attention, such as those illicit buyers at online black markets like the recently closed Silk Road. They tend to be drawn to the anonymous nature of the currency.

But bitcoins have also attracted some major business interests. Baidu (BIDU), a Chinese web services firm, recently started accepting bitcoin payments. And venture capital firms have begun investing in startups, like Circle Internet Financial, that make bitcoin payment tools.