Day 6 – November 9th, 2013
Because of the whole cheating debacle, my new lesson is on 3rd-party services. Instead of downloading the P2P BitMessage application straight to my desktop to send messages, I unknowingly (because I didn’t do my research) used a third-party service, www.bitmessage.ch instead. It was an honest, lazy mistake, but it’s good to now know the difference.
Assignment #3 – Third-Party Services
In its simplest terms, third-party services are the middle men. It is any service that basically provides a convenience to you by doing something for you — so you don’t have to. Instead of walking a letter over to your friend’s farm miles away, the USPS will gladly, as a third-party service, do it for you. Most third-party services come at a cost — even the free ones.
The reason third-party services are so important to Bitcoin are because their existence both makes the early initiation into Bitcoin easier (places like Coinbase.com make is über-simple to store, buy and sell Bitcoin), but in return, they end up lowering the security of the currency and may charge fees.
One downside of Bitcoin being a non-regulated and decentralized currency — meaning no one specific is governing or managing it — is that there is also no one really responsible if foul play comes into the picture.
When you use third-party Bitcoin services like Coinbase or Mt. Gox, you are putting complete trust in them, their systems and their security. Your Bitcoin are only as secure as the website they are stored on — especially if that site generates Bitcoin address private keys on their end. For example, Coinbase creates private keys on the server side of the website meaning they are stored and possibly accessible to the operator, whereas Blockchain’s wallet creates address private keys on the client side. This leaves you with more security, but also more responsibility not to lose that precious private key.
Since the beginning of Bitcoin, there have been numerous reports of websites being hacked, keys being stolen, and Bitcoins disappearing. There was the story of the site that realized it had possibly faulty security; there was the time Bitcoin exchange giant Mt. Gox shut down because of a severe hacking; and there was the time that one site just claimed to have been hacked, possibly making off with a quarter of a million dollars worth of BTC.
And no one could do anything about it really.
Don’t believe me? Want to read for yourself? Here are a few links:
The DailyTech: Inside the Mega-Hack of Bitcoin
Venture Beat: Bitcoin Wallet Service Instawallet Hacked, Shuts Down ‘Indefinitely’
Beta Beat: MyBitcoin.com Is Back: A Week After Disappearing With At Least $250K of Bitcoin
It’s like how you use Facebook as a third-party communication service. The sheer amount of information — personal information — stored all over Facebook in multiple places is vulnerable to possible outside hacks, and is also open to any of Facebook’s highest bidding partners.
The Lesson? Third-party services are convenient, but we should definitely be weighing the pros and cons to see if they are actually worth it.
Learning Bitcoin: BitxBit 