$1 million hack showcases best and worst of bitcoin

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Bitcoin is often compared to the Wild West – a lawless, unregulated environment where anything can and does happen. But it’s not true that a lack of formal oversight and structured governance necessarily leads to anarchy, as the victim of one hacker found out.

When Androklis Polymenis turned on his computer on the morning of July 10, he was in for the shock of his life. Polymenis, better known to his friends online by his forum name ‘kLee’, had amassed a fortune in bitcoins and other forms of digital currency: a technology so new that governments and regulators are only just deciding what they think about it. The total of kLee’s hoard was in excess of $1 million – and it had just been stolen. Since bitcoin payments are irreversible, there was little chance of him getting any of it back

A disruptive technology

Until fairly recently only a small proportion of people had even heard of bitcoin and the related set of technologies known as cryptocurrencies. For the few that have, the most ready association is the Silk Road: the black market auction site that specialised in selling drugs, guns and all manner of illegal goods in return for bitcoins (along with fast and low-cost international transfers, bitcoin offers a degree of anonymity).

Although the narrative is changing due to a flood of venture capital money and acceptance by prominent companies such as Dell and Overstock, bitcoin has retained much of its reputation as a fringe currency. Politicians and regulators are chasing to keep up with something they don’t always fully understand. Cryptocurrency remains the Wild West: a place where there are few rules, and both risks and rewards are high.

As an early bitcoin adopter, kLee saw his initial investment grow exponentially in the space of just three years. At the end of 2013, he chanced around $100 to help fund the development of a new cryptocurrency. Designed to be fast, versatile and better suited than bitcoin to the high-volume demands of modern payment processors, NXT (pronounced ‘next’) is more like an infrastructure for a digital economy than simply a form of online cash. kLee again saw his small stake multiplied thousands of times over.

It’s also the landscape – unregulated, near-anonymous, technophile – that enabled a hacker to gain access to kLee’s computer and steal over $1 million dollars worth of virtual currency: 1,170 bitcoins and some 6 million NXT, representing most of his fortune.

The new Wild West

Bitcoin’s comparison with the Wild West is an apt one, for more than one reason. Pioneers left the safety of their home towns because they knew that fortunes could be made as well as lost in the New World, and it’s the same with bitcoin. Lacking regulation, bitcoin is the ultimate free market: a kind of turbo-capitalism where only the fittest survive. There are no ceilings and no safety nets. It can be a brutal place, but it’s also one in which real innovation can and does thrive, unfettered by bureaucracy. The prizes for those who are hard-working, talented and sometimes just plain lucky are immense.

That’s the environment in which kLee and others have been able to turn a few dollars into a fortune, in his case one of over $1 million. It’s also, inevitably, one that attracts criminals who see lucrative opportunities and limited repercussions.

Anarchy and organisation


Free from the normal social constraints of face-to-face interaction, web forums can be unforgiving places. When kLee announced his loss on the NXT messageboards, responses were mixed. Part of the money stolen was a large slab of funds earmarked for further development of the NXT platform. Since poor security practices had facilitated the theft, kLee was roundly vilified in some quarters. Others were more sympathetic – and angry on his behalf.

kLee had donated substantial sums of his windfalls to charity, including 1 million NXT (then $50,000) to the Brain Preservation Society, and an equal amount for the Alcor Life Extension Foundation. He had also given money to pay for key new elements of NXT’s software.

Overall, the response was overwhelmingly supportive. Members of the forum crowdsourced help, contacting an exchange where some of the stolen funds were being sold and having the account frozen; offering forensic assistance to track the money (something made possible by bitcoin and NXT’s transparent blockchain technology); suggesting advice to improve security; even offering donations.

An unexpected solidarity

Pierre-Joseph Proudhon1 considered anarchy not as chaos but as organisation without government. NXT, a shared platform which belongs to everyone and no one, is the perfect example of how groups can organise effectively around a common goal without formal oversight.

The development that ultimately led to a proportion of the stolen money being recovered was kLee’s offer of a 500 bitcoin bounty (over $300,000) for information leading to its return. As some noted at the time, given bitcoin’s increasing adoption and historical rate of appreciation, that sum could easily be worth 10 times as much in a couple of years. The hacker clearly felt he hadn’t covered his tracks well enough and was anxious enough at the prospect of being caught that he contacted kLee to negotiate a settlement.

Even before this, the level of support shown to kLee is a credit to the relatively small NXT community – though perhaps it is not so surprising. The theft of the money affected everyone, and not just because some of it was intended for further software development. It was an attack on a fledgling cryptocurrency that shows greater potential than perhaps any similar technology due to its versatility, pace of evolution and the drive and talent of its supporters. The NXT community shares the aim of furthering their joint project, and such an event threatens that aim through undermining cohesion, confidence and motivation.

Given cryptocurrency’s harshly meritocratic environment, one insight from all this might be unexpected: innovation isn’t the only thing to emerge from the crucible of a truly free market. Without formal structures of governance, constant management and intervention, there’s also a chance for the importance of reputation, respect and genuine solidarity to be re-established, too.

Postscript: the story remains unresolved, with only part of the promised funds returned and the hacker still at large. To our knowledge, there is still a bounty out for the return of the stolen cryptocurrency.


1. Pierre-Joseph Proudhon

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