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Bitcoin isn’t the only cryptocurrency with a problem. Dogevault, an online wallet service for the Dogecoin cryptocurrency, claims that its servers were attacked on May 11. The service is still working to determine how the attack will affect customer funds, and has warned against sending any funds to accounts associated with its service while its investigation is under way.

The Cryptocurrency Times reports that some Dogevault users saw withdrawals of hundreds of thousands of dogecoins before their accounts were shut down, with the funds reappearing in a “mega wallet” that amassed millions of dogecoins in a short time. This makes the attack “one of the biggest Dogecoin robberies in history,” according to the cryptocurrency-obsessed site.

The attack feels like deja vu for anyone who has been watching the prolonged downfall of Mt. Gox, the Bitcoin exchange that “lost” almost half a billion dollars worth of bitcoins and whose chief executive is accused of both gross ineptitude and financial misconduct. Those problems were first revealed after hackers broke into the service — now that another group has attacked a popular service catering to another cryptocurrency, it’s hard not to wonder what comes next.

Whatever the future holds, it’s bound to be absurd. Dogecoin was founded on a lark to mash the popular doge meme (which uses broken English to describe images) together with digital currencies (which have been in the spotlight since Bitcoin’s rapid ascent) into one tool. Then the joke became serious when it grew popular and reached a roughly $100 million market cap.

Reactions from around the Web

The Daily Dot explains why keeping thousands of dollars worth of these currencies in an online wallet isn’t a good idea:

No matter what happens with the coins deposited in Dogevault, it provides a potent reminder for everyone who deals with cryptocurrencies: online wallet services aren’t banks. It’s unwise to treat online wallet services, not to mention cryptocurrency exchanges that also function as wallet services, as places to house large quantities of coins for long periods of time.

Not only are these services prime targets for hackers, but deposits made in them aren’t insured—so if your money is stolen from one of them, there’s really not much you can do about it. Instead, its far safer to put coins in cold storage on a home computer or on a flash drive air-gapped away from the Internet.

The Register notes that these hackers aren’t making nearly as much from Dogecoin as the supposed hackers are said to have made from stealing bitcoins from Mt. Gox:

With the Dogecoin to $USD exchange rate running at 1000:$0.46, that’s about $51,000 hardly the millions suspected to have evaporated from Bitcoin exchange Mt Gox but still a nasty lot of cryptocash to lose.

If Dogevault has indeed been fatally compromised it will make it harder to sustain cryptocurrency enthusiasm: whatever the upsides of the concept, security of some participants clearly needs to be tightened.

Pando weighs in

On the trust problems inherent to many cryptocurrencies:

In many ways this type of transparency and such a solitary leader are at odds with bitcoin’s foundational tenets: it was created as a decentralized and distributed system meant to remove the need for trust between parties. Rabid libertarians and cyberpunks may be ok with such a system, but average Joes, not to mention the regulators intent on protecting them, are not.

The bitcoin protocol solves a real problem by allowing digital transactions to be completed outside of the costly and cumbersome existing financial infrastructure, but for the value of this solution to be realized, people have to use it. Bitcoin may have emerged as an anti-establishment financial instrument, but for it to survive and more importantly fulfill its lofty potential, it will need to shed much of its early ideology. Trust is key, and trust does not grow in the shadows.

Mt. Gox’s unraveling doesn’t need to be the end of bitcoin, but it needs to be the end of its innocence.

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