Over 70 percent of all bitcoins that will ever exist are already in circulation, bringing the total market capitalization to approximately US$6 billion. Major players in the banking industry have invested heavily in related startups.
Bitcoin’s ecosystem is now made up of thousands of merchants, wallet services, and exchanges, not to mention potentially revolutionary off-shoot projects inspired by the digital currency, such as Ethereum.
For an economic experiment born in a niche internet forum six years ago, it has achieved undisputed world success.
But under the surface of progress, a feud between bitcoin’s more prominent developers and investors is threatening to destroy what the community has achieved.
Last week, news that one of the earliest contributors and evangelists was selling off all his bitcoins and abandoning the cryptocurrency sent its price tumbling down, a 15 percent dip in just two days.
Disillusioned with the community’s alleged inability to address growing pains, developer Mike Hearn summarily pronounced bitcoin dead. He even claimed top players had been censoring one of his projects.
Bitcoin advocates took to social media to reassure the public that everything was fine, and while it’s true that the project can survive without Hearn, his departure cast doubt over whether the community can adequately address the problems he pointed out.
Perks of Decentralization
Bitcoin’s greatest strength is seemingly its greatest weakness, coming to the fore.
Satoshi Nakamoto, bitcoin’s mysterious creator, designed the digital currency to be the opposite of money issued by a central bank: a decentralized network where decision power is distributed, not concentrated in a few hands.
He wanted to make sure that no single entity could shut it down or even alter it without first reaching consensus with other users.
This has provided great transparency and predictability. All actors knew exactly how bitcoin would function, so they were confident in investing funds to create an industry around it.
However, the downside is that when the network needs to adapt to changing conditions, calling a meeting to decide on a course of action is no longer an option.
Being an open-source code project, the way bitcoin users vote on changes is by downloading the piece of software that incorporates them; whichever version is run by the most people wins. Like candidates, proponents necessarily have to go out and talk people into supporting their alternative.
So far, Bitcoin Core has remained the authoritative edition, and virtually no user disputes it as the embodiment of Nakamoto’s initial design.
The developers who maintain the code have made many changes, but so far they have been uncontroversial improvements that did not substantially alter how bitcoin works.
Why This Time Is Different
Enter the Great Blockchain Size Debate.
Bitcoin has become so successful that the network has, at times, trouble handling the volume of daily transactions. This leads to delays; users sometimes report waiting too long for their coins to arrive.
Transaction fees are also rising, which makes the currency less attractive for new users.
Foreseeing these issues, in 2015 bitcoin activists — Hearn being the most vocal — pleaded with the broader community to find a solution, that the network needed to be able to process more transactions if it were to survive.
However, unlike previous cases, the lowest hanging fruit implies modifying a fundamental rule in bitcoin: the block size limit, basically how many transaction requests can fit in a single block. Nakamoto set a one-megabyte limit on blocks to encourage adoption and prevent network overloading attacks.
But this is not a mere technical fix. It has far-ranging and possibly unpredictable consequences. For instance, increasing the block size could shift power toward people who can afford computers that handle more information — a more centralized network.
Also, this was the first time that such harsh criticism came from an industry leader. Doomsayers used to be financial pundits and come from mainstream media.
Bitcoin: VISA or Gold?
At the core of the matter are two visions for bitcoin’s future: whether it should be allowed to grow into a cheap and massive payment system like VISA or Paypal, or remain something like e-gold, a digital currency that protects users from centralized sources of authority.
Hearn was an advocate of the former, and in recent months he had been pushing for a replacement called Bitcoin XT. But according to Franco Amati, co-founder of Bitcoin Argentina, the community deemed it too radical and costly to transition to, so it failed to gain traction.
Amati told the PanAm Post that several alternatives have since emerged, but at the moment only two have real chances of succeeding: an upgraded version of the standard Bitcoin Core, and Bitcoin Classic, a slightly different software under a new leadership.
Most of Core’s developers think they are staying true to Nakamoto’s vision by insisting on decentralization and incremental changes.
Playing down the urgency to increase block sizes and instead focusing on amassing consensus, they have created a roadmap to roll out improvements in the original code, so no one needs to move to a different software right away, just update it when the time comes.
Critics point out, among other concerns, that by the time the whole network upgrades it might be too late, Amati explained.
After Bitcoin XT failed, the banner of mass adoption was taken up by Bitcoin Classic, a proposal that is garnering more support for its cautious approach: it increases the block size to two megabytes as soon as possible and grants users a grace period so that they can switch away from Core.
Ironically, Hearn’s bitcoin obituary seems to have brought the cryptocurrency back to life. As media began to pick up the story, pressure from users, investors, and outsiders catalyzed the bitcoin community out of their gridlock to press ahead with choosing a solution. Intense debate and voting is taking place.
What perhaps will die is the notion than bitcoin is a politically neutral technology suitable to banks and anarchists alike. Users have to choose which path they want to go.