Mar 18, 2016 11:42 am ET
The rift in the Bitcoin community over an arcane line of coding remains as wide as ever despite several concerted efforts to close it, and time may be running out to stave off an existential crisis.
For almost a year now, the bitcoin industry has been starkly divided over the question of how to expand the digital currency’s network, and the fight has morphed from a technical issue to a raging political debate that shows no signs of abating, broadly pitting entrepreneurs who have built businesses around bitcoin against the “miners” who maintain the network, with developers split among the two groups.
“I liken it to when religions split off,” said Bobby Lee, the chief executive of Chinese exchange BTCC. The two camps even have names now, Core and Classic. Core is the more conservative group, mainly miners, which wants to move slowly, if they move at all. Classic is the more business-oriented group, which wants a workable, real-world fix now.
It sounds almost quixotic, this small community involved in this big fight. But there are $6.4 billion worth of bitcoin out there, and more than $1 billion of venture-capital money invested. People have dedicated their lives to it. If this row isn’t resolved, all of that could get washed down the drain.
Bitcoin, the digital currency launched in 2009, can be thought of as an intricate machine, designed to run essentially without any oversight. In order to remain operating without any hand on the tiller, it has a built-in incentive. Participants contribute computing power to the decentralized network, these are the so-called miners, doing the key job of confirming transactions on the network, which are packaged into batches called blocks. In exchange for this service, they get a reward: 25 newly minted bitcoins, paid out roughly every ten minutes to whichever miner is first to process the block. Once confirmed, they are entered into bitcoin’s open ledger, called the blockchain, an unalterable historical record.
As the network has grown, a problem has arisen. The blocks have a 1 megabyte size limit, a cap installed by the pseudonymous inventor of bitcoin, Satoshi Nakamoto, in 2010. What’s happening now is that the network has grown to a point where transactions are completely filling the blocks, with some transactions being forced to wait for several minutes, or in some cases longer, for the next block to be confirmed.
Resolving this issue is much thornier than it sounds. Technically, you just increase the size limit on blocks. Doing that, however, completely alters the profitability of the miners, who have evolved from individuals with desktops to enterprise-level operations with massive server farms. Larger blocks sizes means fewer blocks on the network, which means fewer opportunities to capture the 25-bitcoin prize. It also could mean fewer miners overall, and a concentration of computing power in a smaller number of hands could lead to effective control over the network. For a movement founded on principles of decentralization, this is absolutely unacceptable. Not increasing the size, though, makes the network run more slowly than it could, and makes it potentially less attractive to users. That could affect the business model of all the start-ups in the industry.
This has led to a complete impasse, and a fight that has only gotten nastier and more intractable over the months. The whole thing illustrates just how hard it is to build an open, decentralized network that isn’t the province of any one group, and may be an object lesson for the myriad projects being built around the currency’s underlying technology.
So far, there have been intermittent reports of transaction delays. In general, a large number of blocks have been bumping right up against the 1 megabyte limit. Some companies have reported some customers complaints, but there hasn’t been a breakdown in the network. The price of bitcoin, too, remains so far unaffected. The price has traded mainly above $400 in 2016, most recently around $415.
A late-Feburary meeting in Florida, the so-called Satoshi Roundtable, brought together all the important players in this drama, with the pressing goal of coming to some kind of compromise. The meeting ended without any such accord, as the two sides dug in even more than expected. After the meeting, in fact, several prominent players, including Coinbase CEO Brian Armstrong, Blockchain.info CEO Peter Smith, and lead developer Gavin Andresen, publicly criticized the gathering.
The bitcoin core developers, Mr. Armstrong wrote on Medium, “view themselves as the central planners of the network, and protectors of the people. They seem okay with watching bitcoin fail, as long as they don’t compromise on their principles.”
One participant at the meeting who asked not to be identified felt that after its failure, and after the failure of a series of attempts to bridge the gap, it’s becoming increasingly unlikely that a solution will be found. “I think at this point,” the person said, “there’s not a lot of room left [for compromise].”
The debate is going to run into a large wildcard in three months’ time, one that could possibly spark a real meltdown in bitcoin’s intricate machine: an event that occurs every four years called “the halving.” In order to maintain bitcoin’s self-imposed cap of producing only 21 million bitcoins – a measure designed to prevent inflation from creeping into the currency – the mining reward is halved every four years. This deadline arrives in June, meaning the 25 bitcoins that miners currently receive is going to be cut down to 12.5 bitcoins.
Even if the block-size fight wasn’t happening, this halving event is going to affect the industry, quite simply making mining an unprofitable business for some. This was not an unexpected event, and indeed the laws of supply and demand should rush in to fill any gaps. The fear, though, is that if the block-size impasse is not solved by then, you may end up with a situation where an already sluggish network that isn’t processing transactions quickly could be hit with a significant loss of computing power. The combination could effectively shut down the network.
That’s the worst-case scenario. Nobody knows exactly what will happen.
BTCC’s Mr. Lee is still confident that the whole thing will be resolved. “We’re not going to sit around and watch the thing implode,” he said.