Last week, bitcoin stumbled into the most serious crisis in its history. A long anticipated ceiling on transaction volumes was reached. Transactions, which usually take less than 10 minutes to clear, began taking nearly an hour. Small retailers began to withdraw support. Sceptics could barely contain their glee.
The cryptocurrency is largely a victim of its own success. The congestion is due to the steady growth in the use of bitcoins. At the moment the system is processing over 8 300 transactions per hour — as many as it handled in the first 18 months of its existence.
In order to function, bitcoin relies on a technology called the “blockchain”. This is essentially a shared ledger in which all transactions are recorded. This ledger is protected by powerful encryption which prevents anyone from making fraudulent changes.
Each batch of transactions, called a “block”, must be vetted by the entire network before it is accepted and added to the ledger.
This vetting process is rewards based. The first node in the network to prove a block’s validity successfully is rewarded with 25 new bitcoins (currently worth around US$10 000). This process is called “mining”, even though the generation of new bitcoins is actually secondary to the functioning of the system.
Mining a block takes, on average, around 10 minutes. This is by design. As more miners join the network, the difficulty of mining increases automatically. This feature prevents any one miner from dominating the system and having too much control over the vetting process. It also gives the system some predictability in both money supply and transaction times.
The cause of last week’s congestion was not a lack of enthusiasm by miners, but something more fundamental. At the moment, each block of transactions is limited to 1MB of data. As the number of transactions per hour has climbed, it was only a matter of time before a given batch would not fit into a single block.
This is exactly what happened last week. Transactions that could not fit into the active block spilled over into the next block. If the next block was already full (which it often was), a transaction could spend hours cascading through blocks before finally being vetted. It’s very similar to a catastrophic traffic jam — what is normally a 10-minute journey can easily take two hours.
The solution seems simple — just make blocks larger than 1MB. But, as is often the case with bitcoin, nothing is simple. Doubling the size of each block would relieve the congestion, at least temporarily, but it would also increase the resources required to mine each block.
This question has caused a schism in the bitcoin community. The original bitcoin developers, known as “Core”, are against the doubling of the block size. They fear that to do so would endanger the system’s independence by concentrating mining power into the hands of the few.
Another team of developers, aligned to large bitcoin-based businesses, fears that inaction will cause the system to grind to a halt and lead to a catastrophic loss of confidence. This team, known as “Classic”, has already created a version of the system with more capacity. Both systems are now competing for acceptance by miners, although Core appears to be in the lead.
The political aspect of this schism is far more interesting than the technology. This is a true clash of ideologies — anarchists vs capitalists, purists vs pragmatists. These are not geeks arguing about code — these are colonists fighting over the future of the new world they have founded.
Bitcoin business owners are publicly aghast that the Core developers would prefer the currency to fail rather than compromise its basic principles. The Core team are, no doubt, equally nonplussed by the willingness of the Classic team to undermine the very principles on which the currency is built.
It would be a bitter irony if bitcoin, whose entire reason for existence is to refute centralised authority, were to fail because the people controlling its code could not come to an agreement.
But whether or not bitcoin itself survives, the blockchain technology created to support it will live on. The ability to reconcile batches of transactions reliably in a tamper-proof public ledger, without a need for a central authority, is incredibly powerful.
Large banks are already investing heavily in the technology, as are governments. If properly implemented, the blockchain could completely replace notaries, help prevent forgery and fraud, and hundreds of other applications.
That’s because the blockchain is not about money — the blockchain is about trust. By allowing trust to be safely devolved away from a central authority, we weaken the grip of the bureaucrats and paper pushers on our economies.
This drives down the cost and increases the speed of each transaction dramatically. Imagine if registering a bond took 30 minutes instead of three weeks. Imagine if your physical passport was replaced by a 64-digit number stored on your phone. All of these things are possible with the blockchain.
Will bitcoin survive? It almost doesn’t matter. It has been pronounced dead so many times that I am sceptical that this is truly the end. And even if it does die, it leaves behind a legacy that will reshape our entire world. — (c) 2016 NewsCentral Media