Bitcoin, the cryptocurrency that has earned legions of fans and has often been touted as the future of money, is in danger of having no future at all.
A rift within the peer-to-peer network of users and software developers that operate the bitcoin system has prompted one of its senior developers and most ardent proponents, Mike Hearn, to sell all his bitcoin and pull out of the existing network, which is run on a consensus basis and not overseen by any central authority.
'[Bitcoin] has failed because the community has failed.' - Mike Hearn, senior bitcoin developer
"[Bitcoin] has failed because the community has failed," Hearn wrote in a Jan. 14 blog post explaining his departure. "What was meant to be a new, decentralised form of money that lacked 'systemically important institutions' and 'too big to fail' has become something even worse: a system completely controlled by just a handful of people."
The crux of the disagreement within the bitcoin community is whether to increase the size of the blocks of data that make up the backbone of bitcoin so that the system could process more transactions at a faster rate. A 1 MB cap on the size of the blocks is hardwired into the bitcoin protocol that was created in 2009.
Allowing fewer transactions per second keeps the system safer, but it limits its overall capacity and, critics say, leads to congestion, transaction delays and cancellations as the network runs out of capacity and gets unreliable.
Duelling bitcoin versions
In August 2015, Hearn and another senior developer, Gavin Andresen, proposed an alternative version of bitcoin called Bitcoin XT that allows more transactions per second. Since then, other versions have sprung up, including Bitcoin Classic and Bitcoin Unlimited.
Switching to Bitcoin XT would require the approval of 75 per cent of the network's so-called miners, the superusers who run the computing hardware that generates bitcoin and keeps track of transactions.
Some of those users fear that increasing transaction volume would threaten bitcoin's decentralized model and result in only larger, possibly corporate, users being able to afford to mine bitcoins.
But Hearn and other critics of the existing system allege that control of bitcoin is already centralized. Currently, Hearn says, more than half the processing power is controlled by just two miners in China, which gives them disproportionate control over the bitcoin ecosystem and a disproportionate share of the bitcoin payments that miners get for running the algorithms on which the system operates.
Powerful, expensive hardware is needed in order to generate bitcoins and process transactions. People who own such hardware are called miners and are paid in bitcoin for keeping the protocol running. (Lucas Jackson/Reuters)
"At a recent conference, over 95 per cent of hashing power was controlled by a handful of guys sitting on a single stage. The miners are not allowing the block chain to grow," Hearn wrote.
He and Andresen set the 75 per cent threshold for switching to the XT system so that the expansion couldn't go forward without a large majority and so that a single, large mining pool could not have de facto veto power over expanding the system.
A bitcoin fast lane
Izabella Kaminska, who blogs about bitcoin for the Financial Times, says most miners don't support an overall increase in block size but favour a two-tier system that would charge a premium for faster processing of transactions.
"Once the [block size] limit is reached, miners will have to choose which transactions to include and which to dump," Kaminska said. "Naturally, only fees will help guarantee inclusion — something which stands to make the system really expensive really quickly."
Kaminska says those fees could end up being higher than those charged by banks.
'The most likely outcome will be an evolutionary-style fragmentation ... with both sides turning against each other in a bid to prove they are the better system.' - Izabella Kaminska, financial blogger
"I don't think [Hearn's] project (Bitcoin XT) would have helped one bit even if adopted. Hearn wanted to stage an intervention, [but] someone still has to pay for the increased traffic."
Some say the biggest danger of the current dispute is that it results in two rival systems whose currencies are incompatible, which would destabilize and devalue the currency and undermine the public's trust in bitcoin as a legitimate currency. Others, however, think that a so-called fork within the bitcoin network could lead to innovation and, ultimately, strengthen the virtual coin.
"Unlike a real political vote, there is no jurisdiction being fought over," said Kaminska. "Which is why the most likely outcome will be an evolutionary-style fragmentation ... with both sides turning against each other in a bid to prove they are the better system."
Bitcoin might be a virtual currency, but over the past few years, more brick-and-mortar businesses, such as this bar in Sydney, have begun accepting the currency. That trend has reversed somewhat in the past year as bitcoin failed to gain wider appeal and some financial institutions and governments clamped down on the currency. In August 2015, Australian banks closed the accounts of 13 of the country's 17 bitcoin exchanges. (David Gray/Reuters)
On Feb. 11, a group of some of the biggest players in bitcoin issued a statement calling for consensus on the block size issue. The group agreed that the block size needs to increase but argued that it shouldn't happen through what it called a "contentious hard-fork," such as XT or Classic, which would split bitcoin into two incompatible systems.
"The deployment of hard-forks without widespread consensus is dangerous and has the potential to cause trust and monetary losses," the statement said. "We strongly encourage all bitcoin contributors to come together and resolve their differences to collaborate on the scaling roadmap."
External threats more dangerous than infighting
How the rift will play out and what it means for the future of bitcoin is not yet clear. While its value dove more than 16 per cent the day after Hearn announced his departure, the currency has been declared dead many times before.
'Bitcoin is not static. It will need to be "reprogrammed" periodically to survive.' - Garrick Hileman, economic historian
"Bitcoin's most-pressing challenges are external rather than internal," said Garrick Hileman, an economic historian at the University of Cambridge and the London School of Economics.
"Mike's high-profile departure, and the sharp drop in bitcoin's price following the announcement, appears to have galvanized the bitcoin community into coming together to resolve, at least temporarily, the block-size debate."
But Hileman stressed that the existing ideological differences over bitcoin's future direction aren't going away and will "undoubtedly resurface when the next big decision point arises."
"Bitcoin is not static," he said. "It will need to be 'reprogrammed' periodically to survive, and it is unrealistic to expect that everyone will always be pleased with how bitcoin evolves."
To learn more about bitcoin, listen to "The Illusion of Money" on Ideas Feb. 24 and 25, 2016.
The bitcoin economy
How the peer-to-peer bitcoin network processes payments
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