The price of the digital currency bitcoin fell from around $450 to below $380 late last week following the departure of long-time developer Mike Hearn. Upon his exit, he posted this essay, where he bitterly – and perhaps rightfully – voiced his frustration regarding on the ongoing debate over the block size for bitcoin's blockchain.
As one of the founding developers of the bitcoin core software, Mr. Hearn's opinion that the bitcoin experiment has failed should be taken seriously. But has the experiment really failed? Is bitcoin really dead?
Bitcoin was never at risk of becoming worthless, and if anything, the exit of Hearn has demonstrated its resilience and robustness. Bitcoin is a decentralized, open source platform that is governed by democratic principles. There are other dedicated software developers coming up with solutions to problems as they arise, and the Bitcoin community is able to voice their support or concern democratically and vote on outcomes. As Hearn leaves, there will be many more who step up to innovate in a way that is agreeable by the majority. (For more, see: Risks & Rewards Of Investing In Bitcoin.)
The Block Size Debate
Currently, the maximum amount of data that can be included in any single block in the bitcoin blockchain is one megabyte. This was meant to prevent spammers from bloating the blockchain with superfluous and meaningless transactions, and to keep the overall size of the blockchain manageable for computers which were in use when Bitcoin was released in 2009. If there is not enough room for a transaction to fit into a block, it must wait until the next block to be processed.
Some of Mr. Hearn's concerns are certainly valid. The latency in processing transactions due to full blocks and a backlog in pending transactions is definitely a potential problem. Raising the transaction fees associated with sending an receiving bitcoin is not a good solution when those costs become greater than using credit cards. The obvious solution is to increase the number of transactions included in each block. So why was raising the size of blocks such and issue?
Hearn's radical proposal, Bitcoin XT, would have increased the block size limit from 1MB to 8MB with regular doublings from there every other year. This would have been a fairly unilateral move as XT failed to find much support elsewhere. Chinese miners would have been put at a disadvantage since they operate behind the Great Firewall, limiting connection and data speeds. (These miners operate about 60% of the mining power currently (although much of this is due to pooled mining consisting of individual miners from around the world.)
Convergence to XT would have resulted in a hard fork that would have split the blockchain into two: one that followed XT rules and one which did not. Because there was no consensus, many feared this would create a collapse in value; however, holdouts would be incentivized to join in the more popular blockchain despite disagreeing with its rules.
It is important to understand that Hearn has a vested interest in having a large block size: his vision of Bitcoin is a platform for innovation and disruption above and beyond a simple decentralized currency. He imagines a world many years from now where bitcoin the currency is merely the economic conduit by which decentralized, autonomous agents operate to both service, and be serviced by, human beings. He imagines a self-driving car, which has no owner but owns itself, ferrying customers to and fro, with passengers paying the car itself in bitcoin, and the car then paying a human mechanic to make repairs. (See also: Basics For Buying And Investing In Bitcoin.)
A 1MB block size would be far too small to allow such a world to exist. 2MB, even 4MB would be a constraint. Thousands upon thousands of microtransactions would have to take place every second as each vehicle bid for space on the roads, and the roads would bid for vehicle traffic. At the same time, cars would bid for passengers, etc. I am a big fan of the idea of so-called Decentralized Autonomous Corporations (DACs), they are conceptually a groundbreaking innovation and one that should be taken seriously. But perhaps Bitcoin is not the solution to that problem.
Importantly, Hearn has now joined up with a number of Wall Street firms, global banks, and alternative blockchain solutions such as Ethereum to work on corporate projects including blockchain-based stock exchanges, settlements facilities, and clearing houses in a project called R3 CEV. 1MB blocks just won't cut it for these applications. Wall Street has a vested interest in removing bitcoin as the de-facto blockchain, as it is decentralized and nobody controls it. The big banks would rather implement something where they can have control.
Bitcoin Classic to the Rescue
Still, 1MB will prove to be too small for purely vanilla transactions as bitcoin gains in popularity and acceptance. Nearly everybody agrees with this. Chinese mining pools and farms do have a vested interest in keeping the block size small due to issues with internet bandwidth and profit protection, but they will earn nothing if orders become increasingly backlogged. However, an 800% increase with regular increases, such as that proposed by XT, would be disastrous for these Chinese mining operations that now represent a combined majority of hash power. Western miners are to blame for not keeping up with them. But even the Chinese operations need the block size to grow, or they will be doomed themselves.
In that respect, Bitcoin is not a popular democracy, but a representative democracy. I don't vote for legislation, but I do vote for my congressmen. Therefore, where I choose to mine is like voting for a congressman who may or may not be what I wanted when she starts legislating. In the same way, pools come and go. Remember GHash.IO? XKCD? BTC Guild? Perhaps a new pool can emerge, which gives enough incentive to miners to switch. (See also: What Is Cold Storage For Bitcoin?)
As it turns out, the blocksize debate has also largely been resolved now, not with XT, but with Bitcoin Classic. This will up the block size limit to 2MB, and is backed by core developers Gavin Andresen and Jeff Garzik, one of whom was an outspoken opponent of XT. This will allow transactions to get confirmed in a timely fashion, keep Chinese miners moderately happy, and move on with it – but it will not open the door for self-owned, self-driving cars powered by Bitcoin. Not yet at least.
Bitcoin Dead? The Metrics
So is the claim that bitcoin is dead appropriate? The price of a bitcoin did fall initially but has since stabilized and recovered to over $400. But what about its use? The size of the bitcoin mining network, a proxy for how much computational power is in the network, has reached a record high, continuing a long growth trend. Additionally, the number of transactions per day, which is a measure of how many people are using bitcoin for economic activity, is also continuing its long growth trend with 200,000 unique transactions per day.
The average size of a block is also approaching the 1MB limit on a regular basis, indicating that despite claims of it being dead, it is operating at full capacity. More and more merchants and individuals are accepting bitcoin and using it to conduct business. By looking at the metrics, bitcoin is anything but dead; in fact it is very much alive and growing.
The Bottom Line
Bitcoin has survived the collapse of exchanges such as Mt. Gox (and most recently altcoin exchange Cryptsy), the take down of the Silk Road, and the dismissal of it (until recently) by economists, academics and politicians alike. More hashpower is being added to the network, even as we speak, in record amounts. Bitcoin will also survive the departure of Mike Hearn. He says he sold off all of his bitcoins – go buy them while they are on sale. Long live Bitcoin!