For Bitcoin to Thrive
Imagine it's the summer of 2007 again and Twitter is growing way faster than their infrastructure can handle. This is what Twitter use sounded and felt like back then:
"Check out this picture of my awesome lunch!" Oops fail whale. "Oh great, it's back up." Damnit, fail whale again. For a week?! "Whoa I'm getting SMS flooded by old tweets, but at least Twitter's finally back up!"
Repeat for the next couple years as they restructure for growth tolerance.
Immediately after Twitter would come back up, everybody would complain about the fail whale, on Twitter, of course, spiking tweet volume and causing another string of fail whales, the infamous indicator of a server error (typically the inability to serve the requested content in a reasonable amount of time).
Yesterday’s Bitcoin crash and today’s continued freefall (until MtGox’s trade freeze) is largely a result of MtGox trade volumes tripling this week. Their trade queues filled up, leading to trades taking longer to execute, leading to a liquidity panic as people started to question their ability to get money out of Bitcoin if the bubble were to burst. Yes, Bitcoin's value crashed because of *overwhelming* demand.
This is not supposed to happen to a currency or even a commodity. (Though I hear it used to happen to gold in the early days.) This is not an economic problem, it's a technology infrastructure problem.
We're starting to see what happened to Twitter happen in currency form and people are complaining about downtime using the same platform that's captured their attention and imagination. This time, it's with the most effective means they have of communicating their dissatisfaction. It's with their Bitcoin wallets. In their panic and confusion, people are selling as fast as they can. And just like the situation progressed with Twitter, it's going to get worse before it gets better as Bitcoin exponentially increases in popularity.
During Twitter's growing pains, many tech-savvy Twitter early adopters had called for a decentralized, open source equivalent that anybody could run on their own and link up to everybody or anybody else running an instance, creating an ad-hoc mesh network of status updates that would allow dynamic routing of messages around dead instances and kill the fail whale once and for all. Evan Prodromou would do just that with StatusNet.
Bitcoin needs decentralization for basic financial services, like exchanges, to survive this mania and eventually thrive as a currency. If MtGox's monopoly persists, we'll be left with a single point of vulnerability that can be attacked to undermine Bitcoin's stability and people's trust in the currency's liquidity and longevity, on demand.
These are not new warnings. This crash was not a surprise. It will happen again. There won't just be another liquidity crisis, there will be repeated events unless something changes. The ripples may not be as severe as this crash, but the volatility will nonetheless threaten the long-term viability of all cryptocurrencies.
The irony is Bitcoin was designed to be decentralized. Bitcoin was designed to counter a known fragility of monopolies. But us mere humans have unwittingly and collectively supported the creation of a central monopoly on top of Bitcoin in order to facilitate entry to and egress from the market of Bitcoin as a commodity.
It wasn't always like this. As recent as 2011, there were significant competitors to MtGox, but with the long lull, the major ones have since thrown in the towel or pivoted to offering different services. The small piece of the exchange market MtGox hasn't captured is highly fragmented into many local, currency-specific exchanges. This situation is untenable if Bitcoin, or any other cryptocurrency for that matter, is to thrive.
This is the part where, and I'm trying to keep this short, I'm supposed to dramatically lay out a specific proposal to save Bitcoin and its brethren. All I've got time for is hope there's cryptographer-equivalents to Evan Prodromou and gang out there who deeply appreciate the problem and who'll design a secure and open standard protocol (analogous to StatusNet's OStatus) and build a free and open-source distributed market-making platform for cryptocurrencies, probably reusing some of the same cryptographic protocols in Bitcoin itself. It could be a stand-alone piece of software or integrated into the Bitcoin client or perhaps even the start of a meta-cryptocurrency client.
Are you up to the challenge?