The battle for Bitcoin, explained
Nobody really knows what’s going to happen to the Bitcoin blockchain on August 1. That’s the scheduled date for the next showdown between those who find their interests allied with the Bitcoin Core group of developers and those whose interests are opposed. This is part of an ongoing fight over control of the blockchain and the future of Bitcoin.
The Core group has inherited caretakership of the Bitcoin software from its original author — the mysterious Satoshi Nakamoto — and continue to contribute to its ongoing development. The opposition includes various blocks of “miners” — those who operate the computing infrastructure that performs the massive number of calculations required to provide the cryptographic security upon which Bitcoin is established. In large part, these miners are operating at industrial scale out of facilities constructed near hydroelectric power sources in China, where electricity is obtainable at a very low cost.
This concentration of mining power in the hands of a few individuals is something of an anathema to the concept of decentralization, which is a critical tenant to a lot of the crypto-anarchist ideology underlying the Bitcoin movement — particularly in the West. Meanwhile, the miners, who have managed to centralize the physical infrastructure of the Bitcoin blockchain, accuse Bitcoin Core of attempting to centralize political control over Bitcoin.
All of this is against a backdrop where digital currencies have been gaining acceptance among regulators, increasing in price, and even some normal people are starting to take notice. At the same time, there is an ongoing Cambrian Explosion of new applications, companies, and coins that are rapidly innovating in the space. The sprawling collection of technologies and business models that Bitcoin has spawned are growing up to become its competition. These rivals — Ethereum, Litecoin, Dash, Monero, and so many more — have well-funded development groups, use more advanced technology than Bitcoin, and their communities mostly aren’t immersed in debilitating factional arguments.
The argument between the two groups is ostensibly a disagreement over how Bitcoin should scale to meet its increasing usage. Every 10 minutes or so, the Bitcoin miners create a new block on the chain, which is at most one megabyte in size and generally holds about 1800 to 2000 payment transactions. But Bitcoin has been gaining popularity lately, especially in association with the recent run-up in price. Transactions are now rolling into the system at a volume that regularly exceeds one megabyte’s worth every 10 minutes.
The pool of outstanding transactions is backing up — lots of transactions aren’t going through at all — and this has driven the average price of making a Bitcoin transaction up past $4. The cost is much higher in some cases. Gone are the days when Bitcoin promoters could tout a product that facilitated financial transactions for pennies — or less.
The miner’s preferred solution to this problem is to make it so blocks can be more than one megabyte. They would like to be able to adopt a larger, flexible maximum block size that could fluctuate based on demand. The Core side has expressed a concern that could lead to even more centralization of mining capacity as the size of the blockchain rapidly expands, required amounts of storage that would tend to become uneconomical for the smaller-scale mining operations. They’ve proposed a different solution called Segregated Witness — or SegWit.
SegWit will somewhat expand the number of transactions that can be held in a block but, more importantly paves the way for a “layered” approach to scaling Bitcoin. In this vision, Bitcoin would be the “reserve currency” of the crypto world — remaining slow and expensive, but highly secure. It would serve as a secure final settlement system upon which additional — faster, cheaper, more agile — settlement layers could be built. But the technology for these layers — for example, the so called “Lightning Network” — isn’t here yet and, even when it arrives, may take some time to become fully baked.
However, neither the idea for SegWit nor an increase in block size has been able to gain the acceptance of a supermajority of mining power on the blockchain. Both sides are blaming the other for impeding progress and the high cost of transactions. There have been various attempts to reach some compromise, but those haven’t gained traction either.
In an effort to break the stalemate, allies of Core have proposed something called BIP 148 — the User Activated Soft Fork(USAF). The proposition on the table is that, as of August 1, miners that support BIP 148 will start mining blocks that are organized using SegWit, and ignoring blocks do not support SegWit. Essentially, this “forks” the chain, and the race will be on to determine which fork of the chain will be able to sustain itself in the face of divided miner interest and likely chaos in the Bitcoin market.
If BIP 148 gains sufficient acceptance such that the chain does fork, there is a strong possibility that partisans of one fork will attack the other fork’s chain through a variety of means. These could include denial of service attacks, cyber or physical espionage targeted at electricity systems that power large mining facilities, and attempts to overwhelm the computing power of the opposing blockchain with a “51% attack”.
Some of this mania is driven by the theory of “Bitcoin maximalism,” which holds that, because of winner-take-all style network effects, there can only be one dominant blockchain — much in the way Facebook is dominant in social media, Amazon is dominant in online retail, and Google is dominant in search. The corollary to Bitcoin maximalism would suggest that whichever fork of the blockchain comes in second place in this race is doomed to obscurity. The winning fork, presumably, would continue on to provide ever greater riches to incumbent Bitcoin holders.
Personally, I’m not a believer in Bitcoin maximalism. I think the best thing to do, at this point, is split the baby.
It may be true that the strongest Bitcoin is a united Bitcoin, but that doesn’t seem to be a viable option anymore. Right now, with Ethereum hot on its heels, Bitcoin is on course to lose its vaunted status as the world’s largest cryptocurrency by market cap. If it’s true that there can be only one dominant blockchain, it won’t be Bitcoin’s.
However, both Core and the miners have plausible visions for the future of the Bitcoin blockchain. Core’s vision of a SegWit-enabled Bitcoin that acts as the base layer for more agile protocols is not really any more or any less compelling than the miner’s plan to just crank out a larger volume of cheap transactions using an expanded block size. I honestly don’t know which of these ideas would lead to a stronger, more viable currency in the long run. Neither does anybody else. That’s why I think it’s better to let each side make its best attempt, and let the market sort things out.
The best-case scenario is that both options work, resulting in two fully-functional blockchains focused on different use-cases. Core can use its fork of the chain as a platform for decentralized innovation, while miners can focus on driving down costs. Everyone who own Bitcoin today would continue to own tokens in each of the forked branches, which ensures that each fork would be endowed with a large community that has a vested interest in its success. Neither would be the dominant digital currency in the short term, but rather would be strongly positioned as the #2 and #3 contenders in a highly competitive market.
While it would be optimal for Bitcoin if it were to remain undivided and in the #1 slot, those days are quickly coming to an end. The two sides have dug in their heels and appear to be irreconcilable. As a result, Bitcoin remains comparatively stagnant while competitors surge ahead. The time has come to split the blockchain, letting the chips fall where they may.