Bitcoin feud over expansion threatens to destabilize currency

Bitcoin, the cryptocurrencythat has earned legions of fans andhasoften been touted asthe future of money, is in danger of having no future at all.

A rift within the peer-to-peer network of users and software developersthat operate the bitcoin system has prompted one of its senior developers and most ardent proponents, MikeHearn, 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, seniorbitcoin developer

"[Bitcoin] has failed because the community has failed,"Hearnwrote 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 moretransactions at afaster rate. A 1 MB cap on thesize of the blocks is hardwired into thebitcoin protocol that was created in 2009.

Allowing fewer transactions per second keeps the system safer, butit limits its overall capacityand,critics say, leads to congestion,transaction delays andcancellationsas thenetworkruns out of capacity and gets unreliable.

Duelling bitcoin versions

In August2015,Hearnand another senior developer,GavinAndresen, proposedan alternative version of bitcoincalled Bitcoin XTthat allows more transactions per second. Since then, otherversionshave 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 thatgenerates bitcoin and keeps track of transactions.

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Some of those users fear that increasing transaction volume would threatenbitcoin's decentralized model and resultinonly larger, possibly corporate,users beingable to afford to minebitcoins.

But Hearnand 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 themdisproportionate control over the bitcoin ecosystemand a disproportionate share ofthe bitcoinpayments thatminers get for running the algorithms on which the system operates.

"At a recent conference, over 95 per centof hashing power was controlled bya handful of guys sitting on a single stage. The miners are not allowing the block chain to grow," Hearnwrote.

He and Andresen set the75 per cent threshold for switching to the XT systemso that theexpansion couldn't go forward without a large majority and so thata single, large mining pool could not have de factoveto power over expanding the system.

Abitcoinfastlane

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.- IzabellaKaminska, financialblogger

"I don't think [Hearn's] project (BitcoinXT)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 ofthe current dispute is that it results in two rivalsystems 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."

On Feb. 11, a group of some of the biggest players in bitcoinissued astatementcalling for consensus on the block size issue. The groupagreedthat the block size needs to increasebut argued that it shouldn't happen throughwhat it called a "contentious hard-fork," such as XT or Classic, which would split bitcoininto 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 bitcoinis not yet clear. While its value dove more than 16 per centthe day afterHearn announced hisdeparture,the currencyhas been declared dead many times before.

GarrickHileman, economic historian

"Bitcoin's most-pressing challenges are external rather than internal," said Garrick Hileman, aneconomic historian at the University of Cambridge and theLondon 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 intocoming together to resolve,at least temporarily,the block-size debate."

ButHileman stressed thatthe existingideological differences over bitcoin'sfuturedirection aren't going away andwill "undoubtedly resurfacewhen 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" onIdeas Feb. 24 and 25, 2016.

The bitcoin economy

Howthe peer-to-peer bitcoin network processes payments