Credit: 
Shutterstock photo
Visa’s (V) network can process 56,000 payments per second. Bitcoin can handle about 7, or if you believe Dave Hudson, more like 3. For those who would like to see Bitcoin adopted by a significant portion of the population, this is a problem.
Increasing the block size could solve this issue, but it has its own drawbacks which could be equally or even more detrimental to Bitcoin’s purpose than the status quo. The ideological rifts this dilemma opens up are beginning to look like a Cold War: one false move could nuke the whole project.
Skip This Section If You Know How Bitcoin Works
In case you need help with the terminology before we get into the specifics, here’s a rundown of how Bitcoin currently works.
Bitcoin is an open-source software developed by an individual or group called Satoshi Nakamoto and released in 2009. It is a decentralized payment system or cryptocurrency that operates using a neato technological innovation called the blockchain.
The blockchain is an open, pseudonymous record of every transaction that has ever taken place using Bitcoin. It is updated by miners, who use a lot of computational power (and electricity) to verify and make sense of the transaction requests coming in. The process is artificially difficult, and miners compete among themselves to be the first to produce an acceptable block, that is, one that meets certain arbitrary standards and achieves consensus among fellow miners.
At the moment, a miner who generates a new block is rewarded with transaction fees and 25 newly min(t)ed Bitcoins, but this reward halves every 210,000 blocks, or about 4 years. The upshot is that the total number of Bitcoins will asymptotically approach 21 million.
When that number is reached (much to Zeno’s horror), miners will no longer be compensated with new coins, and will depend solely on transaction fees. Since miners are not required to include a given transaction in the next block, larger users will bid fees up, causing smaller clients to be left in limbo.
The Block Size Dilemma
At present, a new block is completed about every ten minutes, and blocks are arbitrarily capped at 1MB, yielding Bitcoin’s pitiable processing rate. Luckily, anyone can pop into the open source file right now, tweak one line of code and save the nerd money. As soon as everyone redownloads the software we can get back to taking over the world.
But what if everyone doesn’t want your new-fangled Bitcoin? What if they like their Oldcoin? You’ve generated a fork, rendering Bitcoin a monstrous, two-headed thing and guaranteeing that, when it is all over, the people on the wrong chain have lost their money.
It’s happened before. In March 2013, clients running version 0.8 of Bitcoin’s software generated a block that version 0.7 users rejected. This caused two chains to diverge and, for a while, compete for the status of the accepted chain. Bitcoin bigwigs like Gavin Andresen stepped in to get v0.8 miners to stop and allow the v0.7 chain to take over.
The exchange rate, which had dropped 20% against the dollar during the scare, recovered, and everyone patted themselves on the back: “This has actually been an excellent demonstration of how a decentralized development team and community can come together to resolve a major issue,” wrote GoWest.
With all due respect to her or him, the solution seemed to owe a lot to centralization—not official, of course, but de facto. Had a lead developer with name recognition not taken to GitHub, lines might have been drawn, trenches dug and incompatible chains perpetuated. Now imagine the split had been intentional, motivated by ideology, rather than a bug. That’s the risk the block size controversy poses now.
The Arguments
Increase the Block Size
DeathAndTaxes, displaying sanity and eloquence that are rare on the internet, summarizes the arguments for either side of the block size battle nicely, though he openly advocates increasing the size limit.
Those in favor of raising the limit point out that the low-low processing rate 1MB blocks allow for effectively puts a ceiling on the adoption of Bitcoin. If transaction volume increases, smaller transactions will be excluded from the blockchain, because it will not be economical for miners to process them. Only transactions that offer large fees will be accepted, i.e., large transactions, i.e., large users. In essence, banks.
But suppose that Bitcoin is not meant to buy a cup of coffee, to use the common analogy. After all, retailers don’t accept stocks or bonds, but these still hold value. Unfortunately, the problem persists. DeathAndTaxes has calculated that a billion Bitcoin users (9% of the projected world population in 2100) could not perform even a single transaction per decade. For the average person to be able to perform one transaction per year, users would be capped at 64 million people. Nobody wants even a long-term investment that is that illiquid.
Keep the Limit
On the other hand, raising the block size simply transfers the risk of centralization to a different part of the system. Transaction fees stay be low, but the cost of powering servers to solve exponentially more difficult problems would bankrupt all but the biggest miners.
In that case you’re left with a few large entities who may eventually grow tired of competition and merge until, voilà, you’ve got a crypto-Fed. That, or some bureaucracy to regulate the miners and fend off monopolies. Small block sizes, proponents argue, prevent this pull towards centralization.
Compromise?
Some sort of compromise appears to be necessary: not too big, not too small, but just right. Goldiblocks. Side-chains could contribute to the solution: these mini-blockchains feature smaller transactions that are netted out to create one sizeable transaction; that large transaction is in turn is included on the main chain. These require a bit of trust in someone to manage them, but (hopefully) don’t depend on bank-sized entities. The currency could scale and remain reasonably decentralized.
The Cold War
Unfortunately, near-complete consensus is necessary to switch over to a new Bitcoin protocol, however just-right it is, and it’s become clear that that will not happen.
In October, Gavin Andresen published a post proposing that the 1MB limit be raised to allow for scalability. Self-proclaimed peer of the “Bitcoin Lordship” Mircea Popescu, who is opposed to scalability due to his vocal disdain for “the poor”—among others—threatened to sink any attempt to alter the block size by attacking and killing the proposed “Gavincoin” network.
Popescu could fail, of course, and the market might eventually choose Gavincoin over Oldcoin, but someone would lose a lot of money along the way.
So we find ourselves in the Bitcoin “missile crisis,” and uncomfortable ironies abound. The decentralized currency is beset by centralizing pressures if it changes or if it doesn’t. The apolitical currency is being rent by a deeply political rift between camps, each of which purports to be the trusted authority over the trustless, anti-authoritarian currency.
If ideological concerns prevent the community from upgrading Bitcoin, it will remain a curiosity. And yet the alternative is civil war. The blockchain may be a once-in-a-generation breakthrough, but for now Bitcoin is hostage to a design flaw and the online demagogues who love it. Caveat cryptor.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
