When the concept for Bitcoins first appeared in 2008, the cryptographic currency and its innovative modus operandi was described in the pages of a detailed publication called ‘Bitcoin: A Peer-to-Peer Electronic Cash System’. In the paper, the creator of Bitcoin, Satoshi Nakamoto, describes the principal functions of the Bitcoin network, explaining how the intricately designed and highly sophisticated public ledger system (called the Blockchain) would be able to keep track of digital coin transactions which are mined from ‘blocks’.
Those ‘blocks’ are generated in the network, and are subject to strict cryptographic protocols to establish the chronological order for transactions, and to make sure that already established blocks do not become altered (for example). In the process of describing how the Bitcoin network works, Nakamoto made it clear that the system possesses an incorruptible backbone (a set of protocols) that sets it apart from other currencies, as it is ‘a system for electronic transactions [that works] without relying on trust’.
A few months after that publication in January of 2009, the release of the first open source Bitcoin client rolled out the first active and totally unique, open source, and incorruptible crypto-currency network (complete with the first ever or ‘genesis block’ of Bitcoins – of which its progenitor successfully managed to ‘mine’ all of the first 50 available Bitcoins).
Since then, Bitcoin has established itself as a recognized and trusted method for making electronic transactions. This is firstly thanks to the limited total amount of coins (21 million) available, which once all mined will just have to be traded in circulation, meaning that there is no room for inflation caused by printing additional money. Users will instead just trade the existing coins and divisions thereof (1 BTC = $236.38 USD right now, so people are already trading in fractions in order to buy things worth less than one Bitcoin). The second reason is thanks to the transparent nature of the system, where all the blocks in the ledger have total knowledge of every transaction made.
In its current state, however, the Bitcoin network has experts worried that continued growth cannot be sustained. This is because there is only a finite amount of block space. Gavin Andersen, one of Bitcoin’s most prolific developers, explains the problem in his blog post… Batches of Bitcoins known as ‘blocks’, which exist on the public ledger (Blockchain), are believed to (at the moment) be running at an average of 40 percent of their total available space of 1 megabyte. Some experts (including Andersen) are worried that if this gets to 90 percent or perhaps even 100 percent, it could undermine the whole of the Bitcoin network by making it so congested that it simply grinds to a halt, and becomes unusable.
So, the big question is can anything be done about this? At the moment the main suggestion being made to ‘save’ the Blockchain involves the creation of a ‘hard fork’ that would leave Bitcoin users on two sides of a divide… By changing Bitcoin’s underlying protocols in order to split the Blockchain into two parts, the plan is to leave one side of the Blockchain unchanged with blocks of 1 Megabyte, but to also add an extra part to the Blockchain which uses 20 Megabyte blocks. It is hoped the Bitcoin community will then naturally shift to using the larger block size, in order to save the network from becoming all clogged and unusable.
Assuming that Andersen is right, and at 90 percent to 100 percent block use levels the Blockchain does become so slow that it is unusable, one could perhaps argue that there is really no choice in the matter, and one way or another something must be done. After all, if the network does become clogged up and slow, that will also cause a sudden lack of liquidity within the Bitcoin network, and that lack of liquidity stands a much higher chance of negatively affecting Bitcoin value than implementing a solution ever could. However, making sure that the correct solution is implemented, and that everybody is happy with and trusts the chosen solution, is also important, because trust is another driving factor behind a currency’s exchange rate value.
At the time of writing his original publication back in 2008, Mr Nakamota made it clear that the way he had devised the Bitcoin network to work was going to allow it to be completely removed from the pitfalls of traditional printed currencies. However, when Nakamota said that, he was talking about the network with all of his protocols in place. It is of course fair to say that if you go into the Blockchain and change the rules of Nakamota’s system from the inside, then there could well be repercussions. This is why finding a solution to the block size problem is rightly causing so much debate.
Peter Todd, a Bitcoin developer, feels that there are some serious issues with altering the infrastructure that holds the Bitcoin world together,
‘From a social perspective, you don’t want two different Bitcoin systems because it causes incredible uncertainty in the marketplace…‘The fact is, that’s just so disruptive. The vast majority of developers recognize that this is a system that has fundamental issues. You can’t just turn a knob and expect it to still keep working. It’s a trade-off.’
Another worry is that if the size of the Blocks in the Blockchain goes up, then the cost of mining will also be affected – larger blocks means increased costs involved in confirming transactions, and if this is the case it could have the effect of forcing out lower level miners. This will sadly hurt Bitcoin’s thus far egalitarian reputation, and relegate mining into the hands of the few with the economic power to do so.
Having said that, this process is also something that is already happening naturally anyway, because every time that a Bitcoin is mined the algorithm to find another one becomes more complicated, and therefore requires more computing power and energy to discover.
There are of course other options on the table too. The lightning network would work by getting rid of the need for every single block to include all of the transaction data, by setting up a go between – a ‘decentralized channel’ that would wait for a certain number of transactions to have been done before updating the network.
This solution also has its fans and detractors, but according to Andersen, although lightning network would work, we are still a few years away from being able to implement it effectively. It is for this reason that he feels sticking with the current Blockchain system, and simply upgrading the size of the Blocks in the chain – while being transparent about doing it so that everyone knows to move over into the new Block – is the most effective solution and the one least likely to negatively affect the value of Bitcoins.
One thing is for sure, Bitcoin is approaching a dangerous and unknown territory that seems to go a little against what its creator’s original ethos for the system told us… that is should work ‘without relying on trust’. Yet now we have people weighing in on two different sides of an argument, and one of those people, Mike Hearn, even makes the claim (without a shred of proof) that Nakamota told him years ago in an email that increasing the block size would eventually need to be done. It would have been handy if Nakamota had told everyone about this need.
So who do you trust? The fact is that increasing the size of the Blocks in the Blockchain should not (in theory) cause a massive fluctuation in the value of a Bitcoin, but the real truth is that no one really knows. What happens, therefore, if they do change the Blocks is anyone’s guess… its almost like gambling… but then with Bitcoins it has been a bit of a gamble all along!