Monday, 22 February 2016

Is Bitcoin A Victim Of Its Own Success

Bitcoin has become something of a victim of its own success.  There are now so many transactions being completed that the size of the blocks in the blockchain (currently set at 1MB) is becoming a bottleneck.  Because of the way in which the process of solving the proof of work problem operates, it takes about 10 minutes for a new block to be added to the blockchain and so this linear growth means that size of the blockchain has always grown in a relatively linear fashion.

It is technically quite easy to alter this, but it requires everyone involved to work together.  And there's the rub: Bitcoin is a decentralised system and governance (technical or otherwise) is a complex collection of stakeholders including developers, miners, exchanges and various financial actors.

In the early hours of Saturday morning am important group of these stakeholders, meeting in Hong Kong, came to an important agreement (or rather a consensus) about the way forward.  Some had already issued their own software (the self termed Classic Bitcoin) without consultation which had caused some bitter arguments amongst the stakeholders.  But, now it appears that everyone has agreed to issue new software that will update the block size to 2MB, or possibly more.  Technical developments will continue this year until they can find a solution that all are ready to adopt, taking account of what the Classic Bitcoin team have already done.

The software already released by the Classic Bitcoin team will continue as a "soft fork" until agreement can be reached on the details of a "hard fork". 

This is all about power.  Not physical power but computing power.  The grouping of stakeholders who amongst them holds the greatest amount of computing power in the Bitcoin network are the ones who are most likely to win the argument.  And so it has proved here.  The grouping that reached agreement at the weekend represent approximately 80% of the processing power currently deployed in the Bitcoin network.  Hence, its fair to assume that this group is a group that can cause a hard fork.  It's all about the technical detail now.

What this has demonstrated is that although Bitcoin has no central controlling authority, being a technology based system, it does require changes from time to time, not least as the systems attempt to scale.  Achieving this with a disparate stakeholder community is a no mean feat, and perhaps shows that being a decentralised system has downsides as well as upsides.