The battle for the future of bitcoin

There’s a “civil war brewing” over the future of bitcoin that could lead to a “fork” of the cryptocurrency, say Oscar Williams-Grut and Rob Price on BusinessInsider.com. That would result in two separate digital currencies running on separate versions of the underlying software, operating by different rules. If the dispute isn’t resolved – and it may well not be – there could be serious implications for the future of the entire bitcoin project.

Bitcoin is built on a “blockchain”, an immutable distributed database – or ledger – of transactions. Each use of bitcoin is added to a transaction record (a block) and verified by a network of “miners” before that block is added to the public blockchain. When bitcoin was first created, Satoshi Nakamoto, its mysterious and as yet still unidentified inventor, imposed a size limit of one megabyte (1MB) per block. But with bitcoin growing in popularity, the number of transactions in each block is hitting the limit. This means the calculation needed to verify each transaction is becoming more complex, and the time taken to verify it is lengthening dramatically. To reward them for performing the complex calculations needed to verify transactions, miners charge a fee – and as the calculations become more difficult, the fees have started to rise.

This is all very well if you see bitcoin as “digital gold”, ie, a store of value. After all, it doesn’t matter too much if it takes an hour and a modest fee to record your transaction if you’re effectively putting your bitcoins in a virtual vault. But if you want bitcoin to become “digital cash”, a medium of exchange, you need a near-instantaneous record of transactions and negligible fees. There’s no point using it to buy a flat white in a fashionable coffee-bean emporium if the transaction fee approaches the cost of your beverage.

Most people agree that the problem of scaling bitcoin has to be solved somehow. But nobody really agrees on how. A sizeable chunk of the bitcoin community has never been happy with the 1MB block size limit. They see it as both arbitrary and temporary, and want it increased substantially. Arguments are getting heated, so we could soon see a “hard fork” in bitcoin’s underlying code. Because bitcoin is built on open architecture and its code is available to anyone, it’s possible to run different versions of the software side by side, explains Alyssa Hertig on CoinDesk.com.

That’s what’s happening now, with “Bitcoin Unlimited”, which wants block sizes to be agreed on the open market by miners, aiming to split from the “Bitcoin Core”, which is proposing some technical wizardry dubbed “SegWit” that would effectively double the block size without actually increasing the limit. Bitcoin Unlimited followers believe SegWit is at best a temporary solution that would just put off the inevitable, and more drastic action is needed. Those in the Bitcoin Core camp argue that if miners can agree the block size between them, they will have too much control. That will jeopardise the decentralised nature of the cryptocurrency, one of its founding principles.

The debate isn’t just theoretical – it’s already affecting the value of bitcoin. The bitcoin price recently fell by over 20% against the US dollar after 20 bitcoin exchanges said that, while they weren’t endorsing Unlimited, they would be preparing for a “hard fork”. It has since recovered most of its losses, but the uncertainty doesn’t bode well.

Nobody knows which side will win the battle between the two standards, but Bitfinex, a bitcoin-trading platform, has created “chain split tokens”, which allow punters to bet on the outcome, according to Joon Ian Wong on Qz.com. If you buy Bitcoin Core tokens and Unlimited is a success, Core tokens become worthless, and vice versa. At the moment, Core tokens are almost four times as valuable as Unlimited tokens.