Bitcoin continues to experience growing pains. The price of Bitcoin was jolted after the SEC rejected the Winklevoss Brothers application to sponsor an issue a Bitcoin ETF. The price of Bitcoin fell about $150 on the new but quickly rebounded after traders and Bitcoin enthusiasts realized the issue had to do with the security of the exchanges where Bitcoin trade hands. Since this is a fixable problem, investors took the price back up.
But now there is a new problem for the industry to work through. There is now some infighting within the Bitcoin technology development community, which is making people nervous. The technical issue they are fighting over has to do with the size of the blockchain. A “block” represents a batch of transactions that are processed but the Bitcoin network. As it stands now, the size of a block that can be processed by the network is limited to 1 megabyte. As Bitcoin has grown in popularity, the demand on the network has grown and the capacity of the network has grown as well. Some of the developers in the industry want to increase the maximum size of a block.
The essence of the debate is how to scale the technology. Anyone who has downloaded a wallet onto their computer knows that it takes days to load all the data. Most people do not leave their wallets open all the time. As a result, those wallets have to be updated from time to time. This updating process can take hours depending on how many days, weeks or months of transactions have to be added to the wallets database.
The discussion at hand has to do with scale. If Bitcoin is to become mainstream, it has to handle more transactions and do so faster. Cost is an issue as well. Because of the current issues related to scale, the cost of transacting is rising. One of the many benefits of Bitcoin is the low transaction cost relative to traditional financial transactions, so this is an important issue. If a solution cannot be found that everyone can buy into, there is a threat that the Bitcoin itself could splinter. There are some technologists that want to split Bitcoin into two by creating Bitcoin Unlimited (BTU). Indeed, the Bitcoin exchanges (Coinbase and Bitfinex) have stated they are willing to list a BTU if the Bitcoin community wants to go that way.
One of the solutions offered by the development community is to allow the Bitcoin ecosystem activate a “Segregated Witness” that does not depend exclusively on mining pools. (The Segregated Witness is an upgrade to the Bitcoin protocol that separates the signature data from the Bitcoin transaction. This allows for more flexible programming and increases the block size limit.)
This is being called a User-Activated Soft Fork because at least 95% of blocks must be mined this way by November 15, 2017, to signal support for the or it will no longer activate. Segregated Witness capability was included in the latest versions of Bitcoin Core v0.13.0.
So why does this make the Bitcoin community nervous? Bitcoin Unlimited would become an alternative to Bitcoin Core and both would have the same name. Essentially we would end up in a world with Bitcoin and an alternative version of Bitcoin.
Why would this happen? The decentralized nature of Bitcoin administration makes the process of updating and changing the technology base cumbersome. Bitcoin hosts or miners accept or reject changes (a vote if you will) by choosing what software to run. But if large groups choose to run a mutually incompatible code, they generate separate transaction records, and in essence, entirely separate pools of currency. This will undoubtedly cause confusion could result in a big setback for the cryptocurrency with the biggest head start (first mover advantage) and brand name recognition.
In a previous post for the subscriber, we discussed our analysis of the price of BitCoin. Read here to see our analysis.
