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Bitcoin's Big Split is Neither Confusing nor a Crisis

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Shutterstock photo

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One of the main obstacles that Bitcoin faces if it is to ever achieve wider use and fulfill its potential, is one of understanding. To outsiders interested in the currency, or in virtual currency of any kind as a concept, the first impression on investigating the subject is usually that it is extremely confusing. The discussion among enthusiasts is often couched in obscure terms, using words that are just plain scary to those new to the subject. The heated discussion around the subject of the recent “fork” in Bitcoin is no exception.

At its heart, though, as contentious as it is, the dispute is pretty simple. What is at stake is how quickly and in what way the capacity of the Bitcoin network expands. In principle it seems to me that both sides of the argument agree that expansion is, or at some point will be, necessary. Discussion as to how that could be done has been going on for some time, and it is the lack of consensus from those discussions that has prompted the current “crisis.”

As you may have guessed from the scare quotes, I don't see this difference of opinion as a crisis at all. It has been reported as such in many places, and it is easy to see it that way given that what we have now is effectively two versions of Bitcoin running side by side; or in other words a fork. This suggests a deep, irreconcilable split - an existential type of crisis. It is, however, more an example of the healthy disagreement one can expect in a democratized system.

As this Cade Metz article on Wired.com points out, forks are nothing new in the world of open source software. (“Open source” is software that can be used, and even changed, by anybody. The software supporting Bitcoin is essentially that). When two rival versions of the software are made available at the same time it is known as a fork. It is, in effect, a way of forcing a “vote” on which version users prefer. If one is adopted by the vast majority of people, then it naturally becomes the “winner” and the default version. That is what we are seeing right now in terms of the software that supports Bitcoin.

One side of the current debate, led by former Bitcoin Foundation chief geek Gavin Andresen and the ex-Google Bitcoin developer Mike Hearn, has been pushing for change to happen now. Andresen began this as early as May of last year and after over a year of discussion he has, he says “reluctantly” forced a fork and effectively put his idea to a vote. By releasing the new Bitcoin XT Hearn, Andresen et al have forced the community and miners in particular to choose between the current software and their “new & improved” version. Essentially what XT does is to increase the size of the “Blocks” that form the blockchain from a maximum of 1MB to 8MB.

To understand what a block is you have to understand a little bit about how the blockchain, which is the operating system for Bitcoin, works. When a transaction takes place in Bitcoin, it is processed and recorded by multiple computers at the same time. The block is the piece of the software that does that. Think of it as partly a pad on which the Bitcoin ledger is kept and partly a calculator that processes the transactions. It then becomes obvious that the bigger the pad, the more transactions that can be held on it and the bigger the calculator, the faster it can process them. As Bitcoin has grown in popularity and acceptance the day when bigger pads and calculators are needed has come closer. To the XT proponents it makes sense to change now, before it is essential.

The problem is that some don’t see the need to grow yet and believe that XT is motivated by something else. They believe that larger blocks will hasten the day when other banking and trading functions can exist on the Blockchain and that that is undesirable. The 1MB maximum for blocks was not in the original plans for Bitcoin but was added later by Bitcoin’s anonymous creator, known as Satoshi Nakamoto, to protect against spam and graffiti. Many of those opposing expansion of the block size see alternative uses of the blockchain as equivalent to those things, clutter that will negatively impact the purity of the system.

The argument flared quickly and has been, as tends to be the case in the Bitcoin space, heated. Personalities and personal attacks aside, though, the issue is one that had to be addressed; how and when does the blockchain adapt to allow for increased usage? If forced to take a side I would come down on the side of XT. The 1MB limit to block size, it seems to me, was only ever intended to be temporary, and it might as well be increased now. If the change has enough of a downside then, in the democratic nature of Bitcoin and open source software in general, it will be changed again before long and another debate will begin. The beauty of Bitcoin, though, is that mine is just one voice. It will take a large majority of interested parties to agree if change is to come, a marked difference to conventional currency, where the power to change is concentrated in just a few hands.

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.

Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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