There was a time when believers in bitcoin, the virtual currency backed by math instead of any government, thought that it might one day replace cash as a relatively anonymous way to pay for everything from groceries to your morning coffee.
Now, that dream might be smack dab in the midst of crashing down, a function of the currency’s code playing out. At stake is nothing less than two competing visions for the future of bitcoin itself.
The problem is that the digital “blocks” of bitcoin transactions, which must be processed by users in order for transactions to be completed, are filling up. With more competition for space inside blocks, the users who process them—called miners—look for the transactions with the highest fee attached first, a voluntary reward from users who make the transactions. As a result, the fees that people must pay in order to reliably get their transaction included in a block are rising on average, while transactions without fees attached are left to languish, uncompleted, for hours on end instead of the usual 10 minutes.
The end result is that if you want to use bitcoin, you have to pay a few extra cents. This might not seem like much of an issue, but when it comes to the claim that bitcoin could one day replace cash, consider this: When I pay two dollars for my morning coffee in cash, I don’t have to pay any amount, no matter how small or seemingly insignificant, for the privilege. Why would I? Why would anyone? For people who do a lot of transactions, too, even pennies add up.
“It’s not about higher fees, it is about loss of usability and users"
Seasoned bitcoin developers saw this usability issue coming from a mile away. Blocks have been trending towards filling up for some time, causing longtime project leaders like Gavin Andresen and Mike Hearn to raise a call for much larger blocks—from 1 megabyte, the hardcoded limit put in place by Satoshi Nakamoto, bitcoin’s anonymous creator, to 20. To increase the block size would be to augment bitcoin’s core code in an irreversible way, and move the goalposts of the whole ecosystem. They were defeated. In December of 2015, bitcoin developer Jeff Garzik predicted that full blocks would lead to a “fee event,” a major economic disruption in bitcoin which would “[price] some economic actors (bitcoin projects and businesses) out of the system,” he wrote.
And it’s exactly the uses of bitcoin that once invoked a world where every purchase, no matter how large or small, could be made with virtual currency—movie tickets, ice cream cones, a sandwich at lunch—that are now in danger of being priced out of the system. This could have severe implications for average people hopping on the bitcoin bandwagon.
“It’s not about higher fees, it is about loss of usability and users,” said Wouter Schut, a bitcoin user who created a fee event simulation in 2015. In his simulation, as block size rose, so did the amount users were willing to pay to be included in a block. “[It’s] about all the people who are going to give up on using bitcoin all-together. It's a usability nightmare. One where people who complain about higher confirmation times, and higher fees are not taken seriously at all.”
Schut is giving voice to beliefs echoed by many in the bitcoin community, including some developers. But not everybody sees higher fees and smaller uses for bitcoin being phased out as a bad thing—in fact, some see this development as a natural and even welcome development for the virtual currency.
Essentially, there are two competing visions for the future of bitcoin. One, expressed by Schuts, sees the currency scale up to worldwide usage by making blocks bigger and keeping fees and wait times low. Bitcoin would also be more decentralized, the thinking goes, with a plethora of people using the currency and running the software. The other wants to keep block sizes as they are, or only slightly larger, with those bitcoin uses currently being priced out of the system moving to other off-blockchain networks (“layer two”) that don’t put as much strain on the bitcoin network itself, like the Lightning Network. This could make for fewer people in bitcoin, since only actors willing to pay higher costs would use bitcoin proper.
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The 1 megabyte block cap was coded by Nakamoto, giving that arbitrary number the same near-mythical aura and unassailability of the anonymous person themselves. Indeed, bitcoin developer Peter Wuille responded to Andresen’s concerns over rising fees in June of 2015 by writing, “If fees rise high enough, and people pay them, that sounds like a fantastic problem to have…” If bitcoin is trending to price out small-time users, the logic goes, then so be it; there will be more for the rest of us.
“The more fundamental issue is, bitcoin has always been a limited capacity system with an auction mechanism to bid for that capacity,” bitcoin developer Peter Todd wrote me in an email. “Economic actors getting forced out of the system, and onto layers above the blockchain—usually referred to as layer two systems—is something we have to expect and can't prevent.”
This is problematic, Todd added, for people who want to buy a morning coffee with bitcoin, but there are other factors to consider when thinking about changing the block size. For example, powerful Chinese mining pools, which together control half of the entire bitcoin network’s processing power, have expressed concern that bigger blocks would force them off the network due to limits of internet bandwidth in China. The “average person” might win, but the effects on the backend of bitcoin could be unpredictable. If block sizes are kept as they are, however, then the bitcoin network remains on an upward trend of centralization, but continues to work, as some contend, as it was meant to.
“Ultimately the bitcoin network is resilient and self-adjusting, and this will sort itself out at the wallet software (user) level through fees,” longtime bitcoin developer Jeff Garzik, who proposed a more conservative alternative to Andresen’s failed plan to increase block sizes, wrote me in an email. “The transaction fee market is a free market of users bidding for a limited amount of transaction capacity. It is subject to the natural laws of supply and demand for that limited economic resource.”
The debate about which path is the right one for bitcoin is far from over, but the pressure is on for the bitcoin community to make a call, because the effects of indecision are already beginning to pile up, all on their own—after all, it’s in the code.