Bloomberg: Bitcoin's fate lies in the hands of Chinese miners

Wu Jihan still remembers the excitement he felt after discovering Bitcoin in early 2011.

As a computer geek fresh out of China’s top university, Wu absorbed everything he could: about the inventor of the electronic currency and its users’ vision to transform the global financial system. Within a year, he quit his job in private equity to start a bitcoin startup. Today, his company is the world’s largest bitcoin mining company, and it is mining, a computing process, that drives transactions related to the cryptocurrency.

But now, for Wu and the entire Bitcoin online community, excitement has been replaced by fear that the cryptocurrency may have encountered its biggest growth barrier since its creation in 2009. The preset maximum data limit that the Bitcoin network can handle requires the current maximum transaction verification capacity to be increased, otherwise transaction times will drastically expand, undermining Bitcoin's 4,475% growth over the past five years.

In theory, there’s a simple solution to this problem: Fix some code, and transactions can continue to grow at a rapid pace. The problem is that any change to Bitcoin’s architecture is bound to create some losers, and the motley crew of miners, software developers, libertarians and entrepreneurs that make up the Bitcoin world have yet to reach a consensus. At least five attempts to do so have been made in the past year, and backers will try again at a Silicon Valley conference this month. Any solution will have to win the support of attendees from China, which currently accounts for 70% of the world’s Bitcoin computing power and 90% of transactions.

“This is undoubtedly the biggest test of global collaboration,” said Wu Jihan, who runs AntPool, the world’s second-largest mining collective and one of the world’s largest mining equipment manufacturers. “People have invested a lot of capital and emotions, but everyone has a different understanding of the future of Bitcoin.”

Wu and his compatriots undoubtedly have the most say. With competitive labor costs, electricity costs and localized chip manufacturing plants, Chinese miners have successfully defeated their global competitors and dominated the field in providing the complex computing services required to verify Bitcoin transactions - and they receive freshly mined Bitcoins from providing such services. As the price of Bitcoin plummeted from $1,000 in late 2013 to $200 in early 2015, China's cost advantage allowed them to maintain a floating profit, while countless Western miners have collapsed.

At the same time, Bitcoin's volatility is attracting a large number of individual speculators from China, who are more willing to diversify their asset allocation rather than let the yuan dominate after last year's shocking devaluation of the yuan.

Hashrate

HAOBTC Mine

Bitcoin activity is heavily concentrated in China, raising concerns that the system is vulnerable to interference from the ruling party. China tightly regulates the flow of capital across borders and has tight controls on the internet. Such concerns are particularly acute for libertarians, who value Bitcoin's decentralized nature above all else. Unlike most investment instruments, Bitcoin does not have a single authority, such as a central bank, that controls the money supply. The maximum number of Bitcoins that can ever be created is set at 21 million.

Peter Todd, a Toronto-based contributor to the bitcoin code, said China’s monopoly over so much computing power “is a very negative thing.” “It will be very easy for the Chinese government to do bad things,” he said in an email interview.

While China’s central bank has said Bitcoin is not a “real” currency and has taken steps to prevent it from taking root in the country’s financial system, there is absolutely no evidence that policymakers will try to control its global development.

Instead, influence lies with private Chinese miners, who must validate any proposed changes to bitcoin’s architecture because the current system is tied to the software versions used most by miners.

Block size

“Miners have real voting rights,” said Wang Chun , co-founder and chief administrator of F2Pool, the world’s largest mining pool.

The debate over how bitcoin's capacity problem should be addressed has been divided into two main camps. One camp, known as Bitcoin Classic, argues that the size of the "blocks" containing bitcoin transactions should be increased as soon as possible to ensure that transaction processing times do not increase dramatically.

The other camp, Bitcoin Core, believes that now is not the time to make such a drastic decision because it takes a lot of time to ensure the security of the new version of the software. They also worry that drastically increasing the block size will give too much power to a small number of miners who have the computing power to process the lengthy calculations required for larger blocks.

Core supporters are mainly focused on introducing more features to improve transaction efficiency, and some have agreed to a capped increase in block size. They want to gain broader market acceptance before making any major changes. They fear that a split in the Bitcoin community will cause the price of Bitcoin to plummet. Bitcoin has risen 56% this year and was trading at about $676.22 on Wednesday.

Waiting Game

At a meeting in Hong Kong in February, a group of major Chinese miners and a group of Core developers reached an agreement. The new code will be released this month and, if it gains broad support, activated in July 2017. “If this consensus is successfully implemented, it will set an example for future collaboration,” said Wu Gang, CEO of HaoBTC, whose company accounts for about 5% of the bitcoin network’s hash rate.

If an agreement cannot be reached, transaction processing times could jump from hours to days, making Bitcoin inconvenient for many users, who get near-instant payment confirmations from their credit card providers or online money-transfer services such as PayPal. In its latest iteration, the Bitcoin network can handle seven transactions per second, while Visa Inc. , the world’s largest payment processor, can handle more than 24,000 transactions per second.

The sharp increase in processing time will give people a reason to criticize, such as Jamie Dimon, CEO of JPMorgan Chase, who once said that virtual currencies without central authority have no chance of surviving in the foreign exchange market with a daily trading volume of $5.3 trillion. Even though Bitcoin has seen huge growth in the past five years, the current total market value of Bitcoin is only less than $11 billion, and the entire network processes about 120 million transactions per day.

Despite the difficult road ahead, AntPool's Wu remains confident about the future. He is expected to attend the Bitcoin Supporters Conference in California this month and said that miners from China will play a greater role in leading the global community towards consensus. "We can't be stuck in this deadlock forever," Wu said. "There are so many smart people in this industry. We must believe that they will make the right decision."

Original link: After 4,400% Surge, Bitcoin's Fate Hinges on Huge Chinese Miners

Original author: Lulu Yilun Chen & Yuji Nakamura

Media source: Bloomberg

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