Where is Bitcoin going? Even the core developers are confused

     Bitcoin has reached a crossroads. The digital currency and the network that governs it are both maturing, but community members are lost — they can’t decide what a mature network should look like.

     Bitcoin is a decentralized currency that is traded on a public ledger called the blockchain. People called miners obtain Bitcoins through mining (running specific software on their computers), which are then published to the blockchain for transactions after verification. Not everyone is suitable to be a miner because it requires your computer to have strong computing power.

     Last week, a Bitcoin company, CoinWallet, had a massive amount of transactions on the network, giving users a taste of what Bitcoin would be like if it became a mainstream currency. The nasty company CoinWallet released 200 Bitcoins, and people rushed to get them, which triggered a flood of transactions. The next day, there were 190,000 unconfirmed transactions. As of today (September 14), there are still 145,000 backlogged transactions on the Bitcoin network.

A surge in users could paralyze Bitcoin

     CoinWallet's experiment proved that Bitcoin's standard process is not enough to cope with the sudden large number of transactions. Currently, miners process Bitcoin transactions in blocks, and each block can hold 1MB of data.

     In 2010, the Bitcoin designer who calls himself Satoshi Nakamoto limited the block size to 1MB. The original intention was to facilitate small payments of no less than 1 cent and prevent the resulting spam transactions. When there were relatively few Bitcoin owners, this ensured that transactions could be completed quickly. People who made Bitcoin transactions did not have to wait for a long time for blocks to be filled and processed. However, the current community has grown rapidly and is close to the maximum capacity of Bitcoin blocks to be filled quickly, which leads to transaction backlogs, such as what is happening now, and miners are unable to complete transactions quickly.

     If the Bitcoin community cannot agree on how to deal with the backlog, today’s backlog is just the first sign of trouble ahead. Everyone agrees that consensus is needed, but they are stuck on what kind of consensus it should be.

Alternatives: Bitcoin vs. Lightning

     There are some different opinions on how the Bitcoin block size should be changed. Keep in mind that the core value of Bitcoin is to provide an alternative to the financial system controlled by governments and banks.

     Gavin Andresen, chief scientist at the Bitcoin Foundation, and Mike Hearn, a Bitcoin core developer, have created a Bitcoin fork called XT. Miners on the XT network can process Bitcoin blocks up to 8MB in size. Blocks don’t have to be processed in full, but it gives miners an option when transactions are flooded. The XT network scales blocks according to a set schedule, doubling the size every two years. Currently, blocks on XT are compatible with both the original Bitcoin network and the XT network. Once 75% of blocks are compatible with XT, the XT network will hard fork, creating a new network and currency. The network will also not require consensus to operate like the existing Bitcoin network. Of course, the future of XT (coming up with a plan that satisfies Bitcoin businesses that are facing regulatory pressure from financial institutions) is up to Hearn and Andresen. There is also a proposal by Jeff Garzik, a Bitcoin core developer, to slightly increase the block limit to 2MB.

     But another Bitcoin Core developer, Peter Todd, is promoting a solution called Lightning (based on a grant from Thaddeus Dryja and Joseph Poon) that would allow Bitcoin members to transact on the blockchain off-chain. This effectively means people rely on untrusted entities to facilitate transactions on centralized networks. One example is Changetip, a digital wallet that allows people to tip other people with Bitcoin. When people use Changetip to tip, the transaction is not done on the blockchain, but on Changetip's internal network.

     Multiple payment channels will allow the Bitcoin network to process more transactions. Transactions that occur in the same payment channel will be merged before the blockchain verifies them, resulting in smaller files that require less processing power. This solution can redistribute some of the processing power currently owned by miners, who are mainly responsible for verifying Bitcoin transactions.

Existing shortcomings

     Of course, every plan has its opponents.

     Opponents of XT say it will slow down the entire network because larger blocks take more time to confirm. Others claim that the XT network has been targeted for attack, which could discourage miners from migrating. At the same time, XT gives miners a lot of decision-making power, and some believe they already have too much control over the blockchain. In addition, miners may not be tempted by XT for economic reasons. If there is only a small backlog of transactions, Bitcoin encourages users to pay fees to increase priority in a particular block. The purpose of XT is to avoid overloading the system with such competing fees.

     “I want my blocks to be bigger because that means competitors can’t get that information. And will people on the other side give up using their computing power to make money? No, they’ll join the other side,” Park said.

     In terms of ideology, XT also caused problems for some people in the community, after all, it did not gain consensus.

     At the same time, Hearn also questioned the shortcomings of the Lightning scheme, saying that it was unnecessary complex. For example, the Lightning scheme uses smart contracts to prevent Bitcoin from being stolen. Its white paper states: "If Bob can generate 20 bytes of unknown random data R from a known data H within 3 days and provide it to Alice, then Alice will pay Bob 0.1 Bitcoin and complete the contract." If these terms are violated in any way, the contract will be invalid and Bob will not be able to get these Bitcoins.

     There are also potential security flaws, and bitcoins can be stolen in certain specific circumstances, which requires those using payment channels to take complex preventive measures.

     The temporary adjustment of the Bitcoin block size was a compromise solution, but it was criticized for not being thorough enough and not being timely enough. The only point that the community agreed on was that strong action was needed.

Silicon Valley attention

     This divergence may make companies that invest in Bitcoin a little nervous. In the past few years, more and more venture capital has entered the Bitcoin field. According to Coindesk statistics, Bitcoin-related companies have received more than $800 million in venture capital since 2012.

     This week’s “network test” is a manifestation of the overall divisions in the community, indicating that decentralized financial systems are too volatile for banks, venture capital, and startups to continue to invest money in. A network that is so easily broken down by the community will cause trouble for financial institutions.

     Bitcoin investment value may also shrink. Banks and other small startups are trying to develop proprietary blockchain technology. For example, Chain, which just received $30 million in investment, provides personalized blockchain networks for enterprises. Physical enterprises operating within financial supervision may find such technology safer than Bitcoin itself, although some people believe that Bitcoin has its own value outside of the blockchain.

     "Bitcoin's deflationary design and the way it manages its currency growth rate are completely opposite to how fiat currencies are managed," said Marshall Swatt, CTO of Bitcoin exchange company Coinsetter, commenting on the benefits of using the Bitcoin network.

     “I think there are still advantages to adding blockchain technology to existing systems. But it would be a shame if the Bitcoin blockchain dies because the community can’t reach a consensus,” he added.

Bitcoin is not dead

     Even so, the Bitcoin community is not necessarily facing demise, but Bitcoin startups that have received several rounds of investment may. If Bitcoin is not widely accepted, such companies will find it difficult to benefit. Government departments have also felt the pressure and started to regulate such companies. For example, New York requires Bitcoin startups to obtain a license, but this requirement is difficult for some companies to meet, which will force them to leave New York. Some companies are also considering closing down due to the lack of clarity in the regulatory environment.

The survival of the fittest approach may work

     Park, who helped draft the Lightning protocol, said, "If I had to choose between the two, I would rather Bitcoin remain small than become like PayPal." Although keeping the community small and keeping the core concept unchanged is an ideal choice for some people, it is still possible to achieve the opposite effect. Due to the large amount of venture capital supporting various trading platforms and digital wallets, there are many options in the Bitcoin market. However, if the competition is fierce and there are not enough users, the company will be shut down, and only a few trading platforms and digital wallets will remain and become stronger.

     Decisions around Bitcoin are undoubtedly difficult, but in order for the network to grow, certain members of the community must reach consensus, otherwise Bitcoin is doomed to become a "failed project."