The fellowship of Bitcoin

11 Feb, 2016

When the news that Rand Paul was dropping out of the 2016 presidential race broke, after getting only a measly 4.5% of the republican vote at last week’s Iowa caucus, my heart sank for one reason and one reason only; Rand Paul accepted (and still accepts, if you want to donate to an empty cause) donations via Bitcoin and was one of the few politicians to embrace the cryptocurrency. How could the good, god-fearing citizens of the U – S of A not back such a trailblazer? That’s a question beyond my political intelligence, but what I do know is that currently Bitcoin is in a rough place. We’re not talking sandpaper rough, we’re talking James Franco, 127 hours, your only choice is to chop off your forearm for a slim chance to survive, rough.

Mike Hearn, one the main Bitcoin developers for 5 years; a man who has been on Sky News and BBC news and repeatedly cited by the Economist as a Bitcoin expert, has just quit his developer position and sold all his Bitcoins. My first impression, probably similar to yours, was a stark one. He is a man in the know, he really is in the thick of the Bitcoin ecosystem. To get up and just leave and completely cut himself out of the picture, warrants some thinking about the present state of Bitcoin. However, before we start, let’s get a quick overview of what Bitcoin is.

Now I admit, the Economist certainly doesn’t cite me as a Bitcoin expert, but I think I’ve got the basics down¹. Bitcoin is a cryptocurrency. That’s a fancy word but let’s break it down even further into its constituent parts.

Crypto – “a combining form meaning hidden or secret, used in the formation of compound words”.

Currency – “something that is used as a medium of exchange; money.”

Big thanks to my friends at dictionary.com for serving up these useful tidbits.

Right, at first glance, hidden or secret money? Somewhat correct. Bitcoin isn’t hidden at all, in fact every transaction that has ever happened is public.

It is a peer-to-peer system, where transactions do not require an intermediary (a classic example would be a bank). This is achieved by recording all such transactions in a public ledger known as the blockchain. No single person, or company runs the blockchain – it is a decentralised currency. The further beauty of Bitcoin is that there is no storage of money anywhere. Yes, you have a Bitcoin wallet, but no actual Bitcoins, physical or virtual, are stored there. Bitcoins are inseparable from the blockchain. The blockchain itself does not even contain any bitcoins. As aforementioned, all it contains are the transactions:

“Barry mined 12 Bitcoins and sold 6 of them to Jim; Jim gave 2 bitcoins to Harrison and kept the other 4 to himself, and Indiana bought 1.5 Bitcoins from Harrison”.

Note the distinct lack of any specific serial number of a Bitcoin, or anything about the location of a Bitcoin, because there isn’t one. It just records the ownership of bitcoins as they move from one person to another. Your Bitcoin wallet just stores the key for you to access your Bitcoin ‘holdings ‘and be able to send or receive Bitcoins.

Freeing you from the man by skipping the bank, Bitcoins can remove any arbitrary limits and prerequisites; they can be used in any country; no freezing of accounts and the fees are lower (well, at least in principle²). Now if you prefer instead to blindly follow the media, then boy do I have a choice for you! Most people who own Bitcoin today learn about it from the media. Every time Bitcoin is mentioned in a big name media report, people invest and the price goes crazy and a bubble occurs. Why is this a problem? Surely, interest is exactly what this revolution needs.

The blockchain is about to reach maximum capacity. Wait, what? A public ledger of transactions has a capacity? Yep. This artificial limit of one megabyte per block was put in place by Satoshi Nakamoto (the mysterious pseudonym of the person who created Bitcoin) at the beginning of Bitcoin’s lifetime to keep the files small ‘so that new users can get going faster’³. This limit has still not been removed; and with the ever growing media frenzy and the popularity of Bitcoin, we are about to hit its peak. Mike Hearn has some lovely graphs on his ‘Bitcoin is currently really bad, and you should feel bad’ article that I am basing this post on, if you want to see a visual representation of the blockchains impending maximum.

I’m sure you as the reader have a few questions at this point; so what if the blockchain is full? can’t we just raise the limit? Let’s start with the first question:

When networks are maxed out, they get super unstable. Just before Christmas last year, payments started becoming very unreliable and people just wanting to use Bitcoin had huge waiting times, both during peak and off-peak times. I don’t know about you, but personally, when I send money or I am receiving money, I require the assurance that it will be done relatively soon, or at least that is indeed being sent/coming to me. Money is pretty much the definition of value and I’d rather not lose it due to an artificial limit in the system. If your internet is unreliable and it takes an uncertain amount of time to load Google, then you’re gonna do something about that,whether that’\s getting a new router, switching ISP, complaining to the higher powers etc. It’s the same principle here, if Bitcoin reliability is not to be trusted then why use it? It can decentralised to Andromeda and back. but if it doesn’t work in the first place what the heck is the point?

Moving onto the next question at hand: can’t we just raise the limit? This is where it gets really political. Sure, Mike Hearn and co. tried last August with Bitcoin XT. Bitcoin XT had a easy democratic premise. By running it, miners voted for increasing the blockchain limit. Once 75% of miners ran it, the blockchain would be increased. Simple and I think, XT was a good progressive implementation towards the future of Bitcoin. Alas, the people ‘high up’ (or at least they think they are) in the world of Bitcoin were not happy. One admin of Bitcoin.org who previously had never banned any mention of criminal activity on the grounds of freedom of speech, decided he hated this voting idea and to compensate he censored and banned any user just whispering the phrase ‘Bitcoin XT’. One of my favourite quotes of Mike Hearn’s article is what this admin said in response to XT’s democratic execution:

“One of the great things about Bitcoin is its lack of democracy”

…

I think that’s all the has to be said on the topic of this admin. If you want to read the user rage after this admin’s censorship feel free to head over to this Reddit post and get a taste for the pitchforks. Mmm, tastes like oak; that is some mighty high quality pitchforks they have over there.

It gets worse. The blockchain is controlled by chinese miners. 95% of new Bitcoins mined are done so by a handful of guys that were pictured below at a recent Bitcoin conference:

Yes that is indeed the real picture. Sam, Frodo and the Took lads are big fans of these miners ‘extraordinaire’.

So, 95% of new bitcoins come through these guys. Each block they create earns them a sweet $11,000 dollar reward and that’s a great incentive to keep Bitcoin exactly where it is right now. Neither here nor there. The Chinese ‘Great Firewall’ means that these guys inherently have a very flaky connection to the global internet and if the transaction limit were to be raised, and Bitcoin did become more popular, their connection (that they only just about maintain at the current moment) might not last, and their income would be nullified. They really got this stance across, when one keen miner of XT was attacked to the point of his whole region losing their internet access. Now, I say this with a pinch of salt because no one knows for sure if it was these Chinese guys, some Bitcoin knights in shining armour, or your cat; but here’s what the poor miner commented on a Reddit thread about the widespread DDOSes that were happening on XT miners:

“I was DDos’d. It was a massive DDoS that took down my entire (rural) ISP. Everyone in five towns lost their internet service for several hours last summer because of these criminals. It definitely discouraged me from hosting nodes.”

Coinbase, one of the worlds most popular Bitcoin trading sites, was also forced offline for a while when they chose to use XT. Point taken.

Another hurdle that XT faced, and still faces, is for the developers to agree. Unfortunately, one out of the five developers working on Bitcoin in the last few years, is not on track with Bitcoin’s grand plan. He happened to be around when Satoshi gave up the reins and thus qualified, plainly through his mere existence to be a developer; notwithstanding the fact that he once claimed that he had mathematically debunked Bitcoin. Seems legit.

Alright, so big deal, one developer was not on the right track, that’s fine, there’s still four people left. Four out of five is still a democratic majority. Unfortunately, he was not the only one with issues. You ever had a group project? Getting four different people to decide on the same thing is notoriously tricky no matter what the subject; some argued that raising the limit was against decentralisation; that it was too risky etc. Most of all, the developers were too scared to take any action for fear of reprisal from the community and the other developers. And so the solution agreed upon was a great one: to do nothing. Or as Mike Hearn put it:

“The can was kicked down the road.”

Nobody knows just how far the can is down the road, or how much of Bitcoin avenue is left. All these problems still exist, and seemingly will exist for the foreseeable future. Will Bitcoin cut off its arm to survive? Or will it die a slow and painful death trapped under the weight of its bureaucratic stagnation? Only time will tell.>

“Even if a new team was built to replace Bitcoin Core, the problem of mining power being concentrated behind the Great Firewall would remain. Bitcoin has no future whilst it’s controlled by fewer than 10 people. And there’s no solution in sight for this problem: nobody even has any suggestions. For a community that has always worried about the block chain being taken over by an oppressive government, it is a rich irony. “

Mike Hearn – ‘The resolution of the Bitcoin experiment’