Bitcoin has become so successful that the way it operates needs upgrading, and fast. Trouble is, there are opposing views on how to do that and no all-powerful administrative body to determine which method to adopt. After all, part of bitcoin’s allure is its lack of central oversight. The arguments between the different camps transcend the purely technical to encompass philosophy and politics, raising the prospect of the cryptocurrency splitting into two. Although the immediate threat of a split appears to have dissipated, another potential hurdle awaits in November.
1. Why does bitcoin need an upgrade?
Bitcoin was built with security more in mind than the kind of volume its success has brought. To prevent counterfeiting, bitcoin transactions are verified by so-called bitcoin miners in batches called blocks. The blocks are then strung together to form the decentralized open ledger known as the blockchain that’s one of the currency’s biggest selling points. Worries about cyberattacks led the system’s designers to cap the size of blocks at 1 megabyte. But as bitcoin grew in popularity over the past nine years, transaction times and processing fees soared to record levels.
2. How big is the problem?
The average time to confirm a bitcoin deal ballooned to six hours at one point this year from under 20 minutes, according to blockchain.info, which tracks bitcoin activity. The backlog of transactions rose to a record, pushing up fees as bitcoin holders offered miners increasing amounts to deal with their transactions sooner. In recent weeks, the congestion (and fees) have lightened significantly as some users have steered clear of the traffic jam.
3. Who are the opposing sides?
In one corner are the bitcoin miners, the thousands of individuals who form a vital part of the blockchain process by deploying their expensive, powerful computers to verify transactions. They support increasing the number of bitcoin transactions in each block. In the other corner are the so-called Core developers who have been instrumental in constructing bitcoin’s bug-proof system. Their proposal: Allow some data to be moved outside the main network, in effect creating multiple ledgers called sidechains. If the two camps follow their own proposals and reject a compromise, two versions of bitcoin’s blockchain would probably come into existence — effectively splitting the cryptocurrency in two.
4. What would a split mean?
It would send shock waves through the bitcoin community. Traders would have to quickly re-price the value of both versions, probably leading to massive volatility. Bitcoin exchanges alerted users about the potential, warning them to safeguard their bitcoin private keys — the pin codes that guarantee ownership of particular bitcoins — and to stop sending or receiving the currency in the event of a breakup.
5. Could bitcoin survive a split?
Its biggest competitor did. Ethereum, which oversees a digital currency known as ether, was divided in July 2016 in a bid to recover about $50 million worth of ether that had been hacked. A rift emerged in the community over whether it should honor the notion of an immutable blockchain. Two currencies emerged: ETH and ETC. Both have surpassed their pre-split price. In fact, ETH — which doesn’t acknowledge the hack took place — at one time surged to 80 percent of bitcoin’s market value.
6. Is there room for a compromise?
Yes, and one such proposal — called SegWit2x — has emerged as the most likely solution. It’s a combination of the Core developers’ suggestion (called SegWit, for Segregated Witness) and the miners’ proposal. A majority of miners agreed to adopt the technology, on condition that blocks be doubled to 2 megabytes. Opponents among the developers argue that increasing block sizes will leave too much power in too few hands, since the technology required will get more expensive. Miners fear that moving some of bitcoin’s workings off the main network will diminish their importance.
7. What’s likely to happen?
For the time being, it looks like bitcoin might dodge the split. More than 93 percent of miners in July locked in support for the first necessary step in implementing SegWit2x, according to Coin Dance, a website that tracks adoption. It will take until the second week of August for SegWit to be fully adopted, assuming hackers don’t disrupt the process — a genuine risk, developers say. Then, in November, bitcoin will face another challenge when some of the world’s biggest miners move to adopt phase two of the proposal, the doubling of the size of the block. That could lead to bitter disagreements.
8. What’s keeping the bitcoin community together?
Miners and Core developers need each other to function, survive — and prosper. Research analyst Ronnie Moas sees bitcoin’s scarcity and acceptance by investors doubling its value to $5,000 by next year, then surging to as much as $50,000 in the next decade. Miners are paid in new bitcoin. Then there’s the nine years of blood, sweat and tears, not to mention investment, that’s made bitcoin the world’s preeminent cryptocurrency. So far it’s been enough to counter the competing ideologies of what bitcoin should be.
9. What are those different ideologies?
Created in 2009 by a person or a group under the pseudonym Satoshi Nakamoto, bitcoin initially attracted an array of figures including libertarians who wished to counter the control of sovereign regulators and central banks. One attraction is that, in contrast to limitless printed currencies, there can never be more than 21 million bitcoins. And as bitcoin’s market value has surged to $45 billion, the debate has intensified over whether it should embrace more mainstream capitalism or fortify its position as a libertarian beacon. More practically, the debate has revolved around whether bitcoin should become like gold and other assets that store value or develop as a payment system and platform for economic activity.