Bitcoin’s price has always been volatile, but its 29% down-and-mostly-back-up over the last few days was a doozy even for it. For those trying to follow along, there was no shortage of bitcoin jargon to wade through — forks, bitcoin cash, Segwit2x and transaction blocks among them. The big picture is this: The turmoil is what happens when a community designed so no one person or group is in charge tries to sort through the vexing technical and commercial problems created by the pioneering digital currency’s success. This may be a minor bump in the road before factions with diverging interests and ideologies come back together. Or it may be a sign that bitcoin’s future is likely to be fractured.
1. What’s going on?
Like most other pieces of software, the bitcoin network needs periodic upgrades to add new capabilities. Bottlenecks in processing bitcoin transactions have been rising, making the currency uneconomical for some small transactions. But unlike other pieces of software, it requires a consensus of users — specifically, miners, whose computers run its software — to move to a new version. Over the last few months the bitcoin network has already split — or, in industry parlance, forked — twice, into three different versions still running today.
2. What were the forks?
In late July, the bitcoin network split into two, giving birth to bitcoin cash, which featured changes allowing for faster and cheaper transactions. Then in October, the network split off again, giving birth to bitcoin gold, which has a different take on how mining should be done.
3. What’s driving the recent turbulence?
When bitcoin cash was launched, most members of the bitcoin community thought of it as an unnecessary step that would be brushed aside by a broader network upgrade already planned for later. Called SegWit2x, it was to double the blocks in which bitcoin transactions are processed, increasing the network’s speed and reducing fees. But the long agreed-upon upgrade was scratched at the last minute as support for it waned amid worries about security and clashes between core developers and miners. After the cancellation, bitcoin’s price dove, while bitcoin cash — currently the bitcoin network with the biggest blocksize — rallied, coming close to becoming the second-largest crytpocurrency by market capitalisation.
4. What’s the disagreement?
Many miners and other users worried that instituting another fork for the SegWit2x upgrade would leave the network open to the so-called replay problem, meaning that the same transaction could be carried out on the old software and the new. There was also criticism that SegWit2x hadn’t been developed in a transparent manner, which could lead to potential security holes or give its developers an upper hand in governance of the network.
5. What happens next?
There’s widespread agreement that the bitcoin network needs to be made faster. Proponents of SegWit2x argue that those needs will lead to its eventual adoption. Others have moved on to look for entirely new solutions — which could mean even more fragmentation of the bitcoin universe.
6. How did we get here?
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 decentralised 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.
7. How big are the issues?
The average time to confirm a bitcoin deal ballooned from under 20 minutes to six hours at one point this year, according to blockchain.info. 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. Still, the fees are often high enough to render bitcoin’s use in transactions impractical for many consumers.
8. What does ideology have to do with it?
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, peaking at more than $75 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 whether the community should focus on developing it as a payment system and platform for economic activity. And — more importantly — whether its underlying technology should ever be forked or split.
© 2017 Bloomberg