FOR the better part of a decade, bitcoin has been touted as the currency of the future, but for most people it has remained just that – a future not current currency. Technical problems have stymied its mainstream adoption.
But now, an elegant fix to one of bitcoin’s most intractable problems could clear the way, potentially making bitcoin as easy to use as the debit card in your wallet today.
If, that is, bitcoin’s decentralised network of users agree that this is a good idea. The community is at war with itself: some want it to remain a niche currency, used only for sending money across borders or for purchasing items on the dark web. “There are some very outspoken people in bitcoin’s core development team that are stopping progress – it’s crazy,” says Olivier Janssens, a bitcoin investor.
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So why are we at this crossroads, and will it lead to a bitcoin we use to pay rent and buy coffee – or will it seal the cryptocurrency in permanent obscurity?
When bitcoin was introduced in 2008, it promised to become something you could use to buy whatever you wanted, without the need for banks (see “What’s so great about bitcoin?“).
“There is a war on between people who want bitcoin to go mainstream and those who want it to stay niche”
Nearly 10 years later, bitcoin is the world’s largest digital currency. Its and number of users have risen (see graph), as has the .
But recently, the currency has become a little stuck. In its earliest days, bitcoin transactions were free and would take about 10 minutes to process. Now, people are paying on average to the miners who both create bitcoin and process transactions on the network, and can wait hours or days for transactions to be confirmed.
This delay is down to the rise in users. The bitcoin network can support at most seven transactions per second. Compare that with Paypal, which can do 100 per second on average – or Visa, which routinely does about 4000, and could do much more if pressed.
If bitcoin is to compete, it needs to lower fees and be faster. Few would pay $1 to use bitcoins to buy their morning cup of coffee, and that number would drop to none if you had to wait a day for the payment to clear.
Bitcoin has long been in need of an upgrade, but deciding the best way to do that is difficult. By definition, the bitcoin network is under no centralised control. So any decision to make big changes requires a consensus among its users. And at the moment, that seems a long way off.
The controversy is over whether to change the software that is now struggling to cope with bitcoin’s increasing popularity. It all comes down to a simple line of code in the bitcoin network software that sets the maximum block size – representing the number of transactions allowed over roughly 10 minutes – to 1 megabyte. Throw any more transactions at the network than that, and they have to either wait or pay a higher fee to get bumped up the queue.
There seems to be an obvious solution: why not just lift the 1-megabyte limit? In 2015, a group of developers led by Mike Hearn, who had left his job at Google to become a bitcoin developer, tried to do just that. Hearn created a new version of the software running the bitcoin network that changed the limit to 8 megabytes.
The update sparked a furore. One problem was that the new software wasn’t backwards-compatible, so once activated, anyone running the old system would essentially be kicked off the network.
There were more fundamental objections too. Many worried that if the blocksize increased, users would need more computing power and faster internet speeds to be part of the network. Some people feared that this could lead to greater centralisation because only the most powerful mining groups could remain active.
Price crash
By 2016, it was clear that Hearn’s attempt to increase the 1-megabyte limit had failed. As a result, and ceased his involvement with the currency. Two days later, bitcoin’s value had dropped by nearly 15 per cent.
How to increase block size continued to be a problem without a solution. So when a possibly elegant workaround was publicised, many took notice.
Segregated Witness, or segwit, is a suite of technical improvements to the bitcoin network that allows users to have their cake and eat it: it provides a way to effectively increase the 1-megabyte limit without actually changing it.
The trick is that segwit removes some of the data included with each transaction and stores it elsewhere. This reorganisation quadruples the limit size. And yet, it is backwards-compatible. Users will still be able to run older versions of the bitcoin software. And you won’t need to quadruple your processing power to join the bitcoin club.
Since being released in October last year, segwit has been slowly growing in popularity, and now has about 30 per cent support on the bitcoin network – compare that with the 15 per cent at which Hearn’s 8-megabyte solution peaked. If support can hit 95 per cent and stay there for two weeks, segwit will be activated.
That may seem a long way off, but there could be a dark horse in the mix. Another digital currency called litecoin is on the cusp of a segwit rollout.
Litecoin’s software is almost identical to bitcoin’s, but the currency’s total value of about $500 million is around . If segwit performs well on litecoin, “bitcoin users will take note”, says at NEC Research Laboratories in Heidelberg, Germany. In other words, if the upgrade works for litecoin, it could cause support on bitcoin to rapidly head for the required 95 per cent.
If segwit makes it easier for more people to use cryptocurrencies, it will help bring them into the mainstream. Among its improvements, segwit also clears the path for inclusion of a system called the Lightning Network. This allows any regularly occurring transactions – for example, your daily bus fare – to be batched as a monthly bill instead of being confirmed singly.
That would reduce fees because they wouldn’t need to be paid for every transaction, just the total. Advocates say this could turn bitcoin into an everyday currency, opening up the possibility of easy-to-use bitcoin debit cards, turning bitcoin into a credible competitor for the likes of Visa and Paypal, able to process per second.
But first the stalemate needs to be resolved. “Right now, bitcoin is at an impasse,” says Janssens. “If things don’t change soon, bitcoin will start to lose its importance.”
Oddly enough, that may be exactly what some members of the network would prefer. Some people are already making a lot of money, and going mainstream could lose them their edge.
One group that benefits disproportionately from the current setup is the miners who create bitcoins. Mining is more profitable when members of the bitcoin network must pay fees for transactions – more fees translate to more bitcoin rewards for processing transactions. “If the users say that retail isn’t the way to go, other digital currencies can spring up to do that job instead,” says , host of the Let’s Talk Bitcoin podcast.
“The new technology opens up the possibility of easy-to-use bitcoin debit cards that compete with Visa”
However, if segwit leads litecoin to success as a retail currency, it might edge out bitcoin. Either way, litecoin’s decision on whether to adopt segwit could end up determining the future of bitcoin. And perhaps the future of cryptocurrency is not bitcoin at all.
What’s so great about bitcoin?
Bitcoin is popular because it’s free from the control of banks or governments.
“Anyone can send money to anyone else in the world with a transaction fee of less than a dollar,” says Andreas Antonopoulos, who hosts the Let’s Talk Bitcoin podcast. Anyone can – but not everyone does (see main article).
Digital currencies like bitcoin exist solely as records stored on computers around the world. That might seem strange, but few traditional currencies are actually linked to physical commodities like gold any more. For example, most US dollars exist only as digital records held by banks.
Why do you trust that these digital 0s and 1s have value? Because governments back them, and other third parties like banks and payment processors like Visa vouch for the transactions.
But governments can devalue a currency by printing extra money. And the 2008 recession showed that banks don’t always operate with their customers’ best interests at heart.
Proponents of digital currencies say they replace these intermediaries with code. The only thing you need to spend digital currency is knowledge of a secret number associated with an online wallet that no one else needs to vouch for.
To check whether a bitcoin transaction is legitimate doesn’t require a central bank. Instead, it is done by a decentralised network of computers that anyone can join. The system is underpinned by the same mathematics that powers encryption, making it incredibly hard to deceive or control without infeasible amounts of computing power. “The system is built to resist hostile takeover,” says Antonopoulos.
It’s not surprising then that since its conception in 2008, bitcoin has gone from being a plaything of hackers to a multibillion-dollar juggernaut. Every day, there are hundreds of thousands of bitcoin transactions, with people sending money around the world with no centralised oversight or government control.
This article appeared in print under the headline “The toss of a coin”
