Bitcoin: it’s at a crucially important crossroads; it’s approaching a crisis that threatens its very existence; it has never been more likely to erupt into enormous global importance. Which? Don’t be ridiculous. It is all those things at once, of course, as usual. I only wish I was joking.
If you’re dumb enough to judge Bitcoin purely by its exchange rate, you might be fooled into thinking it has entered a period of remarkable stability, hovering around US$225 through all of 2015. But actually quite a lot has happened in the last few months. Let’s itemize a few of those things:
A controversial change to the Bitcoin protocol is under discussion, and some in the field are prophesying utter disaster in the not-too-distant future if it does not happen.
I mean the mooted increase in Bitcoin’s block size. A brief recap: Bitcoin is built upon a decentralized data structure known as the blockchain. A “block” is a group of hundreds of verified transactions; each block points to its predecessor, hence “blockchain.” At present, the block size is capped at 1 megabyte, which effectively limits Bitcoin to (roughly) 7 transactions per second, worldwide. If the network hits its maximum rate, it is argued that the cryptocurrency equivalent of a nuclear meltdown could well ensue.
And yet, increasing the blocksize is a contentious issue in the Bitcoin community — because many of the “miners,” the entities who verify Bitcoin transactions (and are paid in Bitcoin for doing so) may well suffer from this change. This in turn has raised the larger issue of Bitcoin governance, and/or the lack thereof. See this post in Michael Casey’s excellent Wall Street Journal cryptocurrency column BitBeat for further details.
Previously mysterious (and extremely well-funded) Bitcoin startup 21 unveiled its plans for world domination.
I expected Andreessen Horowitz partner Balaji Srinivasan to do something audacious with his $116 million startup, and I wasn’t disappointed. His objective: to put “a bitcoin miner in every hand.” 21 is developing custom Bitcoin mining chips, with the expectation that they’ll be included in next-generation devices from servers to phones. “We believe that embedded mining will ultimately establish bitcoin as a fundamental system resource on par with CPU, bandwidth, hard drive space, and RAM,” he writes. That’s nothing if not audacious. Hats off.
…But this audacity has been met with a considerable amount of skepticism:
and not without reason. Bitcoin mining is power-intensive, which makes it a dubious feature for mobile devices. Srinivasan writes: “Embedded mining means that any device can authenticate itself to the network by sending one Satoshi to a specified address,” but a quirk of the standard Bitcoin protocol implementation means that, at least at the moment, such transactions will probably not be processed. And it’s worth noting that this model is apparently a pivot from 21.co’s original business model, after “the company ended up running up against the difficulty of making money in the cut-throat business of Bitcoin mining.”
Still, there’s a lot to celebrate here. Bitcoin believers talk excitedly, if vaguely, about the limitless, because ill-defined, possibilities of “machine-to-machine micro-transactions.” (I’m not being dismissive: I’m vaguely excited about those possibilities too.) But until 21’s announcement it was always unclear how we actually got to a world in which millions of devices actually had Bitcoin at their disposal for … whatever they might transact.
(You might be thinking: couldn’t you just mine at a central hub with cheap electricity, and distribute cryptocurrency to your devices using software wallets instead of hardware mining chips? Well, yes. But mining is a far more resilient and decentralized means of distributing a regular trickle of currency to an arbitrary number of devices — especially if you could construct autonomous mining pools that don’t require any central hub.)
Someone finally launched the first Bitcoin app with universal appeal.
For years people have been waiting for a Bitcoin app whose use is apparent even to nonbelievers. One has finally arisen, and, of course, it is absurdly simple — that sound you hear is that of a thousand Bitcoin developers smacking themselves on the forehead while chanting “Why didn’t I think of that?”
In the wake of Meerkat and Periscope, I give you Streamium: “Stream Live Video And Get Paid.” Just provide the address of any Bitcoin wallet, and voila, you can charge anyone in the world to watch, without having to deal with PayPal or a bank or credit-card verification or, well, any middlemen at all.
Will most people ever do this? Of course not. But most people will understand the appeal of this, and be able to envision a hypothetical situation where it might be handy, eg remote tutoring, or suddenly finding oneself on-scene at a major breaking news event. No esoteric technical knowledge required.
Wall Street is dipping its toes into Bitcoin’s waters.
The New York Stock Exchange has launched a Bitcoin Index. The NASDAQ has announced plans to “leverage blockchain technology.” Goldman Sachs joined a $50 million funding round for Bitcoin startup Circle. Votes of confidence, all. But at the same time…
Bitcoin mining remains Bitcoin’s chief anchor and primary headache.
I am no cryptocurrency Pollyanna. Bitcoin faces an uncertain future, and several potential disasters; and what these have in common is Bitcoin mining.
Mining is quite surreal, if you think about it. To some extent, like Wikipedia, “it doesn’t work in theory, it only works in practice.” Scattered datacenters around the world are packed full of racks of custom-built chips, working furiously to perform quadrillions of Hashcash calculations every second, to maintain the Bitcoin network — in exchange for regular payouts of newly minted cryptocurrency.
As a result, Bitcoin is continuing to navigate between the Scylla of overly centralized mining and the Charybdis of miners blocking important protocol evolution. This makes mining sound like Bitcoin’s Achilles heel, but (pardon the now extremely mixed classical metaphor) it’s actually Bitcoin’s Achilles; its hero with a fatal flaw. Mining is Bitcoin’s fundamental engine. It what makes the network so computationally powerful. Mining incentives are what caused the Bitcoin network to grow from a deeply weird software experiment running on a single computer to a massive global network of cryptocurrency whose values is measured billions of dollars.
(Also — and this is what interests me most about Bitcoin and its ilk — a network that serves as an example of a powerful and viable fully decentralized system; a notion which is by no means limited to electronic money, but which, alas, has few other successes to cite to date.)
But, at the same time, “Mining does keep me up at night,” admitted Bitcoin core developer Gregory Maxwell at a conference I attended last year. To some degree, at least, he and his fellow core developers are trying to keep innovating to treat Bitcoin’s growing pains, but Bitcoin miners have become anchors holding them back. Let’s hope they don’t drag down the whole network. Interesting times indeed.