Unless Everyone Using Bitcoin Makes This Radical Change, the Currency Will Die

Bitcoin has grown from its niche origins into a legitimate movement, garnering interest from politicians and powerful organizations alike. But Bitcoin was never engineered to be used by the whole world; the system simply can't handle it. That's why some of Bitcoin's most important developers are proposing a radical change that could either save Bitcoin or, as some critics believe, destroy it.

Today, batches of Bitcoin transactions, or "blocks," are uploaded to a public ledger. The ledger is a record of all Bitcoin transactions, called the "blockchain," and the file size of each block can be up to 1 megabyte. This ensures that running a Bitcoin client—which saves the entire blockchain to your machine and continually updates it—doesn't mean you need a server farm to handle the traffic load.

According to a blog post by Gavin Andresen, one of Bitcoin's first and most prolific developers, the average block only uses 30 to 40 percent of its total 1 megabyte capacity right now. This essentially means that the entire Bitcoin network is running at about a third of its capacity, as Bitcoin researcher David Hudson noted in a blog post. But if Bitcoin is ever used by enough people so that blocks are 90 or even 100 percent full, the network could become congested to the point of unusability.

The solution, Andresen believes, is to increase the size of each block to 20 megabytes by 2016. How? By changing Bitcoin's underlying protocol and splitting the blockchain into two different versions—one using 1 megabyte blocks and the other using 20 megabyte blocks—and hoping that the whole Bitcoin community migrates to the new blockchain. This is called a "hard fork," and it would leave some users on different sides of the divide.

"From a social perspective, you don't want two different Bitcoin systems because it causes incredible uncertainty in the marketplace," Peter Todd, a Bitcoin code developer, told me in an interview. "The fact is, that's just so disruptive. The vast majority of developers recognize that this is a system that has fundamental issues. You can't just turn a knob and expect it to still keep working. It's a trade-off."

If a block size change and the associated fork doesn't spell a catastrophe for the Bitcoin community, then at the very least, it could fundamentally change the economics that underpin the system. Currently, Bitcoin users may give "miners"—who process blocks by completing complex mathematical equations—a reward in the form of a fee for including their transaction in the block they're working to solve, which would get it confirmed on the blockchain more quickly. More space in each block could mean less incentive to get your transaction approved next.

"With zero competition for space inside a block, there is no incentive to attach a transaction fee to any bitcoin transaction," Jeff Garzik, another of Bitcoin's first and most respected developers, told me in an email. "Thus a block size increase decreases fee competition, reducing transaction fee revenue—an admittedly miniscule revenue stream today."

There is a political dimension to this as well. Bitcoin is often thought of as a decentralized system. But really it depends on the work of miners who run network "nodes" with their computers—and miners are constrained by very real concerns of money and time. If the size of a block goes up, the resources needed to confirm transactions would also increase.

"Higher costs force out marginal players," Garzik wrote, "potentially increasing centralization and making direct network access expensive [and] less egalitarian." In other words, it would be harder for new miners to establish themselves. Power in the network would essentially be relegated to a few miners with the resources required to process the larger blocks.

Despite these caveats, Garzik told me that a block size increase is entirely necessary for Bitcoin's future. But it must be done right, and the wider Bitcoin community must weigh in.

According to Todd, there are other solutions to Bitcoin's scalability problem that wouldn't require a hard fork of the blockchain. Proposed systems like the Lightning Network would forego recording every single transaction on the blockchain, and instead rely on decentralized "payment channels" that only upload a bulk record of transactions after many have been done, thus decreasing network load. This would sidestep the whole process of including every transaction in a new block, which would negate the need for a larger block size.

But, Andresen claims in another blog post, these systems are years away from being as reliable as the current blockchain-based implementation of Bitcoin. More importantly, if everyone pays attention and works together, a hard fork might not be the disaster some critics imagine it will be.

"I'm proposing a hard fork early next year, so there is plenty of time for everybody to prepare," Andresen told me in an email. "Most users won't need to do anything; if you are using a hosted or lightweight wallet (one that doesn't download the entire 30-something-gigabyte blockchain) you don't have to do anything. The only miners who will be left behind are miners who are either too lazy to upgrade their software or consciously decide to be left behind."

There's also a financial incentive for miners to move to the forked blockchain running the latest protocol, and hence the most people in it, Garzik told me. "Everyone has a clear incentive to pick the fork where everyone else is. It is unlikely that miners, payment processors, and others would split," he explained.

Perhaps the biggest endorsement of an increase in block sizes, however, comes from Satoshi Nakamoto, Bitcoin's anonymous inventor. In a Medium post, Mike Hearn, a core Bitcoin developer known as the group's resident futurist, recounted an email he received from Nakamoto in 2010. "A higher [block size] limit can be phased in once we have actual use closer to the limit and make sure it's working OK," Hearn claims Nakamoto wrote at the time.

Clearly, the Bitcoin community has some very hard choices to make in the near future that could determine whether Bitcoin fails or succeeds at becoming a viable currency for much of the world. But while some might say the options need to be weighed before developers act, Andresen is not one of them.

"I think it is too late to keep navel-gazing," Andresen told me. "We need to schedule the increase now."