Bitcoin: Is the crypto-currency doomed?
18 January 2016
- From the section Technology
A high-profile Bitcoin developer has said the crypto-currency has failed and he will no longer take part in its development.
Mike Hearn, a Zurich-based developer and long-time proponent of Bitcoin, surprised many this weekend when he published a blog calling Bitcoin a “failed” project.
Mr Hearn, who had until recently been working on new software for the currency, says he has now sold all of his own bitcoins and will no longer take part in the crypto-currency’s development.
So, is Bitcoin doomed?
What is Bitcoin?
Bitcoin is a crypto-currency – a system of digitally created and traded tokens to which value is assigned.
Computers have to solve cryptographic problems in order to add blocks to the blockchain – a ledger that records every transaction that has ever occurred with Bitcoin.
In return, those computers receive bitcoins in a process known as bitcoin “mining”.
Users have a “bitcoin address”, to which bitcoins may be sent or from which they may be used.
Addresses are stored online in wallets that function like bank accounts.
Although most people refer to Bitcoin as a currency, it is worth noting that for regulatory reasons many countries – including the United States – have decided to define it as a commodity instead.
What are the problems?
The biggest issue most bitcoin users acknowledge is how quickly new transactions can be processed.
The size of blocks being added to the blockchain has been increasing steadily with the rise of Bitcoin.
As a result, the rate at which transactions can be processed has been slowing.
Indeed, some transactions fail to go through, hampering payments.
Some fear the network will eventually become oversaturated and cease to be usable.
Who is Mike Hearn?
Mike Hearn is a software developer who has worked on Bitcoin technologies for over five years.
In 2014, he left his job at Google to focus on Bitcoin full time.
He has worked closely with Bitcoin chief scientist Gavin Andresen on alternative software for Bitcoin called Bitcoin XT, which aims to address capacity issues facing the network.
Mr Andresen is generally thought of as next in the chain of influence over the currency’s development after Bitcoin’s mysterious founder, Satoshi Nakamoto.
How might the capacity of the network be increased?
Currently, each block can be no more than 1MB.
But in May last year, Mr Andresen said bigger ones should be adopted.
He later wrote, “It is more likely people [will] just stop using Bitcoin because transaction confirmation becomes increasingly unreliable.”
The Bitcoin XT version developed by Mr Hearn, Mr Andresen and others offers to increase the block size limit to 8MB
There are alternatives, however.
Nic Cary, co-founder of Bitcoin start-up Blockchain, points to BitcoinClassic, which would increase the block size limit to 2MB.
Why is there a dispute over this?
Bitcoin’s history as a “decentralised” currency has led to much hesitation over decisions that might change its fundamental nature.
Any proposal relating to Bitcoin is likely to encourage fierce debate and, in some cases, stagnation.
Some have argued vehemently against Bitcoin XT, causing a deep divide in the community. The New York Times has reported that death threats had even been made against some Bitcoin developers.
Mr Cary says the need to update the block size limit is not as urgent as some say.
“This is a matter of perspective,” he told the BBC.
“The Bitcoin network has been updated safely dozens of times and will continue to be the most reliable, affordable, and efficient way to send value around the world.”
How ‘healthy’ is Bitcoin?
Bitcoin’s price fell quite sharply over the weekend, following the publication of Mr Hearn’s blog.
One bitcoin is now worth $380 (£265), down from about $430 on Thursday.
However, the price of Bitcoin is notoriously volatile.
It has been classed as the best performing currency in the world in 2015.
But authors of that analysis, The Money Project, also noted it was the worst performing currency the previous year.
Besides price, Bitcoin has also suffered from a litany of cases in which bitcoins have been stolen from online exchanges in which they were stored, in some cases due to negligence or poor security.
Such incidents generally result in a complete loss of funds for the victims, since it is very difficult to trace where stolen bitcoins have been transferred.
Meanwhile, the currency continues to grow – a sign of good things to come, say many.
What will happen next?
Bitcoin remains popular.
There is still huge interest in developing both the currency and technologies based on the blockchain idea of recording data.
It seems unlikely the currency will collapse overnight.
But it certainly look as though fundamental questions over how Bitcoin works are now coming to a head.
Whether the community that uses and supports Bitcoin will be able to come to a consensus on these matters remains to be seen.
Mr Hearn has lost faith in the project, of that there is no doubt.
But many others are refusing to throw in the towel just yet.