When you make a payment using Bitcoin, the recipient is supposed to get the money in less than an hour. But last summer, a few users started noticing that payments were taking a lot longer — 12 hours in one case, 14 hours in another.
The problem was that the Bitcoin network was getting too crowded to accommodate everyone who wanted to use it. In recent months, most payments are still going through without delays. But as Bitcoin continues to get more popular, congestion and slow payments are going to become a bigger and bigger problem.
The Bitcoin community has split into two opposing — and increasingly hostile — camps over what to do about it. On one side are pragmatists focused on making Bitcoin fast, efficient, and user-friendly so that it can reach mainstream consumers quickly. Opposing them are purists who worry that rapid growth will permanently change the Bitcoin network, giving disproportionate power to the largest players in the Bitcoin economy. They worry that this will destroy what, for them, is Bitcoin's most appealing feature: the decentralization that puts the network beyond the control of any government or corporation.
When I covered this brewing fight last August, I wrote that it was "the closest thing the Bitcoin community has had to a constitutional crisis." Five months later, things are worse than ever. Earlier this month, prominent Bitcoin developer Mike Hearn penned a widely read essay announcing that he was quitting the Bitcoin world. He argued that Bitcoin was a failure, describing it as "a system completely controlled by just a handful of people" and "on the brink of technical collapse."
The debate is so bitter because each side believes the other is conducting a slow-motion coup that will fundamentally transform the Bitcoin network for the worse. The fight is hurting Bitcoin's public image and could hobble its future development.
The Bitcoin network is getting clogged up
The basic problem is this: The Bitcoin network is getting too popular; a growing number of payments is outstripping the network's ability to process those payments. And the leaders of the Bitcoin community can't agree about how to solve this problem — or whether it's even a problem at all.
Bitcoin has captured the imagination of technologists because it's the first global payment system that's not run by any government or financial institution. Instead, Bitcoin uses a novel peer-to-peer design in which all transactions are published in a shared global ledger known as the blockchain. Thousands of computers around the world keep their own separate copies of the blockchain and verify that each transaction complies with the rules of the Bitcoin system.
One obvious danger with this kind of open design is that malicious people could flood the network with a huge number of small transactions, forcing everyone to store copies of these bogus payments. Bitcoin's creator, Satoshi Nakamoto, solved this problem with a crude hack: He set an arbitrary cap on the amount of data the Bitcoin network could process. Each block (a new block is added to the blockchain every 10 minutes) can be no more than 1 megabyte in size. As a result, the Bitcoin network can't handle more than a few thousand transactions per hour.
Of course, that's not nearly enough for Bitcoin to become mainstream in a world with billions of consumers. Popular financial networks like Visa and MasterCard process millions of transactions in an hour. But in a 2010 discussion thread, Nakamoto assured early Bitcoin users that they didn't need to worry about this. Back then, the network had plenty of spare capacity, and Nakamoto argued that "we can phase in a change later if we get closer to needing it."
Five years later, this is no longer a theoretical problem. This chart shows the average size of each block, which is getting closer and closer to the maximum of 1 MB. Because demand fluctuates over the course of the day, the network is already beginning to experience delays during the busiest times. If nothing is done, these delays will become increasingly common in the coming months.
Efforts to increase Bitcoin's capacity have failed
That 1 megabyte limit is just a number that's hardwired into Bitcoin software. In principle, raising the limit is as simple as updating the software with a larger number. If the limit were bumped up to 2, 8, or 100 megabytes, Bitcoin's capacity problems would be solved instantly — at least for a while.
Last August, two prominent Bitcoin developers, Gavin Andresen and Mike Hearn, released a new version of the Bitcoin software to do just that. It increased the maximum block size from 1 to 8 megabytes, and would double the limit every two years after that.
But in the Bitcoin network, this kind of change only works if almost everyone accepts it at the same time. In this case, the change was programmed to go into effect once 75 percent of the Bitcoin network adopted the new software. But that never happened; five months later, only a tiny fraction of the Bitcoin network has upgraded. Hearn became so frustrated by the experience that he quit the Bitcoin world altogether.
Opponents say bigger blocks could destroy Bitcoin's biggest advantage
So why was there so much resistance to increasing the Bitcoin network's capacity? For opponents, the core of Bitcoin's appeal is the fact that it operates beyond the control of any government or financial institution. And they believe premature increases in the Bitcoin network's capacity could threaten that independence.
Remember, the Bitcoin network is a peer-to-peer network in which a few thousand computers work together to process transactions. Right now you can join and participate in the network with an ordinary PC and home broadband connection. But if the network grew from thousands to millions of transactions per hour, participation would take a lot more horsepower — perhaps too much for ordinary users to afford.
Critics worry that the number of computers on the network could plummet as a result. Then control over the Bitcoin network could shift to a much smaller number of big organizations. If this consolidation went too far, Bitcoin could start to resemble the conventional financial system — dominated by a relatively small number of large financial institutions. And these large institutions would be a lot easier for the government to regulate than the thousands of individuals and organizations that run the network today.
Some big-block skeptics concede that some capacity increase will be needed. And they are working on some incremental improvements to improve the network's throughput. But they also argue that the Bitcoin community needs to learn to live with a Bitcoin network where demand for transactions exceeds the supply.
Bitcoin does have a system for coping with congestion: People can pay extra fees to ensure their payments get priority. So far, these fees have been low because there has been plenty of spare capacity. But if the network gets too crowded, it could eventually cost $1, $10, or even $100 to make a single Bitcoin transaction.
If that happened, people would start looking for workarounds that let them pay one another outside of the formal Bitcoin network. Ironically, one likely workaround would be to rely on trusted intermediaries to hold users' funds and make payments on their behalf. For example, if the buyer and seller each has a relationship with an established Bitcoin company such as Coinbase or Bitpay, then this company can complete the payment inside its own system — without having to make a transaction on the public Bitcoin network and pay the necessary fees.
Opponents of big blocks are also developing workarounds that don't rely on large intermediaries. The most often mentioned is a project called the Lightning network. But the technology is still in the early stages of development, and skeptics question whether it can deliver on its lofty promises.
Bitcoin is growing up — and a lot of users hate it
Many new technologies, from radio to the internet, had an early phase dominated by savvy technologists who like to tinker with the new technology. Often this early phase has a radically egalitarian, do-it-yourself feel — in the 1990s, it was common for internet users to create their own websites and even run their own email servers.
But as technologies go mainstream, they tend to become more centralized and less equal. Facebook is many orders of magnitude more popular than the average website, and many more people use Hotmail or Yahoo Mail than run their own email servers. That centralization has made it easier for the government to regulate and spy on our online activities.
The Bitcoin community is currently locked in a debate about whether to follow that same trajectory: whether to grow quickly at the cost of possibly becoming more centralized. The difference is that the way the Bitcoin network works means that early adopters have an effective veto over further growth. If a critical mass of Bitcoin stakeholders refuse to accept larger blocks, the Bitcoin network could be stuck with its current, limited capacity for years to come.
Of course, there's no guarantee that this would maintain Bitcoin's perceived virtues. It might drive most Bitcoin transactions away from the public Bitcoin network and onto the books of large Bitcoin providers, which is a type of centralization in its own right. Or it might hobble Bitcoin so much that it could lose its dominant position to one of Bitcoin's many competitors.
But that's a risk that a lot of people in the Bitcoin world seem willing to take. And that's immensely frustrating for those who are focused on making Bitcoin a mass-market technology.