Bitcoin on the Brink

While TheDAO blazes merrily, melting down the Ethereum network, the Ur-coin, patriarch cryptocurrenty Bitcoin is heading for catastrophe.

For one thing, the entire “no one controls it” concept has been unmasked as factually incorrect. Nathaniel Popper reported in the NYT that four Chinese based consortia control not 51% but more like 69% of the “votes” in the “decentralized” Bitcoin network. (This was not a secret, but the NYT report makes it “official”.)

The notion that “running the software on a zillion tiny computers will assure that no one can dominate the network” was a hand-wavy argument from the start, and it has been proven to be empirically false. (As many of us said from the start.)

Aside from the moral effect of this development, this situation is a drag on innovation (as dramatic income inequality always is). For a year now, Bitcoin has been facing a serious technical issue, as the basic shared data structure (the blockchain) is being overwhelmed by growing traffic. This is a perfectly normal problem to have, and there are technical responses to mitigate the situation. This will require choosing one of the alternative fixes, and changing the code. A perfectly normal process.

But Bitcoin uses a radically “decentralized”, libertarian, “market-based”, approach to both decision making and software modifications. Rather then arguing and then deciding on direction and then implementing the direction, the process is to argue, implement, and then see how many users accept the proposed changes.

In this case, there are two huge problems that arise. First, there are multiple plausible solutions, each with a reasonable amount of support, and all of them mutually incompatible. Second, as noted, the “voting” is done by the network, which not only has multiple interests (which may conflict), but also is dominated by a few large players. The largest miners can effectively veto any changes, and have shown willingness to protect their own financial interests as they see them.  The result has been a chaotic and gridlocked argument about direction.

There is a third problem with this approach to governance. The process is modeled on open source software projects. In these projects, developers always have the option of “forking”, starting a separate, incompatible, version of the software. Developers have to choose to use one or both versions, which is annoying but probably matters little to most users.

Bitcoin has the same process, and there are two and possibly more incompatible versions of the code in development. But unlike a normal software package, it is not possible to use more than one version. Furthermore, transactions (i.e., money) processed by one version do not exist and have no value in any other branch of the family tree. For this reason, forking may have huge financial implications, and a long term or permanent split effectively “breaks” Bitcoin into multiple competing currencies. Not good.

These sorts of challenges are survivable for many kinds of software. Unix/Xenix/Linux has existed for nearly fifty years, in dozens of versions, and is still going strong. Phasing in IPv6 and IPv4 out is taking decades, but it will happen.

But Bitcoin’s function as “currency” throws a wrench in these laissez faire processes. It’s one thing to have some data be incompatible, or require multiple versions for different “forks” of linux. It is another thing entirely to have some set of programmers decide that your money doesn’t count.

And this is what could happen with Bitcoin. And the concentration of computing power based votes means that this set of unelected dragons can decide whose money counts. This prospect erodes the entire ideological basis for Bitcoin as a morally pure virtual gold.

And for the final garnee, much of the “discussion” is done on the elevated plane of Reddit.  Over the top rhetoric is normal, death threats considered a reasonable argument, crude censorship is common, and vigilante hacking attacks considered romantic.  It’s a chaotic mess, and no wonder that grown ups don’t want anything to do with this stuff.

I’d say that Bitcoin is already past its prime, and could well be irrelevant in a couple of years.  Most likely, there will be multiple rump Bitcoins, all claiming to be the “real Bitcoin”.



Cryptocurrency Thursday

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