I Love Bitcoin, too, but BTC has some problems…
I was asked about a year ago, “If I could only buy one cryptocurrency, which one would it be?”
My answer was Bitcoin because of how adoption works: BTC is the biggest, most well know crypto asset. And by “well-known,” I mean Americans have heard of it, but mostly don’t know what it is. Crypto is still a VERY small market, so Mom and Pop coming into the market would to be in the form BTC. That said, I don’t feel Bitcoin represents the best capital growth crypto opportunity long-term. Five years from now, I wouldn’t be surprised to see Ethereum valued more highly because of it’s utility.
Aside from my opinion, though, I’ve chosen to highlight several “persistent and serious issues with Bitcoin from an organizational perspective”, including project governance, proof-of-work miners having too much power, scalability, the infamous Satoshi, and sustainability.
REASON #1: Project governance
- “The irony of a decentralised currency that has governance issues…”
- In early 2009, Bitcoin started as the project of a single identity, Satoshi Nakamoto (SN), and was run as many open source projects are, with SN as the benevolent autocrat.
- SN’s autocracy lasted until late 2010, when SN designated Gavin Andresen as his successor.
- Gavin kept the autocracy going until April 2014, when he stepped down as Lead Developer and became the Chief Scientist.
- At this point Wladimir van der Laan took over as Lead Developer, but it was clear that the previous autocracy was substantially weakened and the transition to an oligarchy began.
- The new oligarchy was comprised of the BC developers and put an effective block on any autocratic actions, requiring new decisions to go through a drawn out discussion process on GitHub, with commit access effectively controlled by a smaller subgroup within the BC developers.
- This informal oligarchy is the current system of governance we have for Bitcoin.
- As most of the Bitcoin community has already noticed, this informal oligarchy has a number of problems:
- The notion of consensus amongst BC developers is “100%” agreement, so making any substantive changes requires unanimous consent.
- Funding for BC developers was entirely donation-driven until 2014. Since donations were insufficient to pay for more than a few developers, many BC developers could not make income working on Bitcoin and had to rely on having the foresight to hold onto a large amount of bitcoin personally.
- In October 2014, a majority of the BC developers decided to participate in the founding of Blockstream, which was VC-backed.
- This intertwined the financial interests of the BC developers and their VC financiers, creating a perceived conflict of interest in the context of Blockstream’s business model and the maximum block size debate.
- Since the majority of BC developers work for Blockstream, it means that this group has an effective veto over any substantive changes to Bitcoin and a large amount of influence on what changes get approved.
- In April 2015, several BC developers joined the MIT Media Lab’s Digital Currency Initiative due to problems with funding from The Bitcoin Foundation.
- Since MIT is an academic institution and not primarily motivated by profit, there is less of a perceived conflict of interest for these BC developers compared to Blockstream.
- However, it is unclear what, if any, influence MIT can or would exert over these developers.
- By the same merit as the reasoning with Blockstream, these BC developers also possess an effective veto over substantive changes to Bitcoin.
- Businesses, developers of non-core Bitcoin infrastructure, miners, holders of bitcoin and developers of alternative Bitcoin implementations have no vote in any decisions about the future of Bitcoin.
- Despite putting in large amounts of time, energy and money, nobody except the BC developers has any real say about the BC decision making process. It is possible for these groups to band together and effectively revolt against the BC developers, but this would create a serious rift between the development team and the community.
- Bitcoin has been suffering from a long-running clash of views about whether to increase the maximum block size or not.
- Informal surveys and content on twitter indicate the majority of businesses and miners support increasing the block size, but a majority of BC developers oppose this increase.
- There are at least 2 less-than-ideal resolutions to this argument:
- Allow BC developers to force the maximum block size to stay at 1 MB, effectively vetoing the community.
- Create a fork of BC that allows larger blocks, and have enough miners and businesses switch to force the block size increase, effectively vetoing the BC developers.
- Neither of these options are very appealing, and more importantly than any resolution that is eventually reached, it reflects a very real crisis in governance.
- Based on all of this, it is abundantly clear that something needs to change with the governance of Bitcoin.
- The current governance model of Bitcoin does not admit multiple stakeholders and is geared towards stagnation because of the way consensus amongst BC developers works.
- Beyond this structure being built to stagnate, even a conversion from a unanimous BC developer consensus model to a weaker one, e.g. with 66% majority required for changes to go in, would be subject to a veto from Blockstream by merit of their employment of so many BC developers.
REASON #2: Proof-of-work miners have too much power
- Bitcoin’s proof-of-work miners possess an enormous amount of influence, and that influence is for the most part unchecked.
- Miners can control the transactions included in a block and which blocks are considered acceptable, which means they can create a denial-of-service by mining empty blocks, censor transactions by explicitly not including them in blocks or hinder new consensus rules from being implemented.
- In practice, miners have not implemented any censorship to date, but there are certainly many blocks that are mined with 0 or low transaction counts.
- To date, miners have not blocked any new consensus rules by refusing to upgrade. While censorship and refusing to upgrade have not been issues to date, they likely will be in the near future.
- The mining of empty or artificially small blocks acts as an effective denial-of-service for Bitcoin.
- Miners still receive the block reward even if the block has 0 transactions included in it and fees are too low to provide an incentive, so there is not a good incentive structure to induce miners to include more transactions in a block.
- Beyond there being no penalty for mining smaller blocks, there is a direct incentive to mine smaller blocks, due to the longer time required to propagate a larger block. These incentives are not aligned with the behavior that most Bitcoin users would want from the network.
- Until recently, with all the drama with China vs. BTC, estimates of hash power distribution by country showed China having over 50% of Bitcoin hash power.
- Since the miners are the ones who create new blocks, they can effectively block or force a software upgrade by working with the other major miners.
- If miners band together, they could entirely block a consensus rules update.
- Alternatively, miners could attempt to force an upgrade on the rest of the network by updating their consensus rules and pushing other full node operators to do the same.
- Miners are another group who possess an effective veto over consensus rule changes.
REASON #3: Scalability
- Regular BTC users are waiting longer and longer for their transactions to be confirmed. Average confirmation time on Feb. 3rd, 2017 was nearly eight hours, though it’s typically closer to 90 minutes.
- It’s important to note that smaller transactions require proportionally larger fees, and often take longer to process.
- Eventually, those who’d like to use bitcoin for its original intended purpose—payments—could become frustrated and leave the network in favor of one of the myriad other cryptocurrencies.
- “Bitcoin is really something that you move infrequently, in large quantities,” said Chris Dannen, founder of Iterative Instinct, an equity fund that trades crypto-assets. “It isn’t going to be the microtransaction panacea that a lot of bitcoin enthusiasts describe it as being.”
- Traders, dealers, wallet and bitcoin payments services get around transaction settlement choke points and fees by netting transactions off-blockchain.
- This over time has created a situation where the majority of small-scale payments are not processed on the bitcoin blockchain at all.
- To the contrary, intermediaries operate for the most part as trusted third parties settling netted sums as and when it becomes cost effective to do so.
- The problem with this approach is the lack of industry-wide standardization.
- Since every entity decides on its own basis when and how frequently to settle netted payments, no guarantee can be made that the network generally is avoiding Herstatt risk.
- This is a scenario where the failure of one institution to honor its netted obligations can cascade across the network jeopardizing the validity of all other settlements.
- Bitcoin is anything but a cheap or competitive system.
- With great irony, Bitcoin is turning into a premium service only cost effective for a select few.
REASON #4: Satoshi
- The entire Bitcoin ecosystem is sitting on a potential volcano… Satoshi’s BTC.
- Satoshi’s BTC lays dormant at the moment, but if the creator had the inkling, he could flood the market with one million coins and destroy Bitcoin’s value.
- Matt Green, a cryptocurrency professor at Johns Hopkins University, says Nakamoto has the power to tank the currency if he wants to.
- Bitcoin has a finite supply of 21 mln which is expected to be reached by the year 2140 – Nakamoto’s one million Bitcoins amount to five percent of the entire cryptocurrency.
- Ben Yu, a Bitcoin investor living in San Francisco, says Nakamoto’s stake in Bitcoin is extremely significant.
- “If Bitcoin fulfills its role of becoming a global currency, then Satoshi Nakamoto would likely be the richest person in the world and also hold a proportionately higher share of the ultimate supply of Bitcoin than something like the US government holds in gold today,” said Yu.
REASON #5: Sustainability
Bitcoin “miners” are electromagnetic alchemists, effectively turning megawatt-hours of electricity into the world’s fastest-growing currency. Their intensive computational activity cryptographically secures the virtual currency, approves transactions, and, in the process, creates new bitcoins for the miners, as payment. And it does another thing, too: It uses an absolutely stunning amount of power. The ever-expanding racks of processors used by miners already consume as much electricity as a small city. It’s a problem that experts say is bad and getting worse…
- The Bitcoin leech sucking on the world’s power grids has been held in check, so far, by rapid gains in the energy efficiency of mining hardware. But energy and blockchain analysts are worried about the possibility of a perfect storm: Those efficiency gains are slowing while bitcoin value is rising fast—and its potential transaction growth is immense.
- Developers of blockchains for such disparate applications as health care management and solar-power trading see Bitcoin’s energy-intensive design as a nonstarter and are now crafting more sustainable blockchains.
- According to Digiconomist, Bitcoin and Ethereum mining taken together consume more power than countries like Jordan, Iceland, and Syria, with the two combined ranking 71st among all countries. This is based on Ethereum mining consuming 4.69 terawatt-hours (TWh) of power and Bitcoin mining consuming 14.54 TWh.
- U.S. households that could be powered by the electricity consumed by Bitcoin mining alone exceeds a 1.25 million. Another way to look at it is that roughly 27 times as much energy is consumed by Bitcoin mining as is consumed by the entire Visa network.
- Bitcoin is far more power intensive than Ethereum when looking at a single transaction, at 163 kilowatt-hours (KWh) versus 49 KWh. That means that a single Bitcoin transaction could power the typical U.S. household for roughly 5.5 days as compared to the 1.5 days of a single Ethereum transaction.
- According to VICE Motherboard, In June 2015 one Bitcoin transaction required the same amount of electricity as powering 1.57 American households for one day, of which the average sized home is approximately 2700 square feet.
- To give some global context, 1.57 American homes roughly equals 20 Hong Kong homes or 11 mainland China homes.
- Mass adoption of Bitcoin across US households will result in very large increases in electricity use relative to existing financial systems.
- Bitcoin has no demonstrable ethos or regard for energy efficiency or sustainability. Instead, we’re seeing bigger and more energy intensive mining farms popping up with greater frequency coupled with growing exuberance and enthusiasm about the rising Bitcoin price.
- Even as mining equipment improves, bitcoin’s code itself supports the incentive to add more mining, requiring more electricity.
- Even if 100 percent of bitcoin mining was powered by wind and solar sources, the fact remains that this activity is displacing other uses of electricity that might be more energy-efficient. With a lot less electricity, a Visa datacenter can power thousands of times more transactions per second.
Solving some of Bitcoin’s problems:
- Straightforward solutions for these problems do not fit well within Bitcoin since they involve making fundamental changes to incentive structures and consensus rules.
- Beyond the technical difficulties with making these changes, based on how vehemently groups within BC disagree on even simple changes like increasing the maximum block size, it is practically assured that any proposed solutions to these problems will not be implemented for one political reason or another.
- As such, the only reasonable way to make real progress on these challenges is to create an altcoin that implements the proposed solutions.
- Out of all of the debates, a technical solution called Segregated Witness was brought forward.
- It was not primarily developed as a scaling solution (though it does add more space for transactions), but as a stepping stone towards a lot of scalability innovation.
- SegWit solves a long standing bug in Bitcoin, which stands in the way of these innovations.
- After over a year of testing, SegWit now has widespread support across all stakeholder groups (Developers, Users, Miners and Businesses) and will soon be implemented.
- This opens the door for one of the next innovations: Schnorr Signatures, which can further help to improve scalability.
- Bitcoin’s biggest challenges
- The biggest threat facing bitcoin has nothing to do with the SEC
- The currency of the future has a settlement problem
- Why Schnorr signatures will help solve 2 of Bitcoin’s biggest problems today
- What If Satoshi Nakamoto Sold All His Bitcoin Today?
- The world’s cryptocurrency mining uses more electricity than Iceland
- Bitcoins Energy Consumption An Unsustainable Protocol That Must Evolve?
- A Single Bitcoin Transaction Takes Thousands of Times More Energy Than a Credit Card Swipe
- How Much Energy Does Bitcoin Use? A Lot It Turns Out.
- How Much Power Does the Bitcoin Network Use?
- The Ridiculous Amount of Energy It Takes to Run Bitcoin
Thanks for reading!
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