Bitcoin Needs an Urgent Redesign
A fatal flaw could render mainstream use of Bitcoin impossible
By now, you will have heard of Bitcoin. Originally released in 2009 by a developer (or developers) under the name of Satoshi Nakamoto, Bitcoin is an alternative payment solution based on blockchain technology. The blockchain is a shared, electronic database where all records are encrypted – which makes it incredibly obvious if records are tampered with. Any transaction added to the chain – also called the General Ledger – stays there forever. In February 2016, Bitcoin was valued at over $5 billion. It’s not difficult to see why Bitcoin has gained traction, as it encourages transparency in a sector that has long been criticised for dishonesty and fraud.
But there’s a problem – as Bitcoin’s popularity grows, the software has to deal with more traffic. This month, Bitcoin hit its highest valuation in three years of $16 billion. This should be a positive, but the blockchain technology that underlies the digital currency just can’t stand up to the processing power of competing payment methods. In order to survive as a viable solution, Bitcoin has to undergo fundamental changes. . . in short, it needs a redesign.
The problem of processing
Financial organisations have been understandably excited by the prospect of using blockchain tech for capital markets. Last year, the Japan Exchange Group claimed that it could improve efficiency and reduce costs. . . but when you really look at it, this begins to sound like wishful thinking. According to a team of 12 researchers from various academic institutions including Cornell University, Bitcoin can’t cope with mass users. The currency can only handle seven exchanges in one second. That’s a far cry from Visa, which deals with 20,000 on average. In total, Visa has the capacity to process 56,000 transactions within that single second. The reason Bitcoin is so limited in comparison is down to the blocks used to store info in the chain. Blocks have a maximum capacity of one megabyte, which only allows for seven transactions at once. This is already causing problems. Gavin Andresen, one of the few public faces behind Bitcoin, has been heavily involved with the currency since 2010. In 2015, he openly admitted that if Bitcoin isn’t redesigned, networks will become congested and unreliable, leading to higher fees on transactions. Customers will be forced to take their business back to mainstream payment methods. Tired of being ignored, he created his own new version called BitcoinXT, sending shockwaves through the community of Bitcoin developers also known as miners. Some supported him whilst others attacked him, but ultimately Andresen is confident that his opponents will realise the depth of the problem and switch to his version. So, what will happen if Bitcoin can overcome these fundamental issues?
What if Bitcoin innovates?
At the moment, Bitcoin could be tweaked to stretch to 27 transactions per second, but even that isn’t good enough. The obvious solution seems to be to enlarge the capacity of blocks. If this can be done, there might be light at the end of the tunnel for Bitcoin. Blockchain technology, if adopted by the financial world, would disrupt the whole industry. Private banks will be accountable to one central bank, rather than conjuring money out of thin air. In theory, this would make it far easier to control the economy. The whole point of Bitcoin, though, is decentralisation – so using it for central authority would not sit well with miners or other enthusiasts. Talking of central authority, Bitcoin may also come up against an obstacle in the form of Donald Trump. The President Elect has demonstrated a muddled relationship with tech, however his policy could actually benefit Bitcoin. Right now, the dollar isn’t particularly healthy, and Trump’s proposed addition of $5.3 trillion to U.S. national debt won’t exactly help. Digital currencies – though not necessarily Bitcoin – could provide an alternative to traditional fiat currencies, especially if the seemingly all-powerful dollar breaks down. In short, the wider adoption of Bitcoin faces more than just technological issues. Even if limitations are overcome, applying blockchain technology as a mainstream financial solution would cause fierce debate and the complete overhaul of a long-established sector. Some would argue that this change needs to happen, but a sceptic would question if it’s really worth it.
In its current state, Bitcoin could continue as an exclusive payment method for the tech-savvy, but without alteration it simply can’t cope with mainstream use. Surely, at a time when FinTech is transforming the financial sector, innovators can find a way to make Bitcoin work without compromising its underlying technology. However, even if blocks are redesigned to offer a higher capacity, there’s a long way to go before the digital currency can stand up to competitors. Wider adoption would also disrupt the entire financial sector, causing established banks to fight tooth and claw to avoid losing their authority.
Even if decentralised payments become widely accepted, Andresen has still warned people against investing their life savings in the currency he helped create. Going further in to 2017, it will be interesting to see how Bitcoiners deal with this threat to their innovative system.
Does Bitcoin have a future or is the writing on the wall? Share your thoughts and opinions.