Bitcoin was designed to be self limiting and scarce so as to endow it with value. But the limitation wasn’t just applied to the number of coins in circulation, it was also applied to the number of transactions/data that can be processed in any given block interval.
That latter constraint is now igniting a bitter schism in the community between those who feel the constraint must be removed to ensure bitcoin can scale universally and those who want it kept intact to allow cost structures to balance out organically.
All will eventually be decided in a forking event.
The forking is an opt-in software update called ‘Blockchain Unlimited’ intended to resolve bitcoin’s scaling limitation by expanding the amount of data that can be processed in any given block. To be successful it must be adopted by a majority of miners. Most miners, however, do not have a financial incentive to back an update that stands to increase their costs without necessarily increasing their revenues. Others fear that without constraints only the best equipped and most highly funded miners will survive a forking event, which would encourage further centralisation of the network.
Ahead of the forking, nevertheless, constraints on bitcoin’s capacity are already leading to higher transaction fees:
https://image.webservices.ft.com/v1/images/raw/https%3A%2F%2Fftalphaville-cdn.ft.com%2Fwp-content%2Fuploads%2F2017%2F03%2F21130058%2FScreen-Shot-2017-03-21-at-13.00.43-590x418.png?source=AlphavilleThis has begun to undermine one of the most actively propagated myths about bitcoin/blockchain: that the network radically reduces the cost of payments and as a consequence can crush the cost of cross-border remittances.
To the contrary, FT Alphaville always argued the network’s perceived cheapness was illusory — the product of investor inflow subsidisation and share dilution in the form of mining awards. If and when capital inflow subsidisation was to abate, we argued, the true cost of funding the network would be exposed — since miners would only be incentivised to keep processing if the transaction fees made it worth their while. This in turn would reveal a core truth about bitcoin: that the network is and always was a luxury payments system, not a universal one.
Whether the Bitcoin Unlimited update is successful or not is unlikely to change this fact. Yes, transactions fees might fall for users temporarily, but the costs will still have to be borne by someone or something. Most likely this will be the miners in the form of infrastructure investments or the network at large in the form of centralisation effects.
To deal with the cognitive dissonance some enthusiasts are unsurprisingly resorting to revisionism, claiming bitcoin was never intended to be cheap or highly scaled. That narrative, they say, was always wrong. These purists cite the likes of Hal Finney, one of bitcoin’s earliest developers, who noted in 2010 that: “Bitcoin itself cannot scale to have every single financial transaction in the world be broadcast to everyone and included in the block chain”. They also quote Amir Taaki, a bitcoin activist, who said in 2014 that: “This vision of Bitcoin as a faster, cheaper and better payments-network is simply not tied to any technological grounding of what Bitcoin is really about.”
The counter-narrative goes on to claim bitcoin was intended from day one to be a neutral, transferable and less corruptible international reserve asset akin to the SDR or Keynes’ bancor – and a reserve unit against which local banking systems could issue their own units against. The elimination of middle-men, consequently, was never a direct objective.*
So how is it that this message was lost on almost everyone?
After all it wasn’t just a few rogue players stressing bitcoin would disrupt the cost of payments across the board, eliminate the middle man and bank the unbanked. It was literally everyone we ever came across in the community. In fact, between 2012 and 2016, there wasn’t a cryptocurrency themed conference, panel event or meet-up we attended that didn’t feature fervent rhetoric of this sort. Whole books were even written arguing as much.
It’s fair to conclude something profound may have happened in the intersection of bitcoin and media during those years: the messenger bearing the real story of bitcoin was shot dead — drowned out by the noise of the PRs and evangelists broadcasting alternative facts and claims. (Many of them communicated at poshly catered functions, panels, and debates at top-end venues across the city).
Did the purist bitcoin community become so distracted guarding itself from double-spending attacks that it missed an an attack of a different order on its network? Namely, a propaganda assault?
Or was this misdirection intentional all along? Who knows.
One thing we do know is that anyone who publicly rejected the propaganda-approved message (that bitcoin was cheap, disruptive, likely to get rid of all the middlemen) and argued bitcoin was mostly just recreating the same old system with new controllers in charge was met with highly hostile trolling attacks.
It’s worth noting that if the true purpose of bitcoin was always to reestablish a conventional and very much hierarchical banking system atop of a bitcoin reserve system — not the disruption of banking per se — distracting the world with fake news about its egalitarian attributes would certainly have served a purpose.
*It’s not a bad idea in essence. Though Finney’s presumption that this could pave the way to a free banking system within which banks’ money-like liabilities trade at varying discounts according to merit is hard to square with money’s need to be a stable and fungible store of value.
https://ftalphaville.ft.com/2017/03/21/2186260/bitcoins-fake-news-problem/
