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Making Sense of Bitcoin's Divisive Block Size Debate

(@pete_rizzo_) | Published on January 19, 2016 at 22:16 BST
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"Consensus is hard."

Issued by developer Peter Todd, the statement does much to sum up the state of debate in the bitcoin community, the loose term for the sprawling network of users, miners, node operators, global investors, hobbyists and CEOs who have an interest in the future of bitcoin, an open-source software project responsible for managing $5.7bn in value.

While prone to controversy, the bitcoin community is in the midst of one of its biggest debates yet, one compounded by a high-profile article that, while presenting a compelling character portrait of a prominent community member, has lead to a wave of coverage that has colored public perception on a highly complex and divisive issue.

Depending on which media outlet you prefer, bitcoin is either "failing", in the process of "breaking up" or has "failed" already

However, the headlines draw not from any actual observation about the network’s performance, but on mounting disagreement over what bitcoin was intended to be, how it was performing against this ideal and the steps the industry can take to achieve a unified path forward.

The problem is that not everyone in the industry sees the bitcoin network in the same terms.

Indeed, attempts to characterize the argument often lead to a series of extended qualifications. Though widely known as the "block size debate", there is by no means agreement in the bitcoin community that bitcoin needs to change the size of the network's data blocks in order to achieve a more scalable platform.

There have even emerged solutions to the debate that do not involve changing the block size at all. Far from fringe opinions, such an idea has been put forward by members of Bitcoin Core, the bitcoin network’s everyday development team.

In the wake of what is the latest popular mischaracterization of events in the industry, community members are increasingly taking to blogs to discuss the state of the network and their views on the path ahead.

Without near universal approval of how the network should operate, bitcoin risks dividing into separate networks with divergent transaction histories. In turn, this would undermine the overall value of the network and affect compatibility between users.

As a sign of the divide, BitGo co-founder CTO Ben Davenport in a recent Medium post even went so far as to extrapolate how the bitcoin network could deal with two competing blockchains used by different parts of the community and with different prices for bitcoin on those ledgers.

In an attempt to add clarity for those following the debate, we’ve compiled a list of the many questions the community is now seeking to inform and answer.

Has bitcoin failed?

Perhaps the most contentious claim issued by ex-bitcoin developer Mike Hearn, the immediate answer to this question is no. Transactions continue to be processed on the bitcoin network and at press time, 148 1MB blocks of transaction data had been processed by bitcoin’s distributed mining ecosystem over the last 24 hours.

The idea that the media response to the incident betrayed a lack of knowledge about the technology was widely acknowledged, most directly by interested venture capitalists.

Adam Draper, CEO of the startup accelerator Boost VC, for example, noted that bitcoin’s current issues could be viewed as a product of its success. Since it was founded, Boost has invested in more than 50 industry firms, including Fold, Mirror and Zapchain.

If the bitcoin network needs the capacity to handle more transactions, Draper reasoned, it’s proof that the experimental transactions protocol is growing, not dying.

Draper wrote:

"Most of Mike [Hearn]’s problems stem from there being excess demand of the network, not too little, which in the world of startups and technology, I would summarize as, ‘champagne problems.’ The network has too many people who want to transact on it, and it cannot keep up on the demand so it doesn’t clear 100% of transactions perfectly. This is what happens with new technology, and this is what drives innovation."

Draper also pointed to the growing institutional interest in the technology as a sign it is becoming better understood. “Bitcoin has been pronounced dead 89 times, I don’t think this will be the last time people believe it is the end,” he continued.

Elsewhere, Union Square Ventures partner Fred Wilson penned a blog post in which he defended the network as one that still features a “number of well-funded companies” and that has attracted "significant venture capital interest".

"The competition between these various companies and their visions has played a part in the stalemate," he wrote, noting that while the debate is heated, most of its participants are aligned to see the network succeed.

He added:

“These companies have a lot to gain or lose if Bitcoin survives or fails. So I expect that there will be some rationality, brought on by capitalist behavior, that will emerge or maybe is already emerging."

What is bitcoin’s big vision?

Given the number of stakeholders in the bitcoin network, there also remains a variety of opinions on how the technology should be developed.

“In my simple mind I liken it to this. Should bitcoin be gold or should bitcoin be Visa?” Wilson wrote.

Here again, the differing interests in bitcoin are divided.

Many startups, for example, built their companies (and raised money) on the idea that bitcoin would be a free platform for financial services, despite the fact that sending data on the network has always had an implicit cost.

Of course, the question of cost isn’t whether bitcoin should be free or not, securing a transaction against the bitcoin blockchain costs a fee regardless. At issue is which stakeholders should pay for this fee.

In his post for Medium, Valery Vavilov, CEO of bitcoin mining giant BitFury argues that bitcoin users who want to have their transactions noted in the blockchain need to reimburse miners for the computing power they expend to perform this action.

"The blockchain is secured with an enormous amount of computing power, and transaction fees are an important incentive to keep contributing that power," Vavilov wrote.

Still, he argued other technical solutions could cut costs for consumers by reducing their need to post payments to the blockchain.

"Just like with instant payments, expensive on-chain bitcoin transactions do not mean that one cannot use bitcoin for cheap value transfer. Overlay networks, such as Lightning and sidechains, can successfully deal with this challenge," Vavilov said.

This idea is in itself contentious as there remains disagreement as to whether a significant part of the network’s value proposition derives from the idea users interact with the blockchain directly, not a third party as in traditional payment systems.

As noted by independent blogger Beautyon wrote recently, how this cost is paid and how high it is set will have ramifications.

“If however it costs a dollar to spend a dollar, no one will use bitcoin to send a dollar. They will use it to send $100 because that is still cheaper than Western Union,” the post argued.

How centralized should bitcoin be?

Though this has emerged as a debated point, for a sizeable amount of bitcoin users, a key part of the network’s value proposition is that it is decentralized.

By spreading out transaction verification across a number of unknown miners, they argue that users are free from the censorship of platforms like Visa or MasterCard, which can now arbitrarily deny service.

As such, those who are in favor of decentralization, generally want to see all aspects of the network maintain low barriers to entry.

This development is perhaps most pronounced in the mining sector where an industrial arms race to assemble computing power has resulted in a relatively small number of participants in this process, at least compared to the network’s early days when anyone with a home computer could mine bitcoins.

A representative of the industrial miners, Vavilov argued that bitcoin is not “a fancy replacement for PayPal or Visa”, contending that its decentralized qualities provide "permissionless entry for users and developers", key components, he believes, to its goal of becoming an open platform.

He added that, regardless of the number of miners, most bitcoin nodes, which are responsible for maintaining complete copies of bitcoin’s transaction ledger, remain outside of the control of major miners.

The subject of the number of the balance between miners and nodes on the network was also discussed in a post by Brian Armstrong, CEO of bitcoin services firm Coinbase.

Armstrong wrote that he does not have “dire concerns” about the centralization of mining, as this could be offset by the number of nodes.

However, here he noted the size of the blockchain nodes hold would expand if the block size is increased, increasing the cost burden on those running nodes.

"So the block size doubled and the number of full nodes fell by 6%. Can we use this as a proxy for what will happen if we raise the block size more? Maybe,” Armstrong wrote.

He went on to provide a “rough” analysis for how a size increase might affect this aspect of the network.

Do scaling solutions need a block size change?

Another question with a relatively straightforward answer, members of the Bitcoin Core development team are openly advocating that more transaction capacity be added without immediately altering the size of data blocks on the blockchain.

At Scaling Bitcoin Hong Kong, Blockstream co-founder and developer Pieter Wiulle introduced a proposal called Segregated Witness that would alter how the network stores transaction signatures.

“What is proposed is a soft-fork that increases bitcoin's scalability and capacity by reorganizing data in blocks to handle the signatures separately, and in doing so takes them outside the scope of the current block size limit,” Blockstream's Greg Maxwell wrote last December.

As opposed to a hard fork, which would create two incompatible versions of the software, a soft fork would allow bitcoin users to continue using older software versions until they upgrade.

As explained by BitGo’s Davenport, the view of Segregated Witness proponents is that a soft fork of the network would be safer than a hard fork, which could split the network into two divergent blockchains.

He wrote:

“The Bitcoin Core team believes doing a hard fork at the present time is needlessly risky, and is instead pursuing SegWit via a soft fork for a similar sized potential gain in throughput."

Developer Peter Todd has explained that he favors a soft fork as it would add rules to the protocol, rather than removing them. In addition, he notes that “modern bitcoin”, a term used to describe the more mature network, has “never done an intentional hard fork”.

“[When a hard fork starts], the blocks from miners adopting the fork are considered invalid by the those who haven’t adopted, because the blocks violate existing rules. So the non-adopting miners build on each others blocks, creating two separate chains,” he wrote.

Elsewhere, he sought to dismiss criticisms that soft forks are dangerous, needlessly complex and undemocratic.

One of the major problems about Segregated Witness, however, may be the lack of communication and its inability to solve the political problem of “fixing the block size issue”.

Developer Peter Todd called this one of the more interesting aspects of the discussion, noting the views of Bitcoin Core’s Jeff Garzik

“His view is we must do a hard fork to show it’s possible. But, why do you want to show it’s possible? Because we’re going to do another. There’s no clear criteria at what point do you stop scaling the limits,” Todd told CoinDesk.

Is a soft fork the best solution?

But while Todd calls soft forks “one of the best tools” that developers have to upgrade the protocol, even this view has attracted its share of detractors.

One effort that has sprung up amidst the wake of Hearn’s post is Bitcoin Classic, which seeks an immediate hard fork that would increase the capacity of the network to 2MB.

The development effort has already received nods of approval from prominent industry firms including mining outlets like BitFury and KnCMiner and consumer services like Coinbase and Circle.

Further, Bitcoin Not Bombs author Chris Pacia has put forth a notable technical criticism to this view.

“I believe that conventional wisdom is wrong,” he wrote in a piece that argued soft forks have not always gone off without difficulty.

How should bitcoin be governed?

Still, there remains the belief that bitcoin’s issue aren’t technical but social.

Pacia suggested that a soft fork would be a governance issue given that “just a few developers and mining pool operators” would effectively be able to determine how the protocol is changed.

But hard forks are not without a governing component.

Davenport along with BitPay CEO Stephen Pair have said they believe that the choice is ultimately up to the miners, who must devote computing power to a fork in bitcoin blockchain. However, Davenport noted that it’s not clear who miners should listen to as they make their decision.

“How are they meant to make such a decision? Should they listen to the developers? to people on Reddit? To the big companies?” Davenport asked.

For his part, Vavilov rejected the idea that bitcoin users should all run nodes, and therefore, all be able to vote on the network's course of action.

"The pipe dream of some in the Bitcoin community is to govern the system by having ordinary users vote for changes by adopting the corresponding full node software. This approach is not only impractical, it is also not desirable," he wrote.

Much of the debate, however, seems to be a byproduct of the lack of a central decision-maker in the debate.

As evidenced at Scaling Bitcoin, decisions proved complex given that miners wanted to follow the recommendations of the development community, while developers sought to avoid pulling the trigger for fear of the repercussions of being labeled as the entity that could enact decisions on the network.

Still, there are signs this concern has been widely interpreted as a sign that Bitcoin Core lacks leadership.

The idea that a change in core development governance would be forthcoming was put forward by Fred Wilson.

“I personally believe we will see a fork accepted by the mining community at some point this year. And that will come with a new set of core developers and some governance about how decisions are made among that core developer team,” he wrote.

Even Todd, a member of Bitcoin Core by association, acknowledged that bitcoin’s developers would need to treat the ongoing debate as a learning experience, adding:

“I get the impression that a lot of this stems from very poor communication between bitcoin core and the rest of the community.”

Division image via Shutterstock

Bitcoin ProtocolBlock SizeSegregated Witness

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