Bitcoin never resolved its constitutional crisis
At the same time Bitcoin startups were struggling last year, the community of Bitcoin developers was going through a controversy that I described at the time as a constitutional crisis. Bitcoin’s creator Satoshi Nakamoto initially designed the network to only process a few thousand transactions per hour. That was plenty when Bitcoin was in its infancy, but as Bitcoin grew more popular it started to be inadequate.
Increasing the network’s capacity isn’t difficult from a technical perspective, but proposals to address the problem encountered a lot of resistance from Bitcoin purists. They worried that boosting the network’s throughput would increase the amount of computing power required to participate in the peer-to-peer Bitcoin network, consolidating power in the hands of large companies. And, they said, this was exactly the kind of concentration of power Bitcoin was created to prevent.
.. This esoteric debate became increasingly bitter, splitting the Bitcoin community into two warring camps. Ultimately, neither side really won the argument. But because the Bitcoin network works by consensus, advocates of maintaining the status quo won by default. As a result, there have been only modest, incremental improvements to the network’s capacity. Bitcoin users have suffered from longer delays completing payments and higher fees.
At this point, there are no real prospects for making the kinds of significant changes that would be required for Bitcoin to become a mainstream payment network akin to Visa or MasterCard. Defenders of maintaining the limited capacity of the existing network have proposed technical workarounds that, they claim, would allow many more transactions without modifying the core Bitcoin software. But this technology is still in the experimental stages, and critics question whether it will ever work well enough.
.. The larger problem, though, is cultural rather than technological. “I think of the Bitcoin community as very political and ideological,” said Eli Dourado, a Bitcoin expert at the Mercatus Center at George Mason University. There’s now a deep rift in Bitcoin’s technical community, and people on one side of the rift are skeptical of making any significant changes to the software.
.. But another big advantage of Ethereum, Dourado argues, is the greater pragmatism of Ethereum’s developer community.
“The Ethereum community is driven a lot more by an engineering mindset,” Dourado said. “People say ‘let’s try it and see what we can do.’”
.. But Bitcoin’s most serious problem may have been something more basic: Nobody has figured out how to make the technology useful to ordinary people.
.. Bitcoin is far less significant than conventional cash. There is more than $1 trillion in $100 bills in circulation, and a large fraction of that cash is used for illicit activities. The Bitcoins in circulation, in contrast, are only worth about $10 billion.
.. The main thing people do with Bitcoins, Sirer told me, is buy it and hold onto it.