Last fall we ran an in depth article on challenges that would be faced by Bitcoin in gaining widespread adoption due to limitations in the technology that it runs on. The article was written by one of the leading experts in the world on payments systems. Now we learn that one of the early developers for Bitcoin is leaving it and has stated it has "failed" on his blog. This story from Reuters appearing on Business Insider covers the situation.
It is amazing how accurate our expert here was when you read this new article. Below are some quotes from this Business Insider article. Followed by that is the text of an email I got from the expert who wrote the article for this blog. I don't know how all this will turn out for Bitcoin, but our expert did identify this potential problem way back in 2012 per his email comments below. One thing to note that our expert pointed out in Part II of our article:
"the blockchain is reliant on the value of the bitcoin to continue to pay the cost of processing its transactions. No bitcoin - no Block-chain? We'll watch this space."
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"Bitcoin slid by 10 percent on Friday after one of its lead developers, Mike Hearn, said in a blogpost that he was ending his involvement with the cryptocurrency and selling all of his remaining holdings because it had "failed"."
. . . . . .
"Despite knowing that bitcoin could fail all along, the now inescapable conclusion that it has failed still saddens me greatly," Hearn said in his post on blog-publishing platform Medium.
Along with Gavin Andresen, who was chosen by bitcoin's elusive creator Satoshi Nakamoto as his successor when he stepped aside in 2011, Hearn has been locked for months in a battle with the other lead developers over whether the "blocks" in which bitcoin transactions are processed should be enlarged.
Each block currently has a capacity of one megabyte, which Hearn says is "an entirely artificial capacity cap", and allows a maximum of just three payments to be processed per second.
In August, Hearn and Andresen released a rival version of the current software, called Bitcoin XT, which would increase the block size to 8 megabytes, allowing up to 24 transactions to be processed every second."
. . . . .
But the new software has not been adopted by the "mining" computers that secure the network, the majority of which are in China, according to Hearn.
. . . . .
"Hearn says the bitcoin network is about to run out of capacity as the volume of transactions increases. And when that happens, the network will become unreliable, with payments unable to be processed and vulnerable to fraud."
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My added comments: The problems mentioned in this article along with a number of others were covered in our article here last fall. Below is a text of an email I got from the expert who wrote our article that talks directly about the issue in this Business Insider article.
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"In 2012 - it was apparent (to me) that the blockchain was technically limited.. fundamentally designed in a way that made it impossible to scale beyond a few (hundred thousand) users, or ever grow to a national scale system.. And it turns out this was well founded. The transactions are severely limited - and the community now agrees. It took 3 years!
The alarming outcome of this - is not the speed or lack of expertise - it is that they found a fix... Which means bitcoin has none of the "permanent security features" they all claim. The strength of bitcoin was always that it was cast in stone. However, a single coder has been able to deploy a core change to the code - which slows transactions, but boosts capacity. This seems okay - until you consider that this breaches the fundamental principle of the protocol's security claim.
Simply "convincing half of the miners to adopt BitcoinXT" - as has been proposed - is also the same in nature as deciding to seek a private consensus amongst miners (even just one) to one day "delete all transactions from wallets/addresses/accounts that have ever been affiliated with X."
(added note: X could be (impacted by) any new rule, including setting all wallet values to $0.00 for any wallet that has, e.g., traded with starbucks, paid taxes, or received income from the US millitary). XT is the proposed new version of the BlockChain 'rulebook' ("BIP") to deal with the size limitations of the current blockchain)."
Added note: Dr. Warren Coats has also written on Bitcoin in this article and this article. He notes many of the same issues mentioned in our article here and adds some others. He does support the innovative spirit behind Bitcoin as an experiment. He is open to innovative new ideas in financial technology.
Additional Added note: The Economic Policy Journal runs this article on this topic and the IMF releases a new study on Virtual Currencies
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