On this page are links to the article on the Bitcoin/Blockchain technology. The article was posted in two parts as shown below:
Financial Technology that Makes the World Better - Is it Bitcoin Part I
In Part I we look at two of four questions in relation to the Bitcoin/blockchain technology:
1) Is the technology easy to use and understand?
2) Does the technology operate cost efficiently?
Financial Technology that Makes the World Better - Is it Bitcoin Part II
In Part II, we look at two more relevant questions:
3) Is the technology safe to use?
4) Does the technology serve only a relatively small niche of the population or does it improve the lives of a significant number of people, including those who need it most?
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The expert who wrote most of this article for this blog sent me this note in an email (this is an expanded version of his comments he asked me to use here):
His email also contained a link to this article which is an interview with Gavin Andresen. It contains the quotes below which illustrate how accurate our expert was back in 2012 when he detected this problem in his research on the technology. Mr. Andresen pretty much says what we have said here on the blog in terms of how hard it would be for Bitcoin to gain broad mainstream adoption (see last question below).
Here are some quotes from the article:
"The way things are going, the digital currency Bitcoin will start to malfunction early next year. Transactions will become increasingly delayed, and the system of money now worth $3.3 billion will begin to die as its flakiness drives people away. So says Gavin Andresen, who in 2010 was designated chief caretaker of the code that powers Bitcoin by its shadowy creator. Andresen held the role of “core maintainer” during most of Bitcoin’s improbable rise; he stepped down last year but still remains heavily involved with the currency (see “The Man Who Really Built Bitcoin”).
Andresen’s gloomy prediction stems from the fact that Bitcoin can’t process more than seven transactions a second. That’s a tiny volume compared to the tens of thousands per second that payment systems like Visa can handle—and a limit he expects to start crippling Bitcoin early in 2016. It stems from the maximum size of the “blocks” that are added to the digital ledger of Bitcoin transactions, the blockchain, by people dubbed miners who run software that confirms Bitcoin transactions and creates new Bitcoin (see “What Bitcoin Is and Why It Matters”)."
How serious is the problem of Bitcoin’s limited transaction rate?
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The expert who wrote most of this article for this blog sent me this note in an email (this is an expanded version of his comments he asked me to use here):
"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).
His email also contained a link to this article which is an interview with Gavin Andresen. It contains the quotes below which illustrate how accurate our expert was back in 2012 when he detected this problem in his research on the technology. Mr. Andresen pretty much says what we have said here on the blog in terms of how hard it would be for Bitcoin to gain broad mainstream adoption (see last question below).
Here are some quotes from the article:
"The way things are going, the digital currency Bitcoin will start to malfunction early next year. Transactions will become increasingly delayed, and the system of money now worth $3.3 billion will begin to die as its flakiness drives people away. So says Gavin Andresen, who in 2010 was designated chief caretaker of the code that powers Bitcoin by its shadowy creator. Andresen held the role of “core maintainer” during most of Bitcoin’s improbable rise; he stepped down last year but still remains heavily involved with the currency (see “The Man Who Really Built Bitcoin”).
Andresen’s gloomy prediction stems from the fact that Bitcoin can’t process more than seven transactions a second. That’s a tiny volume compared to the tens of thousands per second that payment systems like Visa can handle—and a limit he expects to start crippling Bitcoin early in 2016. It stems from the maximum size of the “blocks” that are added to the digital ledger of Bitcoin transactions, the blockchain, by people dubbed miners who run software that confirms Bitcoin transactions and creates new Bitcoin (see “What Bitcoin Is and Why It Matters”)."
How serious is the problem of Bitcoin’s limited transaction rate?
"It is urgent. Looking at the transaction volume on the Bitcoin network, we need to address it within the next four or five months. As we get closer and closer to the limit, bad things start to happen. Networks close to capacity get congested and unreliable. If you want reliability, you’ll have to start paying higher and higher fees on transactions, and there will be a point where fees get high enough that people stop using Bitcoin."
What will happen if nothing is done?
What will happen if nothing is done?
"Transactions will get unreliable and it’ll get worse and worse over time. My fear is there’ll be no critical event that causes people to react—Bitcoin just kind of has a long slow death. I’m trying to set off alarm bells for ‘You know, guys, if we don’t do this, Bitcoin will be dead in four years.’ It’s not easy to sell that, especially when there’s so much controversy."
How widely established is Bitcoin now anyway?
"It’s firmly established in a few niche areas and growing there. An early use case is people who pay international contractors in Bitcoin because it’s easier than figuring out how to transfer dollars into local currency. The major barrier to it going mainstream anywhere is there has to be some way of getting Bitcoin as part of your normal activity. Until part of your paycheck is regularly paid in Bitcoin, I’m not sure how it would really go mainstream. I can imagine places in the world where there are not functioning banking systems, or payroll systems, where it could go mainstream first, because you’re not trying to replace the way people are already doing something.
I still say do not invest your life savings in Bitcoin. It is still an experiment and it could still fail."
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Added note: A thank you to Willem Middelkoop for his mention on his twitter feed of this article.
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Added note: A thank you to Willem Middelkoop for his mention on his twitter feed of this article.
Added note 1-13-16: Here is a well written article that supports what our expert here has written about some limitations on this technology. It's pretty obvious that this technology is not very well understood yet despite a lot of media attention around it.
Added note 1-26-16: IMF releases a new study on Virtual Currencies
Added note 2-10-16: Forbes runs this article showing the problems with the size of the blockchain are still ongoing.
Added note 3-14-16: Yet another Bitcoin developer acknowledges the limitations for Bitcoin/Blockchain technology that our expert said in the email above he was aware of in 2012.
June 2016 - NY Times - China has control of Bitcoin now and the problem with the size of the blockchain is still unresolved.
July 2016 - BOE Study on Central Bank Digital Currencies
August 2016 - Reuters - $72 Million in Bitcoin stolen from Bitfinex Exchange
August 2016 - More problems for Bitcoin
March 2017 - The battle over Block size continues
May 2017 - CNBC notes that the strong recent rise in Bitcoin is related to announcement to increase the block size. Time will tell if this update allows Bitcoin to gain broader adoption and if it really works.
June 2017 - With cryptocurrencies like Bitcoin rising sharply in price this year, there is increasing speculation that this is an early warning signal that more people want to move out of the existing banking system. It only takes a little added demand to move the price higher. It's just another trend that should be watched over time. Also, CNBC puts out this video which points out why most people won't fool with Bitcoin for regular purchases etc. as we pointed out in our article here.
July 2017 - The Confusing World of Cryptocurrencies - update article on status of Bitcoin/Blockchain etc.
July 2017 - IMF on central bank digital currencies & a new gold backed cryptocurrency - both are things we have covered here for some time
August 2017 - Singapore Testing a central bank digital currency
note: Recently I was in touch with the expert who wrote most of the original Bitcoin/Blockchain article linked at the top of this page. He advises me that most of what was in that article is still relevant, but that Bitcoin (and other blockchain based cryptos) are attracting a lot of major capital. He remains of the belief that blockchain is not all that revolutionary from a technology standpoint, but does agree that people who view it as a way to bypass the current banking system are rallying around it and helping to drive up the prices of many of these coin offerings. I believe he does expect that both banks and central banks will continue to try and adopt some form of blockchain technology for various closed system applications (see article just below).
October 2017 - IBM-KlickEx-Stellar Announce New Blockchain Based Payments System
December 2017 - Is there a Path for Bitcoin to go Mainstream? Followup article on Bitcoin Whales
August 2018 - KlickEx CEO Robert Bell talks about how he sees the future for cryptos and blockchain
July 2019 - Not much new to report here. The trend towards possible central bank digital currencies seems to have slowed down for now. The status quo seems firmly entrenched at this time. Perhaps the biggest news in this space was the announcement of Project Libra by Facebook. It has prompted a lot of global news coverage and reaction like this article we ran here. Even so, the goal for the launch of Libra is not until 2020 and there is still no big movement within central banks towards blockchain based currencies or central bank digital currencies of any kind so far.
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