"It is impossible for ideas to
compete in the marketplace if no forum for
their presentation is provided or available."
Thomas Mann, 1896
The Business Forum
What is Wrong With Bitcoin?
An exercise in decision making.
By Joseph Vaughn-Perling
Scientist of the CryptoCrypt)
There have not been many major disruptive consumer financial technologies in
recent history. The last major disruption was the innovation of the payment
card. Payment cards were created before the internet even existed. Bitcoin
is the money of the internet era, and these are the early days. The issues
and precedents established today may become institutionalized if Bitcoin
catches on. Bitcoin is now at a moment where such a precedent is being set,
that could change the fate of the economy for the next century, and a
struggle for that future is mounting.
Over the last few years, I have exposed our readers here to some matters of
importance to businesses and individuals interested in money. There are
problems with all sorts of money: government currencies, problems with
precious metal money gold and silver, and also with crypto currency money.
The most notable of these crypto currencies is Bitcoin. As different as the
problems are with different forms of money, the methods of problem solving
are equally as different. Problem resolution methodology is a practice
useful to any who are engaged in establishing or working with different
With fiat matters, decisions come from the central banks and are suited to
the best benefit of the owning banks. Precious metal money decision making
is the bullion banks and the larger mining institutions. Bitcoin in
contrast is largely without structure. It began with a bunch of hobbyists
and some companies have grown up around it. This presents some unique
challenges with regard to decision making. There is no one in charge, no
one to decide, with Bitcoin decision making is up to all of the individual
participants in the peer to peer open-source community to decide what
software to run and what to decide with regard to updates.
There are some things about Bitcoin that just can not change or else it
stops being Bitcoin. These are described here:https://en.bitcoin.it/wiki/Prohibited_changes and
include things such as changing the total amount of Bitcoins emitted and the
emission schedule through the rewards to Bitcoin miners. These things are
immutable, but there are many issues that do need addressing and require a
consensus to move upon any of them. (You may have heard some famous or rich
Venture Capitalist suggesting otherwise recently, they are simply wrong.)
Of these issues, some of the more contentious, necessary, and problematic
are those that would cause what is called a “Hard Fork” in the code. There
is a list of these issues described here: https://en.bitcoin.it/wiki/Hardfork_Wishlist and
at the top of the list is a matter of the maximum block size. The size of
blocks in the block chain is one of the fundamental limits on the
scalability of Bitcoin. With current block size, Bitcoin can only handle
about 7 transactions per second worldwide maximum. By comparison, Visa
currently handles about 2000 transactions per second average.
As you may know from previous articles here, Bitcoin incorporates an
innovative mechanism for managing the ledger of who has which Bitcoins and
which Bitcoins are transacted from one account to another called the block
chain. Blocks of Bitcoin transactions are “mined” by solving a
cryptographic problem which includes the transactions of the current block
and the previous block and a random number. This problem is solved
trillions of times per second and the solution with the most leading zeros
is the computer that “mines” the block of transactions winning the
transaction fees as well as some freshly minted Bitcoins. Currently the
transaction fees make up only about 1/300th of the total reward.
Most of the reward for mining is the new freshly minted Bitcoin.
Over the coming decades this ratio is expected to change because the freshly
minted Bitcoins are scheduled to decrease about every 4 years by half, and
as transactions increase in number there should be increasingly more fees.
BUT, there is a problem with this, in that the Bitcoin protocol includes a
quick fix that Satoshi Nakamoto added in the early days limiting the maximum
block size to 1MB each in order to prevent the block chain from growing too
quickly in size. In order to change this a few things are needed for a
consensus. This process of this decision has been ongoing for a few years
(whilst other problems are being addressed), and with no consensus reached
Some Argue that “No Solution” Is the Solution
There are a
number of advocates for not changing the block size at all. There are
arguably good reasons for not changing it. As a person who goes by the
moniker of Cascadian Hacker points out
some notes on the matter the reason for the 1MB block size limitation is
to protect the block chain against some types of attacks.
Others cite some
specific use cases of Bitcoin and its compatibility with other technologies
that could become impractical with larger blocks. One of these other
technologies is The Onion Networ (TOR) which provides a layer of network
privacy to all internet transactions that use this technology. It was
invented for use by the US Navy but was made public to encourage general use
among internet users that seek additional privacy.
This is the position of the
keep bitcoin free people, which includes Peter Todd, another of the
Bitcoin Core developers.
If There Is a Solution, What Is The Right Solution?
So what is needed to get consensus amongst all the Bitcoin hobbyists in
order to make a change? Like all decision making, it takes a confluence of
When/What/How being defined and agreed. Narrowly it is simple, there is an
update to the software code, but in broad terms the general population would
need to have incentives to run this new code. To accomplish this requires
the belief that it is not only better, but significantly better enough that
a switch is warranted, and also sufficient others will also do so that (in
the cases of a hard fork) there will be a network systems.
The effects of these hard forks are best implemented well in advance, to
provide for sufficient opportunity for everyone that is going to upgrade to
learn of the need to do so and accomplish it. Additionally there is a great
deal of dependent software that use the Bitcoin network as an input, so
fundamental changes to it can have a ripple effect on many other software
packages. Managing this with Bitcoin is typically done through using a
“block height” trigger.
As mentioned previously, the block chain is made of blocks of transactions,
each block building on the one before it. The block height is just the
sequential numbered block, each one an average of 8-10 minutes after the
previous, so a change in a parameter can be set so that it changes after
some future block height. This choice of how far in the future to put this
change will have to be sufficient for enough people to agree to run that
different version of software, and also to deploy it to their systems. The
consensus on this it will provide the “when”.
The block chain upon which Bitcoin is based, is a marvelous invention
combining computer science, economics’ game theory, and provides a
continuous unchangeable ledger of all Bitcoin transactions. This set of
data accumulates growing larger with each block. If it grows too quickly it
will become more expensive and difficult to manage this data set. However
what may be more tragic would be if Bitcoin commerce were delayed for lack
of available space in a block. With each transaction there is an optional
fee that can be paid to the miners to encourage them to include that
transaction in a block. Currently the custom is to add .0001 Bitcoin which
is about four cents for a transaction. Including a transaction in a block
increases the risk that if another competing miner finds a block and it
becomes a race to see which will transmit their block first that it may take
a fraction of a second longer to transmit the larger block. Having a
transaction included in a block is this a resource the miners are selling
The Bitcoin Foundation Solution
The maximum block size should not be an economic issue though some
artificial constraint on Bitcoin commerce. There is a good blog post on Blocksize
Economics by Gavin Andresen of the Bitcoin Foundation and he has also
proposed a solution, which is to increase blocksize along the historical
trend of bandwidth growth called Neilson’s
Law and extrapolated into the future. This solution has a very good
chance of reaching consensus, as it is the simplest solution that could
possibly work. I however am in the dissent, and hoping for better than this
Or the Better Solution
We should not need to extrapolate on past historical data to forecast the
future. Not when we have this block chain technology that will be gathering
data on the transactions into the far distant future of Bitcoin. We ought
not have to guess at what the future will bring with regard to technology
because if Bitcoin is there, the Bitcoin block chain will be there gathering
this data for us. Further this proposal does not resolve the fundamental
problem of the current setting, which is that it does not accommodate what
future technology may allow. If Bitcoin is to make a fundamental change
requiring a hard fork, it should do so either only in a crisis that
necessitates it, or it should fix it in a way that will not require
re-fixing again and again.
Milton Freidman Agrees with Me on This.
Freidman (one of the greatest economists of modern history) believed that
Reserve should be abolished, but if the money supply was to be
controlled, (as the Federal Reserve does today) that the preferable way to
do it would be with a mechanical system that would keep the quantity of
money increasing at a steady rate. Bitcoin does just that. Therefore this
may be a watershed moment for Bitcoin. By introducing a changing parameter
that is a component of the money supply, and proposed to be adopted by the
Chief Scientist of The Bitcoin Foundation, Bitcoin runs the risk of undoing
Milton Friedman’s dream by re-creating a new Bitcoin Federal Reserve type
Central Banking institution. Just like the Federal Reserve which is owned
by the largest banks, the Bitcoin Foundation is a member organization whose
board is primarily the largest banking type organizations for Bitcoin. The
largest Bitcoin businesses and Exchanges have historically formed this
board. Several of the early board members have resigned due to problems
with their governments, and been replaced by new people. We cannot say who
the future members of this institution may be, but this sets a precedent
that will likely have to be repeated.
The way to avoid this would be to fix the problem in a way that would not
have to be fixed again later, and this is what I advocate. That we use the
data of the block chain, the size of the blocks, or the fees paid to the
miners, or a formula combining these, to determine what the environment of
the future economy will require.
This would not only be a better solution than that proposed by The Bitcoin
Foundation, it would also be a solution that would not need to be
re-adjusted again and again through history, and de-risks the issue of
centralization. This makes the proposal a fundamentally better solution, as
it would not be managed in the way that Milton Freidman was looking to
Bitcoin is reaching a point where a decision will ultimately be needed; the
average block is now about a third of the maximum block size. So there must
be a change, and a consensus will need to be reached in order to avoid the
block size limitation.
This may just be a time where “good enough” just is not good enough.
is a Fellow of The Business Forum Institute and
is currently the Security and Authentication Capability Manager for
British Telecom Global Services. He holds a B.S. degree in
Psychology & Cognitive Science from the University of California Los
Angeles and studied Law at the University of San Diego Law School. Prior to
joining British Telecom he was
LAN/WAN Technologist for William O’Neil & Co.
publisher of Investors Daily; and was Senior Consulting Engineer, (Global Security, Security Development &
Legal Dept) at Infonet Services Corporation. Joseph is a Certified
Information Systems Security Professional (CISSP) and a Certified
Checkpoint Systems Engineer (CCSE) He is a recognized Network Design
Architect for fault tolerant globe spanning networks and applications
and Member of the Board of Directors for International Networking
Nothing you read in
The Business Forum Journal
should ever be construed to
be the opinion of, statements condoned by, or advice
from, The Business Forum, its staff, workers, officers, members, directors, sponsors or shareholders. We pass no opinion whatsoever on the content
of what we publish, nor do we accept any responsibility for the claims, or
any of the statements made, within anything published herein. We merely
aim to provide an academic forum and an information sourcing vehicle for
the benefit of the business and the academic communities of the Pacific States of America
and the World.
Therefore, readers must always determine for themselves where the statistics, comments, statements and
advice that are published herein are gained from and act, or not act, upon such entirely and always at their own risk. We
accept absolutely no liability whatsoever, nor take any responsibility for
what anyone does, or does not do, based upon what is published herein, or
information gained through the use of links to other web sites included
Please refer to our:
Beverly Hills, California, United States of America
Copyright The Business Forum Institute - 1982 - 2015 **
All rights reserved.
The Business Forum Institute is not responsible
the content of external sites.