Reports of the demise of Bitcoin appear to be premature
It's well known that bitcoin has died a number of times, most recently, it appears, in March this year, when a well-known software developer in the cryptocurrency community said he was throwing in the towel.
Developer Mike Hearn, who previously worked at Google, but left after seven and a half years to work full-time on bitcoin development, said in a post on medium.com that despite knowing that bitcoin could fail all along, 'the now inescapable conclusion that is has failed saddens me greatly'.
He would no longer be taking part in bitcoin development, and had sold all his coins.
Hearn said bitcoin had failed because the community had failed, and went on to say that what was meant to be a new, decentralised form of money without 'systemically important institutions' was now controlled by a handful of people, and the network itself was on the brink of technical collapse.
For the record, and at the time of writing, reports of the demise of bitcoin appear to be premature. On any day, there are thousands of transactions being processed and the market cap is around $6.5 billion. One bitcoin is worth around $415, and is traded on South African exchanges for around R7 400.
Hearn's complaint about the 'technical collapse' is about increasing the block size, a long-running and divisive debate within the community.
But before we get into that, why does this matter and why should we care about a seemingly obscure debate taking place among developers?
In part, it's about the promise of a new and transparent way of doing business, without an intermediary. Some even say that the blockchain - the technology underpinning bitcoin - is as important an innovation as the internet.
Force for freedom
One such person is Lorien Gamaroff, CEO of a South African company called Bankymoon, a blockchain solution and services company. Gamaroff spends many hours teaching others about bitcoin and the blockchain. When discovering a kindred spirit, his eyes seem to gleam with a kind of fervour.
"In the same way the internet became a force for freedom by making information freely available, the blockchain has the potential to do the same thing. It has the power to liberate people from the necessity of trusted third parties for mediating the transfer of the ownership of assets."
Listening to evangelists for bitcoin, it's hard not to be swept up in their enthusiasm; after all, it sounds so good on paper: a way to transfer digital assets (shares, money, etc.) to anyone in the world, instantly, at a fraction of the cost that banks and other institutions charge us.
This enthusiasm was palpable at the Bitcoin Blockchain Africa conference in Johannesburg in March. Hundreds arrived to hear about the latest use cases and, not surprisingly, there were plenty of bankers (Absa was a sponsor) and a handful of people from the Reserve Bank.
Marcus Swanepoel, the CEO of BitX, a bitcoin exchange platform, said at the conference that while he had no doubt that bitcoin would survive, it was currently going through 'growing pains', part of which was due to the blockchain size.
So why is the blockchain size so important?
Before we answer that, let's start with a bitcoin. A bitcoin is a single unit of measure, and there are 21 million units in the network. Each unit is made up of a hundred million 'satoshis' (named for Satoshi Nakamoto, the inventor of the currency), and all these can be used for transactions. Perhaps aptly for an inventor of a cryptocurrency, Nakamoto has never been identified, but after posting his paper, 'Bitcoin: A Peer-to-Peer Electronic Cash System', to a cryptography mailing list in November 2008, plenty of reporters attempted to find him. In any event, we still don't know who he is, or even if 'he' is a number of people.
The bitcoin blockchain is a distributed and shared database of all the bitcoin transactions that have ever taken place. Whenever there's a transaction, this information - typically a sender, receiver and an amount - is grouped along with other transactions and inserted into a block. The block - the size of which is limited to a megabyte - can only take a certain number of bitcoin transactions. When the block is full, it gets posted to the bitcoin network, where it's validated by every node in the global network.
There's a lack of practicality, because there's no benevolent leader, no CEO of bitcoin. The problem we have is that no one can make any decisions.Vinny Lingham
Blocks of transactions are processed by the network on average every ten minutes. This creates an artifi cial limit to how many transactions can be processed in a period of time. Currently, the limit is around seven transactions a second. When blocks are filled, new transactions must wait ten minutes before being included and processed in the next block. Due to the increased adoption of bitcoin as a currency, blocks are now coming close to reaching this maximum capacity. This has led some, such as Mike Hearn, to raise the alarm.
Hearn believes the blockchain size has not been increased because it's controlled by a handful of Chinese 'miners' (more about this later), who control the lion's share of the network's processing power. These miners are also not keen to increase the size of the block because this would mean even more compute power to process the blocks and keep their bitcoins flowing in.
Mining is the term used to refer to transaction- processing. Volunteers contribute computing power to the bitcoin network, which is used to secure and validate the transactions. They are incentivised by receiving new bitcoins for each block of transactions that are processed. Currently, the amount is 25 bitcoins. This amount will gradually decrease until the limit of 21 million is reached. At present, the processing power of the network exceeds the combined processing power of all the world's supercomputers and is the most powerful network on the planet.
So why not just increase the block size? As it turns out, it's complicated.
South African internet entrepreneur Vinny Lingham, now living in Silicon Valley, said at the bitcoin conference that he was glad it had taken so long to reach the point at which the block size was now being debated.
Lingham sits on the eight-member board of directors of the Bitcoin Foundation, a non-profit organisation that aims to increase the adoption and development of bitcoin and blockchain technology.
He told the conference in Johannesburg that among those in the bitcoin community, 'the smallest or seemingly mundane changes get discussed and debated to exhaustion, so therefore it's a pretty stable platform'.
"We don't make changes easily. There's a lack of practicality, because there's no benevolent leader, no CEO of bitcoin. The problem we have is that no one can make any decisions."
He said if bitcoin was a company, 'someone would have said a year ago, 'We're doing this, we're done, move on'. But it's not, and that's the problem.'
He said he believed the bitcoin board had 'largely' kept the network intact, but there has been a 'complacency' that had emerged among board members.
"There's a lot of debate going back and forth. The blocksize debate is massive," he said, adding that the debate needed to come to a head 'soon' and that Satoshi Nakamoto's decision to govern the block size to one megabyte, 'was to limit spam, not create an economic malaise'.
"Block size should never be a debate, as the point of bitcoin is to create an ultra-cheap transaction platform for payments, contracts and other use cases."
He said the foundation could either increase the block size or 'kick the can down the road'. "I'm okay with either, but we have to have a decision."
Referring to the rival cryptocurrency Ethereum, Lingham said it presented a 'major risk' to bitcoin, and that many financial institutions, and others, including Microsoft, were throwing in their lot with the newcomer.
Why are banks so interested in the blockchain? Using a distributed ledger, banks can speed up interbank transfers, without the need for a settlement or clearing house to get involved.
While there are different models being looked at, the banks would probably need to cooperate, perhaps on a private or consortium blockchain, which differ from public blockchains in that the controlling entities set the rules.
And as was the case with the internet in its infancy, the full ramification of this technology is not fully imagined as yet.Paul Nel, Barclays Africa
Paul Nel, head of Open Innovation, Barclays Africa, said crypto-currencies and the blockchain offered a means of marrying value and information.
"And as was the case with the internet in its infancy, the full ramification of this technology is not fully imagined as yet."
He said that Rise (www.thinkrise.com), Barclays' platform for open innovation and of which Absa is a participant, has already shown an interest in the potential of blockchain. He also mentioned http://www.everledger.io/, a Barclays Accelerator alumnus that uses blockchain to follow the provenance of diamonds.
Another example where blockchain could be used to great effect is in the clearing and settling of securities. This refers to the transfer of financial instruments, such as shares, and at the moment it takes a few days for the transfer between seller and buyer to take place. A blockchain-based system could certainly speed up this process.
Another area is remittance, now dominated by players like Western Union and MoneyGram, which Gamaroff says face becoming 'Kodak companies'.
For now, the Reserve Bank is still monitoring the developments around virtual currencies 'to inform any future regulatory approaches that may become necessary within the South African jurisdiction', according to a statement from Hlengani Mathebula, head of the group strategy and communications at the Reserve Bank, in 2014.
Mathebula said bitcoin has no legal status or regulatory framework, and poses risks for those who choose to transact with it.
Be that as it may, bitcoin - for all its bad press over the years - seems like it's here to stay and is seeing increasing adoption and acceptance. It also has the most stable blockchain, by virtue of the huge number of miners who validate and secure transactions.
There also seems to have been a spike in interest in the currency in particular, and blockchains in general. Aside from the slew of upcoming international conferences, you can also attend a course at South Africa's Bitcoin Academy, which runs courses for beginners, coders and advanced users.
Gamaroff has also come up with a real use case of his own, whereby people can donate money straight to a blockchain smart meter installed in a school. He's already installed one, in the Emaweni Primary School in Senoane, Soweto, and plans to install others in schools in every province, once a crowdfunding initiative is launched.
How it works is that the software on the smart meter accepts bitcoin, or other crypto-currency, and then converts it to rand. It then calculates the tariff and converts it into electricity. Donations thus go straight on to the blockchain and not to a third party. He presented the concept, via Skype, to a blockchain energy conference at MIT, and, along with some teachers, was at the school as the first bitcoin was paid for and 'fed' into the meter. The school lit up, to cheers in both Soweto and Boston.
This article was first published in the May 2016 edition of ITWeb Brainstorm magazine. To read more, go to the Brainstorm website.