Spectators may be under the impression that it is uncertainty coming from China that poses the most threat to the Bitcoin ecosystem and market these days. Earlier this month it was reported by Bloomberg, Coindesk and others that the PBOC (China Central Bank) issued a second round of stark warnings to a dozen Bitcoin exchanges and companies, including the top three BTCC, Huobi and OKCoin. Bitcoin platforms are being told to enforce anti-money laundering and foreign exchange rules, with the PBOC making clear that:
“If the exchanges violated the above requirements, and if the circumstances were serious, the inspection team may ask the relevant departments to close down the exchanges according to law.”
The situation is apparently so serious that the major exchanges have announced that withdrawals are being suspended for up to one month.
Furthermore, following the first meetings held several weeks previously between the Central Bank and BTCC, Huobi and OKCoin, the Chinese Bitcoin exchanges quickly moved to implement trading fees. This followed many months of zero-fee trading facilitated by these exchanges, a feature which analysts suspected was being manipulated to spoof trading volumes.
That volume appears to have dropped by 95% and over on these major platforms appears now to provide evidence to support these claims.
Although this sounds bad enough, there is more uncertainty heading Bitcoin’s way, this time from a completely different source.
Transaction limits reached; fees increasing
As Bitcoin is adopted by more people the current transaction limit of roughly 7 tx/s is being proved not enough to meet demand. The mempool (transaction backlog) is frequently blowing up in size, with in the worst cases transactions taking days to complete.
Transaction fees are increasing as users pay more to push their transactions further up the queue, and overall the median time it takes for a transaction to be confirmed is steeply increasing.
Scaling the Bitcoin system so that it can handle more throughput has arguably been the biggest subject on the community’s agenda for over a year, and from the intense debate two major views on how to solve the problem are clear.
Segwit and Bitcoin Unlimited
The Bitcoin Core development team propose a solution commonly known as “Segwit”, which was originally presented in December 2015 and released as pull request 7910 in April 2016 (see previous article on Reddheads). On 27 October 2016 the new code was included in Bitcoin Core release 0.13.1.
By splitting the data included in Bitcoin transactions Segwit allows for transactions that take up less space on the blockchain, creating space for more transactions during any given time period and thus scaling the capacity of the Bitcoin network (by between 175% to 400%) while also laying the foundations for further types of scaling.
In order for Segwit and its scaling feature to become activated 95% of blocks from a given number (2016 blocks) have to be mined by miners signalling support. The problem is, statistics clearly show that a month after signalling began the percentage of blocks signalling Segwit support plateaued at a figure of around 25%. This has remained unchanged for the last three and a half months.
Furthermore, the other view on how to scale Bitcoin – a simple increase in the blocksize limit to allow for more transactions to be included in each block – appears to be gaining traction in the community. Bitcoin Unlimited, software that has been engineered to allow for increases in blocksize, is beginning to give Bitcoin Core a serious run for its money.
As stated in the above diagram, although Segwit needs 95% or mining power to activate, in theory Bitcoin Unlimited only requires 51% of mining power before it can radically change Bitcoin forever.
The unthinkable – a contentious fork
The idea that the Bitcoin network could split into two has been unthinkable ever since the genesis block was created on 3 January 2009. Fundamentally the system is designed to discourage in every possible way (technically and from game-theoretic points of view) a split in the network from happening, so as to maintain the single infallible distributed ledger and keep sacrosanct the total supply of coins. When the Ethereum blockchain split into two, resulting in the birth of Ethereum Classic, the project was ridiculed and harshly criticised by many in the Bitcoin community.
Now it looks increasingly likely that the same outcome is reserved for Bitcoin in the near future.
Once more than 51% of all blocks in the Bitcoin network are signalling miners’ acceptance of blocks larger than 1MB (Bitcoin Unlimited is configured to accept blocks up to 16MB in size by default) then the moment a block larger than 1MB is generated by any of these miners it would become the tip of the longest chain, causing all miners running Core software to fork onto a different chain – creating two incompatible Bitcoin blockchains.
It is a sign of how desperate the situation is becoming that this possibility is even being taken seriously by anyone in the Bitcoin community, but the idea that this might happen is becoming almost commonplace – no longer a question of if, but a question of when. For the first time in the history of Bitcoin there is a greater evil than splitting the network: the fact that the network is becoming congested to the point of failing as a peer-to-peer digital cash system. With no real hope for a fast solution from Bitcoin Core, Unlimited provides the community a way to take the destiny of Bitcoin into their own hands.
So, while many analysts are still projecting increasing adoption and a major rise in market value for Bitcoin in 2017, it looks as if a black swan has already appeared on the horizon.