Bitcoin value dropped significantly in August, which proves that Bitcoin and crypto-currency markets are still developing. The value of Bitcoin is tumultuous to put it lightly, but dropping from $256 on August 17th to $200 on the 25th of August is pretty a big deal. Furthermore, this drop happened in opposition to what many may suggest Bitcoin should have done in response to China’s devaluation and the subsequent big losses in the U.S. economy. Driving this devaluation is fear, and the exposure of the most important development in the crypto currency movement: politics.
Right now a fascinating lesson is happening over at Bitcoin. Bitcoin is quickly reaching an inflection point where the technology will reach a maximum of transactions that it can handle in a given day. Unable to agree on a consensus, quickly enough for the proponents of BitcoinXT, supporters of change pulled their biggest programming weapon out and used it.
I refer, of course, to the fork.
Open source programming is kind of like a page on Wikipedia: Anyone can log in and contribute, while different levels have more administrative rights than others, everyone can see the underlying code and debate and work on making it better. However, sometimes there is a disagreement and this is when things get tricky with a leaderless movement or program. Previously, the lead contributors of Bitcoin have waited for consensus among themselves before rolling out any changes, and then waited for 95% implementation before fully rolling out those changes. Even this conservative model previously caused waves at times in the community including several incidents of blocks of transactions, one in early July, that were wrongly added causing some problems in transactions and some doubt about the system earlier this summer.
Not willing to wait out the normal internal debate among the lead Bitcoin Core developers, BitcoinXT developers posted a forked version of Bitcoin Core. The “fork” doesn’t have many immediate changes, but if implemented, will signal a shift in the way that consensus has previously been agreed to in the Bitcoin community.
The BitcoinXT change — the fork — is fundamental shift in Bitcoin’s blockchain from blocks of 1 megabyte to blocks of 8 megabytes that will double in size every 2 years. For now users of the BitcoinXT and Bitcoin Core forks are working on the same blockchain, and approximately 11.3% of the Bitcoin community is using the forked version of Bitcoin Core. However, if users of BitcoinXT have reached 75% of the network the change in Block size will happen.
The goal of the blockchain increase is to dramatically expand the amount of transactions that the network can process. But, the increase in size also makes it harder to mine Bitcoin and maintain a democratically built block chain. Proponents are betting on the forecast growth of computer and Internet speed, and opponents of the change are really just being more conservative.
A recent article in the Economist concluded by sniping, “Whether majority rule is the best way to run a system with Bitcoin’s pretensions is an entirely different question.” This statement fails to calculate the subtle differences in what is happening in the Bitcoin debate vs. what happens in the everyday life of our political system. While the forking is contentious within the Bitcoin community, the way that the debate or argumentative nuclear option of the fork was employed is completely public. In politics, the initial debate happens in public, but the final negotiations are often done behind closed doors. Now the developers of BitcoinXT have just done the opposite. They had their behind-closed-door argument, and they are now negotiating publicly. They are merely forcing a decision that all developers that want to continue working on Bitcoin will eventually agree too.
This political Bitcoin fight has caused investors to have more than 20 percent of their investments wiped away. The market will eventually recover, but this incident does show just how political our world is. Even something that relies on mathematical certainty, Bitcoin, is exposed to the ebbs and flows of political infighting. As a political spectator, this is a fun fight to watch, but this is real money. Hopefully Bitcoin or other crypto-currencies will eventually compete with our similarly mismanaged central banks. In order to do so, they need to figure out how to successfully avoid this type of political nuclear option in the future.
Charles Sauer, an economist, is the President of the Market Institute.
