Bitcoin developer Mike Hearn said the cryptocurrency has “failed” in a widely circulated Medium post this week, announcing an end to his involvement with bitcoin.
“The fundamentals are broken and whatever happens to the price in the short term, the long term trend should probably be downwards,” Hearn wrote. “I will no longer be taking part in Bitcoin development and have sold all my coins.”
His post, coupled with an announcement by bitcoin exchange and storage service Cryptsy that it was freezing customer withdrawals after allegedly losing millions of dollars in cryptocurrency in a cyberattack, appeared to contribute to a nearly 10% decline in the dollar value of bitcoin Friday.
Hearn was among the chief developers of Bitcoin XT, a controversial new version of the currency’s underlying code designed to boost the speed at which the bitcoin network could record transactions to the shared ledger called the blockchain. New bitcoin transactions are circulated first to a peer-to-peer network, then grouped by power users called miners into mathematical structures called blocks that form the permanent blockchain.
Only blocks that meet certain mathematical properties in relation to the existing chain are deemed valid, and miners are rewarded with new bitcoin and generally small transaction fees for assembling transactions into proper blocks. The requirements for a valid block automatically adjust based on active miners’ total computing power to ensure new blocks are added to the chain roughly every 10 minutes.
The problem, Hearn and others argue, is that blocks are also limited in size to roughly 1 megabyte—placing a limit on the number of transactions that miners can record in a given amount of time and creating the potential for a transaction backlog as bitcoin becomes more popular.
It also drives up transaction fees, Hearn writes, since bitcoin users are effectively forced to bid for the limited space available in the blocks that miners add to the chain.
“Once upon a time, Bitcoin had the killer advantage of low and even zero fees, but it’s now common to be asked to pay more to miners than a credit card would charge,” Hearn wrote.
He argues that a small group of bitcoin’s miners and developers have failed to accept Bitcoin XT or other proposals that would solve the block size issue, even censoring forum posts advocating for changes, or “forks,” to the currency’s Bitcoin Core software, and that the rising fees and transaction delays will make the currency untenable.
Still, others in the bitcoin world remain more optimistic about the currency’s prospects.
“I’m still worried about reliability of the network in the short term, which is why I’ve been so vocal on the block size limit issue, and which is part of the reason I’m supporting alternatives to Bitcoin Core,” wrote developer Gavin Andresen, who has contributed to Bitcoin XT and other potential new versions of the software, in a blog post of his own. “In the long run, I think everything will work out fine, no matter what happens with the block limit.”
Andresen argued that while the uncertainty and network issues might slow the adoption of bitcoin, engineers would manage to find ways around the block size limit, such as larger blocks called “extension blocks” used by some users on a voluntary basis, or supplemental networks or chains, to keep transactions flowing.
“I’d prefer a nice, simple, clean solution, but I’m old enough to know that most of the world’s great technologies are built on top of horrifying piles of legacy cruft, and they work just fine pretty much all of the time,” he wrote.
A recent pair of “Scaling Bitcoin” conferences led to a number of widely accepted proposals to enable bitcoin to handle a larger transaction volume, including some already undergoing testing, says Austin Hill, CEO of bitcoin startup Blockstream. That includes “segregated witness”—a controversial method suggested by Blockstream developer Pieter Wuille that would pull some block information into separate data structures to make room for more transactions without introducing incompatibilities with existing bitcoin software.
Regardless of the ultimate solution, Hill says, the need to handle increased transaction volume is ultimately a positive sign for bitcoin.
“I think one of the points that gets lost in all this is, yes, transactions are growing on the network because bitcoin is becoming more popular,” he says. “It’s succeeding.”
Similarly, venture capitalist Fred Wilson, of Union Square Ventures, wrote that he’s “not ready to declare that bitcoin has failed” in a Friday blog post. Wilson, who wrote that he’s invested in bitcoin-related businesses and owns some actual bitcoin, argued it’s more likely that the bitcoin mining community will accept a new version of the code sometime in 2016, along with changes to how decisions are made by the currency’s developers.
“But it could well take a massive collapse in the price of Bitcoin, breakdowns in the Bitcoin network, or worse to get there,” he warned. “And all of that could cause the whole house of cards to come crashing down. Anything is possible.”
Of course, even a complete collapse of bitcoin might not mean the end of blockchain technology as a whole. Even bitcoin skeptic Hearn, who previously held technical positions at Google and Andreessen Horowitz, announced in November that he was joining R3 CEV—a company working with dozens of major banks and tech companies to build and standardize blockchains for the mainstream financial world.
Since financial industry blockchains would be used by a relatively small group of players to record standardized financial transactions to a shared database, they could likely avoid some of the complexity of bitcoin, which is developed to be secure with large numbers of untrusted users, and move more quickly to implement necessary technical upgrades.
And while bitcoin is the most popular cryptographic currency, users could potentially move to any of a number of alternative currencies, popularly dubbed altcoins, should bitcoin fail altogether.
But, as Wilson argues, existing bitcoin exchanges, miners, and other companies working with the currency have a strong financial incentive to find a solution to keep bitcoin itself viable.
“These companies have a lot to gain or lose if Bitcoin survives or fails,” he wrote. “So I expect that there will be some rationality, brought on by capitalist behavior, that will emerge or maybe is already emerging.”
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