Bitcoin, the coin of the people. But is it truly? Let’s first get back to how bitcoins work. The bitcoin is the first decentralized digital currency that you can send through the internet. Bitcoin goes directly from person to person, which means that the fees are much lower, you can use them in every country, your account cannot be frozen and there are no arbitrary limits. Although, this is what bitcoin promised at the launch in 2008 (WeUseCoins, 2011).
Bitcoins can be generated by everybody, this is called mining bitcoins. Each blocks of coins costs a certain amount of effort by your computer to create. The network makes sure that the bitcoins are produced at a predictable rate. When you are mining bitcoins, you are actually transferring transactions that other people do. So for comparison, banks store your transaction data locally at their servers. When you are a miner of Bitcoin, you are the server of bitcoin, you are storing transaction data and you processing transactions. As a reward you receive bitcoins. This mechanism, of decentralized storage and processing of data, is called the blockchain.
Sounds perfect doesn’t it? However, lately bitcoin received some criticism. And although criticism about the bitcoin is not uncommon, it was criticism from a very important programmer in the bitcoin world. A person who stopped with his job at Google to work for the bitcoin community, Mike Hearn (2016). After five years of working for bitcoin he stated that the digital currency is on the “brink of technical collapse”. Although bitcoin seems like the coin of the people, it is not really. Behind the bitcoin community there is a handful of people who control the bitcoin.
But first lets discuss the problem of the blockchain behind Bitcoin. The blockchain is full. There are so many transactions, and there is not enough computer power to process these transactions. Luckily, bitcoin has a mechanism to solve this problem, it increases the transaction prices and puts transactions in line to lower demand. However, this price is becoming so high that the bitcoin does not have an advantage over current currency methods like credit card and this approach also increased the normal waiting time for a transaction with Bitcoin to 10 minutes. Luckily, it is possible to solve this problem, by raising the limit of the amount of agreed transactions per second.
However two Chinese miners, who own gigantic servers, control more than 50% of the hash power, do not want this. They do not want the currency to become more popular, because that will make it harder for them to mine bitcoins, and thus earn money. Another problem is that when bitcoin becomes more popular and its transaction volume increases, only big companies are able to mine, because big companies can mine for a low price thanks to the scaling costs. This means that the whole advantage of being decentralized vanishes. Hearn concluded that “if growth threatens decentralisation, the bitcoin should not be allowed to grow”. This paradox created a civil war in the bitcoin community.
Conclusively, the bitcoin is controlled by a small group of people and the community is divided about a solution for the overloaded blockchain. Yesterday, march the 3th, within two months after Mike Hearn published his article, Business Insider published a post with the title: “Bitcoin payments around the world are failing as the platform is overwhelmed” (Price, 2016). Is this the beginning of the end of bitcoin? For me, it is clear, bitcoin (and maybe cryptocoins in general) cannot compete with existing financial systems. The true value of the Bitcoin is the blockchain mechanism, a technology where we going to hear more from in the near future.
Hearn, M. (2016) The resolution of the Bitcoin experiment https://medium.com/@octskyward/the-resolution-of-the-bitcoin-experiment-dabb30201f7#.4v6ffe2yv Retrieved: 4 march 2016
Price, R. (2016) Bitcoin is collapsing and payments around the world are failing, Business Insider, http://uk.businessinsider.com/bitcoin-is-collapsing-and-payments-around-the-world-are-failing-2016-3 Retrieved: 4 march 2016
WeUseCoins (2011) What is Bitcoin? https://www.youtube.com/watch?v=Um63OQz3bjo