Bitcoin Has Avoided Tearing Itself Apart (for Now)
The cryptocurrency looked headed for a “hard fork”—which wouldn’t be all that different from how physical currencies have evolved in the past.
The world’s most popular cryptocurrency has been facing a challenging problem for several years now: it can only be used to make seven transactions per second. If it’s to become a truly useful payment system in the future, that’s nowhere near enough—but moves to fix the fault have caused huge and potentially troubling divides in its user base.
The issue is well known, but as the currency has continued to grow in popularity, it’s become an ever-increasing threat to its own success. As we’ve pointed out in the past, Bitcoin’s transaction rate is paltry compared with those of conventional payment systems like, say, Visa, which processes an average of 2,000 transactions per second and can handle up to 56,000 transactions per second if pushed.
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The good news is that Bitcoin’s underlying software can be updated to allow it to handle more transactions. The bad news? Bitcoin’s vocal user base has been radically divided about the best way to update the technology, in a clash that has in some cryptocurrency circles been described as a “civil war.”
Right now, there are several competing proposals. One of them, known as Bitcoin Improvement Proposal 148, would lead to a splitting—a “hard fork”—of the currency, so that there are two types of Bitcoin tokens in the future, on August 1. Among the other proposals is one called Bitcoin Improvement Proposal 91, which offers a more modest update in capacity to the currency but wouldn’t cause a split.
Proponents of Proposal 148 think that the improved performance is worth the fork. Those backing Proposal 91 worry that a hard fork will create competing marketplaces and potentially damage the value of one or both currencies.
Last week, Bitcoin miners began to signal support for Proposal 91—in other words, telling the network that they would like to begin using the update it describes—and exceeded the 80 percent threshold required to activate the proposal. That means the protocol is now activated and can be used by miners.
Still, the future of Bitcoin isn’t now set in stone. First, miners must actually use the software they’ve chosen to back: 51 percent of miners need to use Proposal 91’s software tweak for it to be adopted. Second, even if Proposal 91 does win, some commentators believe there’s still the chance of a hard fork happening at some point in the near future, as further updates might be required that bring about a similar situation.
Perhaps the biggest question to ask though is: does it really matter anyway? Here, some perspective is useful. Aaron Brown, a former managing director at AQR Capital Management, argues that physical currencies, including the dollar, have endured hard forks in the past. “It is the rule, not the exception, that currencies evaporate due to hyperinflation, government default or expropriation, or a losing a war,” he argues. “People do not use them because they have faith in their long-term survival, but because they can facilitate transactions today.”
In other words: people might feel very strongly about whether they want a fork or not, but in the grand scheme of things it might not make all that much difference.
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