Decentralization: The Death or Salvation of Bitcoin?
Since its inception, Bitcoin’s main selling point has been its decentralization. Bitcoin claims to solve an age-old problem: how do you transfer value between strangers without a trusted, centralized, third-party? Early adopters have embraced Bitcoin as a superior alternative to centralized systems, which have shown themselves often to be unworthy of the trust given to […]
Since its inception, Bitcoin’s main selling point has been its decentralization. Bitcoin claims to solve an age-old problem: how do you transfer value between strangers without a trusted, centralized, third-party? Early adopters have embraced Bitcoin as a superior alternative to centralized systems, which have shown themselves often to be unworthy of the trust given to them. However, Bitcoin is now facing an existential crisis that tests its decentralized nature.
The ongoing blocksize debate – which is about so much more than the block size – reveals fundamental rifts between major players in the Bitcoin ecosystem. Who decides Bitcoin’s future? Core developers, miners, merchants, node owners, and regular users all have a legitimate stake in Bitcoin, and all in some way are involved in charting the future of the cryptocurrency. That is the essence of decentralization – no one person or entity decides Bitcoin’s direction. But what happens when these parties fall into opposing factions? The temptation arises to create a central authority who can make a final decision.
The Appeal of a Central Authority
This temptation can be very strong for those who only give lip service to decentralization without truly understanding it. One thing that needs to be remembered when it comes to decentralization: it can be very messy. One of the great appeals of dictators – the ultimate central authorities – is that they bring order. With one person in charge, so the argument goes, there is no need for ugly debates and fights over policy. Just let the dictator decide. A decentralized process has no such “luxury” (thankfully). But this means that disagreements that touch fundamental issues – like whether Bitcoin is primarily for settlement or payment – can cause the fight to get downright nasty. At this point, the opponents of decentralization become emboldened and argue that decentralized systems are inherently doomed for failure.
But what people often forget in these messy debates is that this is when decentralization is most important. If everyone is in agreement, there is no desire or need for a centralized authority. It is only when there are fundamental disagreements that a decentralized system is put to the test.
The Fracturing of Bitcoin?
On a more practical level, this is what we see happening right now in the Bitcoin ecosystem. For quite some time, many Bitcoin supporters have been arguing that the protocol needs to increase the 1MB maximum blocksize. What began as a few people turned into a tidal wave, as more and more people throughout the ecosystem believe a blocksize increase is necessary for the survival of Bitcoin and is needed now. Yet the Core developers have refused to increase the blocksize, arguing that a hard fork would be more damaging to Bitcoin. This has led to competing clients, such as Bitcoin XT, Bitcoin Unlimited, and, most recently, Bitcoin Classic, all of which will hard fork the protocol and increase the blocksize. Lately, bigger blocksize supporters have mostly coalesced around Bitcoin Classic, which modestly wants to increase the blocksize to 2MB.
How does decentralization resolve this debate? There are multiple possibilities:
- None of the alternatives to Core gain enough support, and the Core developers continue to control the protocol indefinitely.
- One of the alternatives to Core, such as Classic, gains a large enough level of support to initiate the hard fork, which causes a vast majority of users/miners/merchants/etc. to adopt the new hard fork. Then the Classic team would have control of the protocol.
- One of the Core alternatives, such as Classic, gain a large enough level of support to initiate the hard fork, but a sizable enough minority stay with Core and the two chains develop separately. In this case, there are actually two “Bitcoins” instead of one.
Decentralization is the Solution, Not the Problem
What is important to realize is that whatever the outcome, decentralization ensures that this is what the market wanted. Whether Core, Classic, or both Core/Classic, the end result is determined not by a centralized authority mandating it, but by actual users of the system – at all levels – making their voices heard by the choices they make.
During this process, it is likely that some people’s faith in Bitcoin, and any decentralized currency, will be shaken. The price might drop … even precipitously. But if the market really desires a decentralized currency, then eventually the price will rebound, and most important, more and more people will use the decentralized currency that is most wanted.
What do you think? Is Bitcoin’s decentralized nature a strength or a fatal flaw? Can a decentralized system get past fundamental disagreements? Let us know in the comments below!
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