As the Bitcoin price hit a new record high less than two weeks ago, long-time “hodlers” (an inside joke in crypto based on a typo in a drunken Bitcoin Talk forum message in 2013) celebrated on Twitter and Reddit with jokes about buying Lambos, and a clip from Wayne’s World where the main characters frolic and chant, “We’ve got $5,000! We’ve got $5,000!”
On Saturday, the price surged to yet another all-time high, $6,194.88, according to Coinmarketcap.com, and the market capitalization briefly exceeded $100 billion.
The reasons for the jumps are unclear, but unless there's negative news, every day, at minimum, the price is likely to rise because of new money coming into the system. Every day on Coinbase alone, about 35,000 new accounts open -- a figure that sometimes reaches 50,000 -- and thousands of people in South Korea and Japan, two countries where Bitcoin has taken off, are also bringing new fiat money into the system.
But the market’s rosy outlook is in stark contrast to the prognosis many insiders give to Bitcoin right now: The almost nine-year-old cryptocurrency is facing its gravest test yet. Whether or not it will survive, or in what form, is anyone’s guess.
On or around November 16, Bitcoin, the original cryptocurrency created by a novel technology called blockchain — a masterpiece of game theory, cryptography and, of all things, the age-old ledger — will split into two chains, each with its own set of coins. Hodlers should be happy about suddenly owning double the number of Bitcoins except for the fact that the question of which of these will be called the true Bitcoin is, for now, up in the air — and that could create turmoil in the market. Anyone willing to bet their money by selling one set of coins for another stands to take a financial hit — either because they’ve picked the wrong side, or, for technical reasons, because selling one set may actually cause a sale on both sides of the chain.
To be sure, Bitcoin has undergone such an event before. In August, a group split the chain to create a new form of Bitcoin that they called Bitcoin Cash. The two blockchains shared a transaction history up until the time of the split, giving anyone who held any number of Bitcoins until the so-called hard fork the equivalent number of Bitcoin Cash on the new fork. (A hard fork is a software change that runs the risk of splitting the blockchain into two, particularly if the community disagrees about it. If you follow Ethereum or cryptocurrency, you may have heard that Ethereum split into Ethereum and Ethereum Classic after a contentious hard fork.) However, many people who didn’t support Bitcoin Cash dumped their coins quickly, and, after initially spiking up to $900, the price has now deflated to about $300. But because Bitcoin itself didn’t suffer much from the split, many people believe that hard forks are no big deal. This one is different.
“At the last fork, it was very clear which fork was the minority chain,” says Olaf Carlson-Wee, founder and CEO of Polychain Capital, a $250 million crypto hedge fund. “With this fork, there is a battle over Bitcoin — the name and brand and which chain is the true Bitcoin. And no one is backing down.”
Since it became clear this hard fork would occur, Bitcoin Twitter has been a toxic stew of name-calling, trolling, bullying, blocking and threats, with some altercations spanning months with replies numbering in the hundreds. No tweet or Bitcoin Talk comment made by anyone is too old to dredge up and hold against them, no quote from Satoshi Nakamoto too out of context (or fictional) to be used to bolster one’s argument. The two Bitcoin subreddits — “hard forked” politically and ideologically long ago by censorship — espouse such different views, switching between them is like passing through the looking glass. In one forum, one side of the hard fork will certainly triumph, and the backers of the other side are vilified; in the other subreddit, the opposite chain will come out on top, and the first subreddit’s villains are heroes. Each side is so convinced it will win that a few insiders made a $4 million bet — though, being denominated in Bitcoin, the amount on the line now is $6 million.
How the first cryptocurrency reached this cliffhanger in its journey is a story that has been many years in the making and finally pits against each other what were strange bedfellows anyway: the cypherpunks who, years before Bitcoin even existed, developed the various technologies that finally resulted in the first true digital asset and the Silicon Valley types who popularized the cryptocurrency that now has at least tens of millions of users and a $100 billion market cap. Whether one side will prevail or their death match will destroy Bitcoin is anyone’s guess.
What Are They Fighting About?
At its most basic level, the question that divides the community is a seemingly trivial one: how to upgrade the network to accommodate more transactions at any given time. It has produced a contentious divide because the various ways to go about it all result in tradeoffs — and which compromises the different sides are willing to make reflect deep philosophical differences. Throw in accusations of censorship, racism, hypocrisy, corporate takeovers and deal-making behind closed doors, and the three-year-long battle has become a geek’s version of a soap opera — if soap operas were mostly about and watched by men.
Bitcoin transactions are grouped into blocks that get processed every 10 minutes. The amount of data that can be included in any given block is limited to 1MB — an arbitrary cap instituted early on to prevent spam on the network. However, transaction volume has been growing, making blocks full, pushing up transaction fees as people compete to ensure that their transaction makes it into the next block or one soon after. While everyone agrees the number of transactions that can be processed at any given time needs to be increased, there is no consensus around how.
If you’re newer to Bitcoin (like if you came here because of Scott Disick’s tweets or you’re a Wall Streeter newly interested in Bitcoin), you can think of the two most-discussed ways to increase the network capacity as two different proposals for enabling more stuff to fit in a house. One side says: Let’s organize the items in it more efficiently. Not every single thing in this house needs to be here. We can put some of it outside in the shed and better organize the objects that need to remain inside. (For future reference, in Bitcoin terms, this proposal is called SegWit.) The other side says: Let’s just make the house bigger. (This solution has gone by different names in the past depending on the size of the increase being suggested, but broadly, it’s known as bigger blocks, and is now most commonly denominated by the block size currently on the table: 2MB or 2x.) Both sides agree that eventually they need to build other, more technically challenging solutions, such as enabling people that want to use the house to whip up and close down temporary shelters for less important items but putting the most important ones in the house. (These are called second-layer or layer 2 solutions, with Lightning Network being one example, that use the Bitcoin blockchain as a settlement layer for transactions.) But these other solutions are a few years off.
However, the two proposals presented above aren’t the exact ones the community faces now. The first is the same as the first description above (SegWit), but the second is a compromise solution. That plan says, sure, we can organize things better but that’s only going to help us for so long. So, let’s better organize it and make the house twice as big. That will buy us the time we need to build the second-layer solutions. This plan is SegWit plus a 2MB block; hence, SegWit2x.
But because we’re talking about Bitcoin, we’re not just building one house. We’re making one house roughly every 10 minutes. And it’s not the same person or organization producing each house. The constructors can be anyone who buys the right equipment (in Bitcoin, these are called miners and are the people who own the equipment designed to solve the math problems that enable someone to add a new block to the blockchain) — and they can be located anywhere in the world, because after all, these “houses” (blocks of Bitcoin transactions) are virtual and live in the cloud.
The Philosophical Divide: Cypherpunk Vs. Silicon Valley
Here's where the philosophical differences start to come in: The first group says, actually, if we make the houses bigger, then it’s going to be a bit harder for the many people who make them. We might end up with fewer builders overall, which would be dangerous, because then the power of constructing these houses will become more centralized into the hands of fewer players. And if that happened, not only would they have too much power, but then a government or other hostile actor could target them in order to stop us from building houses altogether.
The second group says, but to go from a minuscule-sized house to a tiny one isn’t going to make it that much more difficult for the builders. Plus, organizing better will only give us more space gradually over time, while doubling the size of the house will give us space we really need overnight.
This is the debate that’s gone back and forth for at least three years. The efficient organizer side includes the cypherpunks who envision a world in which the barriers to anyone running their own Bitcoin node (like running your own email server instead of using Gmail) are low, keeping the network as decentralized as possible and therefore further beyond the reach of any government or control by any entity or group of entities. One of the people aligned with this group is Dr. Adam Back, CEO of blockchain-focused technologies company Blockstream. Back in the 1997, he created a precursor to Bitcoin called Hash Cash that employed an algorithm called proof of work (also used by Bitcoin) to help prevent spam on early versions of Internet discussion forums. Back became interested in subsequent versions of digital money that were released, including Digicash, which was programmed to only have one million units. Soon, he saw users “bootstrapping” a value onto it by selling T-shirts and other items whose prices were denominated in Digicash. However, it was dispensed by a central server and when the company went out of business, Back’s Digicash became useless. When Bitcoin came around, he wondered if people would again ascribe a value to it. And they have — a big one.
He says he chooses to align with the so-called small blockers or 1x side because Bitcoin’s “differentiating value is the payments that you can only make with Bitcoin” — transactions in which you don’t have permission to send money, where you’re concerned about transacting for privacy reasons or where the receiver doesn’t have a bank account. “These payments are differentiating payments. Those are the ones that are unique and some of those scenarios banks cannot compete with. So you have the space to yourself in a business setting — for regulatory reasons or because of the difficulty of obtaining bank accounts or because it’s used for programming an online service and it’s very complicated to get permission from a bank.” He pooh-poohed a 2014 headline-making wave of big retailers such as Overstock, Expedia and Dell accepting Bitcoin. “If you’re ordering a computer from Dell and live in the U.S, and give your street address, what’s the benefit? What’s unique and different? I’d argue there isn’t one.”
While he agrees the community should try to scale Bitcoin so everyone on the planet can use it, he says that will happen with so-called second-layer solutions such as the Lightning Network and the product his company is working on, side chains, in which transactions don’t occur directly on the Bitcoin blockchain but are settled on it. (Blockstream plans to sell side chains to enterprises, charging a fixed monthly fee, taking transaction fees and even selling hardware — a fact that has caused the big blockers to protest that Blockstream and the engineers it employs who are also Bitcoin core developers want to keep the block size small so Blockstream can profit. Back says this isn’t true because, beyond a certain point, side chains won’t really solve scaling.) Back says the community shouldn’t remove Bitcoin’s unique features in order to scale the network. Drawing out the other side's position to an extreme, he says, “If we’re going to get centralized into a big data center somewhere, as in the PayPal case, it’s basically guaranteed the company running it will get national security layers and black lists and all the things banks do and regulations will apply to them."
Back’s (and the cypherpunks’) vision for the future of Bitcoin is one in which users can run their own nodes and control their own private keys rather than entrusting a company. Right now, a number of startups manage users’ private keys for them, with the biggest being Coinbase — a Silicon Valley unicorn with backing from the New York Stock Exchange, Andreessen Horowitz, Union Square Ventures and Institutional Venture Partners, among others. “Using smart contracts, there are ways to get the security features of something like a custodian while having control yourself,” Back says before launching into the technical features of how it works.
The bigger block side includes several venture-backed startups who have brought millions of people to Bitcoin such as the two biggest wallets, Coinbase and Blockchain who have an estimated 30 million crypto users altogether. Other popular companies on this side include Xapo, which is one of the top five Bitcoin storage companies globally and whose CEO Wences Casares may be the entrepreneur most responsible for getting Silicon Valley excited about Bitcoin; Shapeshift, which CEO Erik Voorhees says sees 2-3% of the daily global Bitcoin transactions; Circle, which has backing from Goldman Sachs; Blockchain, whose investors include Lightspeed Venture Partners and Richard Branson; and the biggest investor in the space itself, Barry Silbert’s Digital Currency Group.
Their vision for Bitcoin is of a new form of money not dictated by any government or central bank but created and used by the people — lots of people, including traditional Wall Street financiers investing in Bitcoin, people in developing countries making $5 transactions, people in developed ones paying for $5 for a cup of coffee.
One of the largest Bitcoin holders, Roger Ver, who is a proponent of big blocks, says the small blockers “think it’s just an interesting science experiment, and they can have everybody running Bitcoin on their Raspberry Pi at home. For me, I want to build a currency that’s going to replace the euro, the dollar and the yen, and every other government-issued currency around the world, and in order to do that Bitcoin needs to scale massively.”
Vinny Lingham, a serial entrepreneur, shark on South Africa’s Shark Tank and current CEO and cofounder of blockchain identity startup Civic, also supports big blocks. (Civic uses the Bitcoin blockchain.) “If you want Bitcoin to stay with the cypherpunk mentality, you have a much smaller market for Bitcoin than if it goes mainstream,” he says. “Most people buying Bitcoin today don’t even know what the hell cypherpunk is. They don’t care. They don’t know what SegWit is. They don’t care.” He says Bitcoin companies have made everyday consumers aware of the cryptocurrency and driven the adoption that has pushed up the price — mostly to the benefit of the cypherpunks who got in early.
Shapeshift’s Voorhees says his interest in Bitcoin grew out of a realization he had during the financial crisis: how central banks debase fiat currencies, “stealing several percent of everyone’s money every year” — which he calls the biggest financial fraud ever perpetrated in the world. “I saw Bitcoin as the world’s first free-market form of finance, a way to have money and everything else built upon finance from the bottom up without banks or government money involved at all.” Like other big blockers, he is pragmatic about what he sees as a need for larger blocks. Because the second-layer solutions are not yet available, “blocks have been full and fees have been rising drastically. It’s now silly and stupid to send a bitcoin transaction less than $10 or $20 because the fee is $0.50 to $10 and that makes that prohibitive. When I got involved in Bitcoin, it was amazing to send Bitcoin anywhere in the world at almost no cost, like fractions of a penny.” He says high transaction fees have made Bitcoin uncompetitive and pointed to the examples of Counterparty and Omni, two protocols that, early on, enabled developers to launch tokens on Bitcoin. “Those became completely unusable when fees got so high on Bitcoin. What it meant was, instead of people creating tokens on the Bitcoin platform, now they just create tokens on the Ethereum platform. For someone who is dedicated to making Bitcoin a success, when I see that happening unnecessarily, I think it’s a problem — especially when you can solve it relatively easily by creating more space in the blocks while the layer two technologies get built. Those who are just working on the protocol or who work in areas where they don’t have actually customers or users, where they don’t see the software being used at scale, they don’t appreciate these issues. They don’t see them. They see things academically as opposed to how it’s actually used in the real world. Shapeshift itself is 2-3% of all the Bitcoin transactions in the world. We have a good idea of how this technology gets used by real people in the real world and, if you’ll notice, the companies that have the most users are all nearly unanimously in favor of a larger block and Segwit2x generally.”
Carlson-Wee, summarizing the divide between the cypherpunks and startups, says the 2x supporters want lower transactions fees for users. “The question is what’s the timeline and the urgency and how do you balance the need for that vs. the need to make it cheap to run a fully validating node. There is no technically right answer,” he says. “It just becomes an ideological battle about would you rather have transaction fees lower or would you rather have a fully validating node cost less, because there’s a sliding scale. When one goes up, the other goes down to some extent. People have different values and visions and so what is ultimately in my mind a pretty small technical debate about 1MB or 2 has become very politicized and ideological.”