This Coindesk article identifies Bitcoins “Biggest Systemic Risk” according the CEO of Coinbase:
“Brian Armstrong, CEO of bitcoin exchange service Coinbase, said Friday that he believes the Bitcoin Core team, the development team that oversees work on bitcoin’s software, may be the biggest systemic risk for the bitcoin network.”
More of this article is below, but first it is important to recognize that this is only one of the systemic risks to Bitcoin. The Mercator Advisory Group Research Note “How Many Sidechains Can Bitcoin Economics Support?” published September 9, 2015 also identifies the operators of Bitcoin as a significant area of risk, however the Research Note went further and identified several additional areas of systemic risk, each of which risks damage to the delicate balance of the recursive Bitcoin ecosystem. This interdependent ecosystem tightly couples 1) the bitcoin value and the fees paid for transactions to 2) the activity of Miners that establishes 3) the Bitcoin trust model, which in turn is critical to 4) creating and maintaining market confidence in the value of bitcoin (and so we are back to #1 above). Any failure of this ecosystem will have severe consequences for Bitcoin. Now back to the article:
‘He went on to write:
“The conversations initially focused on various compromises that could be made to kick the can down the road on scalability. But as the conversations went on, I became less and less concerned about what short-term solution we pick because I realized we all had a much bigger problem: the systemic risk to bitcoin if Bitcoin Core was the only team working on bitcoin.”
From there, Armstrong details his concerns with the Core team. Some of them, he writes, “show very poor communication skills” or “lack maturity”, which he argued has kept other developers away from bitcoin.
He also drew contention with what he characterized as a preference for “perfect” solutions over “good enough” ones.
“If no perfect solution exists they seem OK with inaction, even if that puts bitcoin at risk,” he wrote.
Lastly, Armstrong criticized the Core team’s overall position on scaling the bitcoin network, writing:
“They seem to have a strong belief that bitcoin will not be able to scale long term, and any block size increase is a slippery slope to a future that they are unwilling to allow.”
According to a list included on the Satoshi Roundtable website, the group of Core contributors present at the gathering included Matt Corallo, Luke Dashjr, Alex Morcos and Peter Todd.
‘Worst-case scenario’
Armstrong used the blog post to highlight a scenario in which, following the upcoming halving of the bitcoin network subsidy – instead of producing 25 new bitcoins per block, only 12.5 bitcoins will be created.
Miner profitability will plunge, he argued, thereby driving some of them out of the network entirely.
“The implication of this is that we could see a reduction of hashing power on the network at the July halving date. Perhaps in the range of 10–50% (I don’t have a good way to estimate this, if anyone does please post it),” he said.
Acknowledging that the likelihood of this scenario is “unclear”, but he argued that any risk merits taking action to forestall any serious network disruption.
“But I also feel that there is no reason to risk it and it’s incredibly irresponsible to play things so close to the edge,” he wrote. “The network today, with 70% of blocks full, is already experiencing congestion issues and backlogs. Any reduction in hashing power will exacerbate the problem.”
In the context of this hypothetical scenario, Armstrong criticized Core’s push for Segregated Witness, a change to how signature data is stored in bitcoin transactions. He argued that it would essentially take too long for both Bitcoin Core and wallet service providers to draft new code to handle support for Segregated Witness.
In light of the risks, Armstrong wrote, such an approach would be “irresponsible and dangerous” in light of issues that some transactors have experienced trying to broadcast transactions to the bitcoin network.
According to some observers, such activity adversely affects Coinbase’s business model, as users are unable to deposit or withdraw funds in a timely fashion, which in turn impacts the overall customer experience.
Push for Classic
Armstrong’s solution: an immediate network shift to Bitcoin Classic, a competing bitcoin implementation that supporters say would keep the network cheap and accessible by, in the short term, raising the maximum size of transaction blocks from 1 megabyte (MB) to 2 MB.
He wrote:
“This is the most realistic short-term scaling solution that will buy us time. My belief is that we will either be doing this upgrade now (when there is sufficient lead time for everyone to prepare), or we will be doing it in the midst of an emergency down the road. It is not a matter of if, but when.”
Armstrong has voiced his support for the project in the past, and his company hosted a media conference call featuring developer Gavin Andresen after last month’s Classic release. Armstrong was also the first bitcoin business executive to indicate support for Classic on the project’s GitHub page when it launched in January.
He reiterated past calls for competing teams working to develop bitcoin implementations, writing that Classic is “simply is the best option to mitigate risk right now”.
Armstrong then pushed for the creation of a “new team” to guide development of bitcoin. He wrote that the preferred team would be one that is “welcoming of new developers to the community, willing to make reasonable trade offs, and a team that will help the protocol continue to scale”.
He suggested that Coinbase would play a role in the creation of this new group.
“In the future, we will need to create a new team to work on the bitcoin protocol and help bitcoin become a multi-party system to avoid the systemic risk of core being the only team working on the protocol,” he wrote, adding:
“I hope to have an update for you on that in the coming months.” ‘
Overview by Tim Sloane, VP, Payments Innovation at Mercator Advisory Group
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