Bitcoin’s Price In Limbo As Struggle Over Control Of Protocol Continues

Bitcoin Price and ChinaIn January of this year, one of Bitcoin’s insiders got upset and left the Bitcoin arena. In doing so, he burnt the bridge, so to speak, and will not have a place with Bitcoin in the future.

Despite his harsh words towards Bitcoin upon his departure, and despite his severing all ties, the battle for control over the Bitcoin Protocol rages on. Many people within the Bitcoin community believe this man had ulterior motives and was on the side of mainstream banks, and their desire to co-opt Bitcoin.

Forbes has the details:

For the last year, the Bitcoin community has been embroiled in what is, on one level, a technical debate over how to upgrade the network to accommodate growing transaction volume.

The fighting reached a head in mid-January, when a prominent developer declared the currency a failure and left Bitcoin. It promptly lost about 15% of its value and hasn’t recovered.

What has been called “the block size debate” (referring to the megabyte limit for each group of transactions processed) has now grown into a power struggle, with the group of volunteer developers working on the protocol splitting into several camps.

“This is not really about block size,” says core developer Eric Lombrozo. “It’s really about the control of the protocol.”

What seems like a technical debate on the surface is actually deeply informed by human politics and personality differences. But because major players in the Bitcoin ecosystem are based in China, the outcome of this dispute in the Western Bitcoin community is also being influenced by cultural gaps between the West and China of which they may be only vaguely aware.

On Wednesday, one of the new teams, which has christened itself Bitcoin Classic and is supported by Coinbase, one of the most well-funded companies in the space (the original team is called Bitcoin Core), released a new version of the software making another attempt at an upgrade, which Lombrozo called “a tactic to shift power away from the Core devs.”

However, by Thursday morning, two dozen people representing almost 20 Bitcoin companies, many of which would be directly affected by the software change (and accounting for more than half of the network powering Bitcoin) formed a group called the Bitcoin Roundtable and released a statement effectively rejecting the new software, at least for the time being.

In fact, one of the very companies listed on the Bitcoin Classic website as if it were a supporter, HaoBTC, disavowed this new version of the software in an email. Chief strategy officer Eric Mu wrote, “We did use the word 支持 (translated as ‘support’), in both the CEO’s statement and verbally when meeting with Classic lead developer Mr. Jeff Garzik in Beijing. However, that is by no means to say that we will switch our mining power to Classic.”

Mining is the activity that sustains the network — and it distinguishes Bitcoin from previous Internet applications. Bitcoin is often described as a way to transfer money peer-to-peer, without a bank or financial institution acting as a middleman. For this reason, the Bitcoin community likes to describe the currency as “trustless,” meaning that a user does not have to trust a third party such as a bank to ensure the proper processing of a transaction. However, using Bitcoin does in fact require trusting a collective third party: the miners who process the transactions by recording the most recent transactions onto a public ledger containing every Bitcoin transaction in history, copies of which are kept on computers around the world.

As David Evans, a lecturer at University of Chicago Law School wrote in a 2014 paper, “the fact that the public ledger is decentralized — so there is not a bank or a government acting as the intermediary — may have interesting political or social value to some. But from the standpoint of considering economic efficiency there is still an intermediary, just a very different sort of one.” He says Bitcoin is much more complicated than a typical open source project because it involves managing and incentivizing a large network of laborers — the miners — to process the transactions.

This is the problem that competing Bitcoin teams are running up against: no one camp can very easily wrest power away from the other without the support of the miners — and about three-quarters of their current network power is located in China.

At the present time, in spite of tirllions of dollars at their disposal, the western mega-banks, JPM, BAC, Citi, etc, cannot wrest control of Bitcoin due to the fact that the majority of Bitcoin mining is done in China, and the miners are the ones holding the control of the protocol.

This has been an interesting battle to watch, and one thing is very clear: the battle will continue to rage on. Meanwhile, the Bitcoin price is taking a breather to see which way the power struggle goes.

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