DA oh…O! Bitcoin is forking

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19 August 2015
John Dwyer
Some days ago I alluded to the fact that there was a divergence occurring within the Blockchain ecosystem as different camps begin to emerge each of which is approaching the technology in slightly different ways. Some are permissioned whereas others are permissionless; some use a cryptocurrency whilst others do not; and so on. Well, it seems that there is now divergence in the Bitcoin Blockchain itself as reports emerge in recent days of different groups of Bitcoin developers having different views on the future of the Bitcoin network. The central issue is around block capacity of the network-the existing 1mb it is argued is insufficient for the scale-up of transaction processing envisaged and a separate version of Bitcoin, called Bitcoin XT, will have capacity of 8mb. Bitcoin XT will be incompatible with the original Bitcoin software as I understand it. There is a long debate between both the 1mb and 8mb camps as to why the capacity should or should not be changed. Frankly, it doesn’t really matter at this point. The central issue here is that the Bitcoin Blockchain is a DAO-a decentralized autonomous organization-which means that no-one controls it. Unfortunately, just as no-one controls it per se it can also mean that it can be uncontrollable. Decentralization is fine when you are talking about, say, the internet where the uncontrollable pace of growth of new websites and their variety are what contribute to the richness of the on-line experience and fosters innovation. However, something like Blockchain which includes a protocol, mining, cryptocurrency, and a huge ecosystem of developers, wallets, VCs, start-ups etc. dependent upon it means that interdependency can become very tricky. Which fork should a start-up follow? What about future forks? You get my drift. This DAO issue of Bitcoin and the potential for splintering is one which I have been talking to clients about for some months and is highlighted in my research. Bitcoin will likely face other significant structural choices around its protocol (capacity in this case but there are others down the road which are potentially even more critical) and driving consensus is likely to prove challenging and likely to create further forks in the road. There are a couple of critical takeaways here from my perspective:
  1. Anyone interested in blockchain technology should focus on companies that control their own destiny and are not dependent upon the collective decisions of others. The general idea is that start-ups must be able to pivot their business model as they see fit as opposed to having the protocol on which they are programming change on an ad hoc basis which may substantively impact their own business model.
  2. Secondly, a solid platform is required in order to support innovation of distributed ledgers/ blockchain technology and that platform, at least from a banking & capital markets perspective, is likely to come from fiat currency.
You will be hearing a lot more about #2 going forward…

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