Bitcoin's future is more at risk now than at any time in its six-year existence.
A civil war has erupted over the best way to scale the digital currency to handle a larger number of transactions.
Every Bitcoin transaction must be verified by the Bitcoin miners and broadcast to the entire global network. This is done through the creation of blocks on the blockchain. One block is created about every 10 minutes, containing all the transactions from that time span.
But right now each block is just 1 megabyte in size, limiting the Bitcoin network to about seven transactions per second. By comparison, a credit card company like Visa Inc. (NYSE: V) has the network capacity to execute tens of thousands of transactions per second.
Everyone agrees that Bitcoin needs to be able to handle a lot more transactions per second to become practical. In fact, it's expected that Bitcoin will hit a wall next year or by 2017 at the latest if nothing is done.
The dispute is over how to do it. That's been argued within the Bitcoin community for months.
But the first real shot in this civil war was fired this past weekend by leading Bitcoin developers Gavin Andresen and Mike Hearn. On Saturday, they released a new version of the "node" software that plugs into the Bitcoin network.
As their plan hit the Bitcoin news outlets in the weeks leading up the release, uncertainty started to erode the Bitcoin price. The Bitcoin price is down more than 20% over the past three weeks.
Called Bitcoin XT, the software allows the creation of 8-megabyte Bitcoin blocks. It's a sort of patch to the current Bitcoin Core node software, using the same network and protocols.
Andresen and Hearn structured Bitcoin XT to become the official Bitcoin node software when 75% of users adopt it (but after January 2016). At that point, compatibility with the new 8-megabyte blocks will be required to make any transaction.
Here's why that's such a thorny issue...
Why Bitcoin's Future Hangs in the Balance
Those still using the older Bitcoin Core software will need to upgrade to Bitcoin XT to continue using Bitcoin. Or, in the nightmare scenario, they just keep using the old version amongst themselves, permanently dividing the Bitcoin community.
Opponents of Bitcoin XT have charged that Andresen and Hearn are trying to "take over" the decentralized cryptocurrency in contradiction of the intent of its creator, the mysterious Satoshi Nakamoto.
These folks also don't like the 8-megabyte alternative. They view it as a stopgap for a problem that needs a bigger, more comprehensive solution.
The impasse has put Bitcoin's future in doubt. If its users split apart now, with Bitcoin in its infancy, it will undermine trust and discourage adoption - potentially smothering Bitcoin in its crib.
To be sure, the technology of digital currency will survive - the potential of the blockchain is too great for venture capitalists and Wall Street types to abandon it.
But if the decentralized version that is today's Bitcoin implodes, the dominant cryptocurrency that emerges will probably be under the control of Wall Street bankers. And that most certainly contradicts Nakamoto's vision.
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With Bitcoin's future in the balance, one would hope that the warring factions can reach some sort of compromise, such as implementing Bitcoin XT for now while agreeing to work together on a better, more permanent solution to the scalability issue.
Now would be a great time for the real Satoshi Nakamoto, who no one has heard from in years, to step out of the shadows and rescue his baby.
Follow me on Twitter @DavidGZeiler.
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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.