In Defense of Bitcoin Gridlock

Thursday, November 9, 2017

Last week, I wrote about the Bitcoin scaling proposal known as SegWit2x, which proposed to double the size of the blocks storing transaction data to help the network handle more volume. I characterized SegWit2x as the scaling proposal that involved less centralization at the mining level, ironically, and compared it with another proposal called Bitcoin Cash. But in the last 24 hours, the coalition supporting SegWit2x fell apart, and the planned “fork” implementing the changes was cancelled. And the reason for much of the backlash against the plan was opposition to even this smaller proposed increase in the size of blocks.

My first reaction to the news this morning was to roll my eyes at the idealism of the Bitcoin community. Bitcoin must find a way to scale up the number of transactions it processes, yet every idea — including Bitcoin Cash — appears to ultimately be shot down as an attack on the purity of some sort of crypto-utopia. With no central ownership of the code running Bitcoin’s blockchain, the buck stops with nobody, and debate can continue ad infinitum.

But maybe this extremely messy governance structure is entirely the point. First, Bitcoin probably has a while to figure out big questions like scaling. Mass adoption of the cryptocurrency probably won’t happen for a long time. And given such time, the community can potentially develop solutions that are more elegant.

Perhaps even more importantly, central governance is exactly the problem with the fiat currencies Bitcoin aims to topple. Governments insist that central control is needed to take quick action in case of emergencies, but such control is far more often used to inflate and manipulate for political gain. Imagine if the question at hand wasn’t how to scale Bitcoin, but rather whether to increase the limit of 21 million bitcoins in the current code. Central control, especially by someone who stood to gain at the expense of ordinary people from such inflation, could make it happen in a heartbeat. A messy, large, diverse community of miners and developers would no doubt engage in endless contentious debate. But in this case, it would almost certainly be a good thing.

My main area of expertise in economics is industrial organization, basically the microeconomics of firms and markets. So I sometimes find myself thinking of Bitcoin or other cryptocurrencies as winning if they amass as much market share as they can as quickly as possible. But Bitcoin is a decentralized currency, not a business. Bitcoin’s messy governance structure might be protecting the currency, rather than preventing quick, strategic decisions.

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Max Gulker, PhD

Max Gulker joined AIER in 2015. His primary research areas are applied microeconomics and industrial organization. Max previously worked as an economist for Keystone Strategy, supporting expert testimony for antitrust and intellectual property litigation in high tech industries. Prior to that, he worked on financial litigation matters with NERA Economic Consulting. Max holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Follow @maxgAIER.