Bitcoin Rallies Sharply After Vote Resolves Bitter Scaling Debate

Bitcoin’s most abrasive fight is over, for now at least.

Bitcoin prices rallied more than 50% this week after a vote in favor of expansion by the computer operators who maintain the digital currency’s network, the so-called miners. On Friday afternoon, bitcoin was trading at $ 2,748, up 52% from Sunday’s low of $ 1,835, when fears about the vote’s outcome pushed prices down. The digital currency reached a high of $ 2,940 Thursday, near its high of $ 3,018 in June.

The rally was sparked by a breakthrough in bitcoin’s two-year-old “scaling debate” over how to expand bitcoin’s processing capacity. In its early days, it was a philosophical and technical debate, but it exploded into a rancorous, online argument over what bitcoin should be and who should control it. The disagreement so bitterly divided both sides – miners on one side, developers on the other – that they were willing to essentially split the digital currency in two and operate separate versions of bitcoin’s software.

For now, that’s off the table. Miners representing 99% of bitcoin’s computing power signaled overwhelming support, through an online voting mechanism, for a new piece of software that would sharply expand bitcoin’s processing power, without making any changes to the currency’s actual software.

This software, called Segregated Witness, or SegWit, was long-favored by developers as a solution, so the vote brings the two camps into alignment on this issue.  SegWit, and its adoption is a key component of a deal called the New York Agreement (where it was brokered) that would ostensibly end the scaling fight.

Before this vote, there were legitimate fears that each side would start running their own versions of bitcoin’s software, resulting in multiple currencies all calling themselves bitcoin.

Since bitcoin was launched in 2009, much of its code has been rewritten. One aspect of it, though, remains unchanged: the one-megabyte size limit on a “block” of transactions. Individual transactions are packaged into these blocks, and processed as a group, and the limit means bitcoin can handle about seven transactions per second. When bitcoin was younger and there were fewer transactions, this limit was not a problem.

It was always expected that the limit would be raised, but there was no clear way to do it without drastically altering other aspects of a network that was designed to run without a central authority overseeing it. One side, mainly led by miners and entrepreneurs, wanted to increase block size, maximizing bitcoin’s value as a payments network. The other side, largely led by developers, is more cautious and opposes drastic increases. They argue that larger block sizes increase operating costs for miners, which will drive out some and lead to centralized control.

Leaving bitcoin as is would result in a network geared toward only larger transactions, since the steadily rising number of transactions would be forced through the same narrow capacity constraints, leading to higher costs to users per transaction.

Essentially, it’s a fight over which of bitcoin’s two main functions – a means of exchange or a store of value – will be its primary function. As the debate escalated, there were increasing calls to simply split bitcoin in two, and let each side run its own versions of the software.

SegWit is designed to handle a larger capacity to process transactions. It does so, however, on what is essentially a separate network. It then bundles those transactions together and settles them on the main bitcoin network. Increasing capacity without threatening bitcoin’s core operating system essentially solves the main points of contention between the miners and the developers and allows both sides to claim partial victory.

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SegWit is just one half – and the less contentious half –  of the New York Agreement. Increasing the maximum block size is the other main proposed upgrade, and this issue could end up being the one that really does lead to a bitcoin split. Bitcoin’s core developers are opposed to it, and since larger blocks are more expensive to process – more data equaling more computing requirements – there are fears that miners, too, could ultimately reject it.

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