US vs. China: The 20 MB Miner War That Could Destroy Bitcoin (Op-Ed)

The world’s two largest economies; two of the three most populated countries on earth; much more importantly: the world’s two largest Bitcoin mining communities locking horns in a struggle for power and control over the Bitcoin blockchain.

The Far East versus the West; the United States versus China: a classic battle of global superpowers that may not have a winner, but may take the world’s first global currency down in the digital crossfire.

Possible implosion

The issue of Bitcoin block size is coming to a head within a matter of days. Could a battle over block size between Western businesses and Eastern miners leave Bitcoin in danger of self-destruction?

Mike Hearn, a Bitcoin core developer, says it is highly unlikely, but yes, it is possible. Speaking to Epicenter Bitcoin in episode #82 recently, Hearn laid out the potential scenario for an implosion of Bitcoin, however unlikely.

The issue lies in the need for block size maintenance to prevent a logjam of transactions within the next year. Bitcoin blockchains can currently only handle seven transactions per second, and at current transaction rates, this will exceed the current 1 MB block size sometime next year. A raise to 20 MB has been proposed by core developers Hearn and Gavin Andresen.

The problem with the tentative plan of expansion is the overall effect on the mining industry, particularly in China, where reportedly 80% of all global Bitcoin trading volume takes place. Margins are thin after a year of price correction since the Mt. Gox collapse, and the vast majority of major Chinese miners and exchanges are in opposition to a massive increase in block size. The 20-times larger blocks would go from almost full to mostly vacant, causing some short-term issues for miners. Hearn explained:

“The worst-case scenario is the economic majority is in favor, but the hash-power mining majority is not. That would be a very messy situation for Bitcoin. If the needs of the wider majority diverge from what the miners in China want, who wins? In a worst-case scenario, if the miners and the rest of the Bitcoin community end up in some full-fledged war that would wreck Bitcoin.”

Worst-case scenario

Bitcoin miners in China have relatively poor Internet access compared to the U.S., so Western miners and businesses may require more block space than China to run transactional operations. The bulk of Bitcoin businesses reside in the West, and the bulk of bitcoin miners are in China, creating a War-of-the-Worlds scenario.

This could generate a “fork” in the blockchain, with the 20 MB blocks starting a new chain. Businesses would have to be convinced to follow it and get off the original blockchain that has been in service since 2009. The original blockchain might remain at 1 MB indefinitely.

Theoretically, the strength behind both chains would leave a fracture within Bitcoin that may never be repaired. With both chains agreeing to disagree, this may cause irreparable long-term damage to the demand and value of the entire protocol. Again, this is a worst-case scenario, but still possible.

Hearn also states in the interview that a Bitcoin XT update with miner voting rights will be sent out this week. It will allow miners to vote for or against the 20 MB block size increase. Hearn believes a majority of miners and users are in favor, according to his preliminary estimates and discussions with principles, but the voting outcome will confirm the facts. If a clear majority shows for the block increase, he said, it will begin to propagate shortly after that.

Hearn worked for seven years managing network capacity for Google, before becoming a core developer for Bitcoin, so he has ample experience in this field at the highest level. He mentions speaking to Satoshi Nakamoto about the 1 MB block limit early on in Bitcoin’s development, and says that Nakamoto believed the 1 MB block size was only needed temporarily, not as a long-term governor.

Given the seasonal influxes of bitcoin transactions during the winter, Bitcoin will be essentially at the maximum network capacity early next year, according to Hearn. At that point, transactions may take hours instead of minutes, and resending of duplicate transactions may exacerbate the logjam effect, if not planned for in advance.

Increase, but by how much?

Genesis Mining — with mining farms in Europe, Asia and the U.S. and headquarters in Hong Kong — conducted a poll of their miners on the 20 MB block size issue earlier this month. They found an overwhelming majority, 87%, agreed with the proposed 20 MB block size increase.

According to Genesis, the disadvantage of bigger blocks is that they will destroy the market for transaction fees. If block space is not scarce, a market for transaction fees will not be established. Thus, the block reward might dwindle in the long run.

Also, requirements for full nodes will increase, requiring bigger blocks with much more bandwidth, making it harder to run a full node so some short-term issues would be expected.

-- Image provided by Genesis Mining

Increasing the block size will increase capacity that is currently too low to support a global payment network. Current transaction amounts are not sufficient to support a massive global payment network. Transaction fees would become more expensive, catering only to larger settlements between large, centralized market players.

Greater block size will also increase the total transaction fees. Allowing many transactions in one block will increase the total amount of fees, which will be a benefit for miners in the long run.

My only question is not the need for a block size increase, but the amount of the increase. Bitcoin has shown steady growth in the number of transactions worldwide, so something has to be done to give it the capacity that it needs to grow.

How was 20 MB decided upon? And is it too much, too soon? Can the same be accomplished with an increase of 8 MB? A 20-fold increase is massive, and, in theory, I can understand the consternation amongst some miners. There is a price for progress, but both sides should work together on a resolution. There has to be a middle ground between the status quo and a 20-fold size increase.

Who is on the right side of history in this battle among national factions? Share above and comment below.