Guest post by Bitcoin Author, Speaker, and Investor Max Wright.
I have met and interviewed Mike Hearn a number of times at various crypto currency events. He has been one of my favorite bitcoin advocates over the past few years and sadly yesterday he published an article on his blog declaring “Bitcoin is Broken”.
The article was such a bombshell that the New York Times picked up the story and most likely Hearn’s article was responsible for drop in bitcoin price of 10% in the following hours.
Hearn has always been a straight shooter and that has made him a lot of enemies but personally I have valued his directness. In almost every interview he is quick to remind you that Bitcoin is an experiment and that you should only play with it money that you can afford to lose. Wise words indeed.
Having said that he quit his job at Google 6 years ago to dedicate himself full time to furthering the cause of bitcoin so there was no question he was behind the project with all his might during that time. So what brought about the change of heart?
In Hearn’s article he cited a 4 main reasons why he decided to walk away from the bitcoin ecosystem.
- The mining power has become centralized
- The miners with the power to make decisions are making bad decision (namely BIP 101)
- The blockchain will soon be at its capacity and will not be able to grow further without BIP 101
- The flow of information is no longer decentralized but rather curated by moderators.
I have been saying for along time that Bitcoin is trending towards centralization. Hearn said that recently he was at a conference and over 50% of the worlds hashing power was controlled by 5 guys up on stage. And that is raw hashing power. If you think about pools it is even more centralized.
This is definitely a significant problem. I would argue that is bitcoin is not decentralized then it is nothing. That single fact is one of its most appealing attributes to many, especially those in the libertarian camp.
But I think it is Hearn’s second point that is even more telling. He explains that the miners are incentivized to do something that is against the benefit of Bitcoin. This is a perverse incentive and he is correct.
I have argued a number of times that this is in fact a huge design flaw of bitcoin. The challenge is that miners are not stake holders. They are not the ones who hold bitcoin first and foremost although many of them do of course. They are first and foremost miners. For the vast majority of decisions about the protocol this works out fine because for the most part what is good for bitcoin is good for miners. But where a disaster happens is on those few occasions when what is good for stake holders is not god for miners.
I often use this analogy Imagine a night club where the bouncer has all the power the owner normally has. He can set drink prices, Hire and fire DJ’s etc. For the vast majority of decisions what is good for the nightclub is good for the bouncer. The bouncer wants the bar to be popular so he can get tips to let people cut the line, the better the clientele the better the tips etc.
If the bouncer will most likely make a lot of decisions identical to the nightclub owner if they have the same skill set. But every now and again a decision comes up where the bouncer will sensibly choose differently. For example: How much should the bouncer get paid? When this issue comes up the bouncer will not act in the best interest of the nightclub but rather pay himself a high salary.
This is the problem with the bitcoin protocol. The miners are the wrong people to have the power. they are the bouncers. they secure the network. It is the stake holders, the ones who actually own bitcoin who should decide. One satoshi. One vote.
That is and has always been the way a cryptocurrency should work. Can bitcoin pivot and come up with such a system. Well only time will tell but the course has been charted already by at least one alt coin that I am familiar with. Bitshares has successfully implemented that system some time ago