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The Irony Of Bitcoin And The Future Of Shared Ledger Technology

The irony of Bitcoin and the future of Shared Ledger Technology

In earlier blogs, I talked about Bitcoin’s attempt to do away with trust in payments, and how it has a “snapshot” problem.  I now want to explore the implications of this for shared ledger technology (SLT) and suggest a way forward.

Bitcoin participants have realised the block size is too small to continue performing transactions in a timely manner, and so the Bitcoin network is gradually grinding to a stop.  But that is not the problem – the problem is agreeing what to do about it. Any solution causes a ‘hard fork’ – that is, all participants have to simultaneously upgrade to the same new solution, creating in effect two species of Bitcoin, existing and new. Currently the proponents of new Bitcoin (Bitcoin Classic) cannot convince the existing users of the existing Bitcoin (Bitcoin Core) to upgrade in sufficient numbers.

A range of clever solutions have been proposed by a range of clever people, but there is no obvious way to reach a consensus on what to do, even though something must be done.   This is a failure of governance.   With no trusted central party to manage evolution, Bitcoin is in trouble.

I sincerely hope the Bitcoin block size fork is solved.  This is the most ambitious financial engineering experiment since collateralised debt obligations and that one didn’t end up so well.  But ironically, the act of solving it will mean giving up on the core promise that we can do away with trust in payments.  Why?  Because some human decision-making structure trusted by the Bitcoin community will have to take control of the problem and fix it. 

This is not a one-off problem.  No network survives without change, so there needs to be a reliable, trustworthy way of orchestrating change, and at least for the time being, no technology can do that all by itself.    The good news is that there are a range of institutional solutions to this problem,  which have been tried and tested over the long history of network economics, going back well before computers existed.

In brief, history suggests there are three main models for managing network evolution:

  • Government control, where the network is so important to the economy the government steps in to manage it, or at least directs its ongoing evolution. 
  • Market control, where networks are run by a commercialised central owner, and each network competes with other similar networks.  Market forces provide the incentive to deliver a good service and improve it over time. 
  • Mutual control, where the participants in the network get together to agree how the network will be run, and how it will evolve over time. APCA itself is an example of this. 

With appropriate modifications any of these could work for SLT as well as they worked for earlier financial networks.  But I must declare a bias:  I think the distributed, shared, even libertarian nature of SLT is better suited to self-regulatory or mutual control.  What SLT needs is much better governance frameworks through which participants in the network have their say, but then make a collective agreement which binds them all.  This is never easy, of course, but it is the means by which so many financial networks endure and prosper over time as conditions change – Australian payments included.

Ironically, all we need to do is have some trust!

 

To read the full series, click below:

Part 1: We need to talk about Bitcoin’s trust issues: the founding principle of Bitcoin and why trust is a bad thing
Part 2: Why Shared Ledger Technology won’t free us from human fallibility: does a shared ledger really remove trust from the equation?
Part 3: The ‘Snapshot Problem’: how does a shared ledger react to a changing environment?
Part 4: Conclusion

Chris Hamilton

Chris Hamilton

Mr Chris Hamilton was the Chief Executive Officer of APCA from January 2006 to May 2016.

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