Bitcoin Is Damaged Beyond Repair, and We Badly Need a Replacement

11,613 24 Loading

Not long ago, venture capitalists were talking about how Bitcoin was going to transform the global currency system and render governments powerless to police monetary transactions. Now the cryptocurrency is fighting for survival. The reality came to light on Jan. 14, when its influential developer, Mike Hearn, declared Bitcoin a failure and disclosed that he had sold all of his Bitcoins. The price of Bitcoin fell 10 percent in a single day on the news, a sad result for those who are losing money on it.

Bitcoin did have great potential, but it is damaged beyond repair. A replacement is badly needed.

Most currency and transaction systems today are opaque, inefficient, and expensive. Take the NASDAQ stock exchange, as an example. It is amongst the most technologically advanced in the world. Yet if I buy or sell a share of Facebook on the NASDAQ, I have to wait several days for the trade to finalize and clear. This is unacceptable; it should take milliseconds.

In Venezuela, citizens wishing to buy anything of value on supermarket shelves wait all day in lines to do so, because hyperinflation causes the paper currencies in their pockets to lose significant value every day. When migrant workers there send money back to their families in places such as Mexico, India, and Africa, they are gouged by money-transfer companies—paying as much as 5–12 percent in fees. And even in the United States, payment processors and credit-card companies collect merchant fees of 1–2.5 percent of the value of every transaction. This is a burden on the economy.

Bitcoin was born with serious flaws. It was unregulated and provided anonymity, so it rapidly became a haven for drug dealers and anarchists. Its price fluctuated wildly, allowing for crazy speculation. And, with the majority of Bitcoin being owned by the small group that started promoting it, it has been compared to a Ponzi scheme. Exchanges built on top of it also had severe security vulnerabilities. And then there were the venture capitalists who got carried away. Several of them purchased considerable coinage and then began to hype it as a powerful disruption that could underpin all manner of financial innovation, from mobile banking to borderless, instant money transfers. They also poured millions of dollars into Bitcoin start-ups hoping to reap even greater fortunes.

But Bitcoin was not ready for primetime. Hearn’s criticism has laid bare the nightmarish reality—a list of negatives that is both long and frightening.

Chinese Bitcoin miners control more than 50 percent of the currency-creation capacity and are connected to the rest of the Bitcoin ecosystem through the Great Firewall of China. This slows down the entire system because, as Hearn explained, it is the equivalent of a bad hotel WiFi connection. It also gives the People’s Army a strategic vantage point over a global currency.

The Bitcoin distributed network can process only a handful of transactions per second. That causes unpredictable transaction-resolution times and other behaviors that one really does not want as part of a monetary system. Bitcoin fees can, at peak times, exceed credit-card fees, for example.

As if all this weren’t bad enough, the Bitcoin community appears to be engaged in open civil war. Its members have been censoring debates and attacking each other’s servers. A tiny committee of five core developers that controls the Bitcoin codebase has become the Star Chamber that guides the future of Bitcoin.

This has been a severe blow to the reputation—and wallets—of VCs. Yet some of them are still staunchly defending Bitcoin.

It’s time to admit that the current Bitcoin needs to be scrapped and to take advantage of the innovations behind the technology that underlies Bitcoin, the blockchain. The blockchain is a transparent ledger of transactions—concurrently hosted on numerous computers around the world—allowing the creation of digital currencies and virtual banks. Implemented correctly, it will, I believe, prove to be a better transactional and verification model than we presently use for the global financial system and for many other types of activities such as voting, public registries, provenance of works of art, and real-estate transfers.

From Bitcoin’s failures, we have learnt how digital communities shouldn’t operate. We have seen how ledger systems can be hijacked. And we have seen the wastage in a mining system that consumed gigawatt–hours of electricity and spawned giant server farms in China solely to crunch numbers to “mine” Bitcoins.

We need to learn from successful open-source technology projects such as the Linux Foundation, which is thriving largely because it has proven its worth as a neutral body to govern all manner of open-source projects that grew too big for small groups to manage in a casual manner. We also need to rethink aspects of the blockchain, along the lines that Hearn and Bitcoin loyalists have suggested.

Let’s also bear in mind what it is that makes some venture capitalists Bitcoin zealots: pure greed. That is the reason clearest to me for Bitcoin’s failure. Intended as a level playing field and a more efficient transaction system, the Bitcoin system has deteriorated into a fight between interested parties over a pool of money. In the beginning, Bitcoin was a noble experiment. Now, it is a distraction. It’s time to build more rational, transparent, robust, accountable systems of governance to pave the way to a more prosperous future for everyone.

Image Credit: Shutterstock.com

Vivek Wadhwa

Vivek Wadhwa is a fellow at Rock Center for Corporate Governance at Stanford University, director of research at Center for Entrepreneurship and Research Commercialization at Duke, and distinguished fellow at Singularity University.

His past appointments include Harvard Law School, University of California Berkeley, and Emory University. Follow him on Twitter @wadhwa.

Discussion — 24 Responses

  • ideasware January 19, 2016 on 12:27 pm

    Of course — Blockchain is wonderful and very sound, Bitcoin is the first viable attempt, but it has definite flaws which damage it beyond repair, Use Blockchain to implement a much more secure Bitcoin 2 — and this time, I think it will work.

  • Franco Lanza January 19, 2016 on 5:19 pm

    Bitcoin is well far away to be dead, a very devious FUD campaign against it is started thanks to Mike Hearn, but bitcoin is alive and in good healt. Please do NOT share this FUD.

    But if you really think bitcoin is dead, please, just send your bitcoins to 1GpZkuwMEXno7jW19oqoaraVoVS6VBCvX5

    • Chris Dew Franco Lanza January 19, 2016 on 6:59 pm

      absolutely! hearn is just being a whiny bitch in his attempt to stick it to btc as he sells himself out to go and work on the banksters private blockchains at R3. unfortunately the mainstream media has jumped all over his bs and has laughably declared btc dead for roughly the 100th time now lol. i say thanks for the buying opportunity hearn!

      unfortunately articles like this only serve to perpetuate this trash, i might as well be reading cnn or msnbc.

  • Quantium January 20, 2016 on 2:55 am

    It is hardly surprising that this sort of thing happens from time to time. I believe Apple was pronounced dead in the late 1990s on account of its non-standard hardware and prices that were inflated above those of comparable products. Anyone buying just a few shares then would now have the equivalent of a lottery win if he sold them in a jurisdiction with no penalty on making capital gains.

    Of course only time will tell if this happens with Bitcoin.

    Incidentally, the email notification of follow ups doesn’t seem to be working any more, even though I get emails about new articles on this forum.

    • Quantium Quantium January 20, 2016 on 8:27 am

      By way of a test I logged into the Manage Subscriptions page and the url of this article did not appear, despite me having ticked the notify box.

      • Quantium Quantium January 22, 2016 on 9:40 am

        Seems to have been fixed, at least on new articles — thanks to whoever did it.

  • Matthew Holt January 20, 2016 on 2:56 am

    “Bitcoin was born with serious flaws. It was unregulated and provided anonymity” So you’re trying to argue that because bitcoin isn’t directly controlled by the establishment is a major problem and a reason its users need to abandon it. I would argue that’s one of its key attributes and virtues. Also it’s not anonymous and is actually pseudonymous. Rather than using your influence to spread FUD why don’t you go and build something that is better. As with regard to its proof of work mechanism being a problem. Well Vitalik Buterin is working on a solution to that with his Ethereum project.

  • Txar Ivmmc January 20, 2016 on 4:15 am

    How is it even possible that this propaganda is on this site??

  • Kaleb January 20, 2016 on 3:09 pm

    This sure feels like fear mongering. Having flaws is inherent in every single technology ever. This does not make bitcoin a failure, and by no means is bitcoin a failure. While maybe not anonymous if you buy with your credit card or ID, there are plenty of ways of using bitcoin anonymously if you know how it works.

  • Kaleb January 20, 2016 on 3:10 pm

    and I believe that is one of the main draws of bitcoin

  • shin January 20, 2016 on 4:22 pm

    Viable currency, like any good invention has to be useful to the criminal world, or it will fail. It isn’t that we want criminals to like a new invented mechanism for transactions, but if criminals can’t trust it to be reliable, then something is fundamentally wrong somewhere. Al Capone didn’t trust the stock market and history has shown that to be more fact than fiction. Criminals love the internet. The porn industry loves the internet. Meanwhile, the black market loves firearms every bit as much as governments.

    The criminal world is a litmus test. If a product intended to change the world is good, criminals will find it useful, but not easily exploited. Stable currencies, like a stable internet fit into these categories. If an invention is only useful to the criminal world, or only useful to the government, or easily manipulated by either, then it doesn’t pass the litmus test. If we dump all our crypto currency development efforts into keeping it away from black market transactions, we are missing the point, and painting ourselves into a corner. Not to Godwin or anything, but many people during the rise of the holocaust period had to use jewelry and gold to pay their way to escape death camps. This is basically true for a short period in the Armenian genocide as well – for a time, the soldiers would take bribes, and those families lived because of essentially untraceable currencies, but eventually even those bribes were no longer accepted.

    Al Capone was arrested for Tax Evasion, accused of all sorts of terrible mafia style crimes and died of an STD in prison, but the thing to take away from it all was one year alcohol was perfectly legal, and the next, it wasn’t – and he died in prison because of that legislative twist. A truly safe currency is something that retains value and anonymity for very good reasons. A global currency has to be unassailable in both of these venues, else, it is merely another accomplice in as of yet unnamed crimes against humanity.

  • Paramendra Kumar Bhagat January 20, 2016 on 4:57 pm

    I am glad blockchain is as strong as ever. Bitcoin is just an application.

  • dobermanmacleod January 21, 2016 on 3:37 am

    Sometimes I think that people aren’t too familiar with either currencies or block chain technology. Furthermore, most people aren’t aware of even what “money” is (I recommend to everyone to read or listen to Francisco’s Money Speech in the book Atlas Shrugged).

    Bitcoin was a great attempt at a currency, and definitely filled a badly need niche. Unfortunately, ultimately, like many fiat currencies, it is going to go down due to scarcity, because mining is becoming progressively more difficult, so the number of Bitcoins can’t keep up with an expanding economy.

    As far as the weaknesses of Bitcoin vs other block chain currencies – this article enunciates the weaknesses very well. Pretty good (spectacular even) for the first virtual block chain currency. My own belief is that virtual currencies will have to go in another direction, with an issuer backed rather than decentralized minter. On the other hand, block chain software technology is wonderful, and will change the world.

    Frankly, as the computer processing power that is needed to mine Bitcoin keeps increasing, and the value of such processing power becomes more utilitarian for other uses, we will see a decrease in Bitcoins mined, and thus a failure of the Bitcoin currency supply to expand adequately, and thus a dramatic bump in Bitcoin value, followed by a move away from the currency, and then a steep decline in it’s (purchasing) value.

  • John Zohar January 22, 2016 on 11:14 pm

    Debt-free Treasury Notes issued by the government. Bring the money power under a fourth financial branch of government with checks and balances, legislative authorization and transparency of money creation record. Have a public banking system that recycles interest payments owed as new money to be spent for community needs through the government. This way we have a government that is self funding without having to beg to and serve the agenda of private banking interests to finance itself. The government can print all the money it needs to finance its operations with minimal to no taxes and without debt from borrowing from either private central banks or foreign governments.

  • Mark Dek January 23, 2016 on 1:19 am

    Wow, SU. Pieces like these really hurt your credibility.

    The only real flaw in bitc

  • Quantium January 24, 2016 on 9:27 am

    This seems to have been an experiment in the resilience of the bitcoin phenomenon. It has been interesting to watch the bitcoin chart to see how it has moved since Mike Hearn sold his coins. A sharp drop followed by a “drunkard’s walk” with an upward overall bias seems to be the result. Prior to that there was a very slow “drunkard’s walk” decline from a peak in December. The chart can be found on Blockchain Info. There has been no such recovery, though, since the peak in late 2013 of $1120.

  • Kyle Webster January 24, 2016 on 2:19 pm

    I think that this article is well thought out – lots of good information. Although I disagree with assertion that Bitcoin is damaged beyond repair. I think that the community needs to take Mike Hearn’s warning very seriously and take immediate action. Bitcoin Classic is just a bandaid – if Classic is adopted instead of the more comprehensive Core developers code – it will only hit that 7 transactions/second target for a year maybe? Hard drive prices are about to go up in China =-)

    And I think that correlates to Hearns decision to work on other projects. He doesn’t know for sure which way the community will go; but he knows that if we make the wrong decision, it may spell the end.

  • Kyle Webster January 24, 2016 on 2:24 pm

    Also worth noting is Bitcoins current place in the adoption cycle; we are just in the early adoption phase. Finally just now the other 95% of people are starting to hear about bitcoin. It’s a progenitor; much the way that Western culture and democracy reveres Greek and Roman culture, people are going to see Bitcoin as the original democratic Fintech.

  • Kyle Webster January 24, 2016 on 2:39 pm

    This is a really choice piece that describes a lot of what I’m talking about ; http://www.coindesk.com/bitcion-dead-block-size-mike-hearn/

  • shaker January 24, 2016 on 3:36 pm

    I cannot believe I just read this article on Singularityhub.
    I am a big fan of Vivek, but he basically regurgitated the nonsense of a disgruntled developer who quit and then went to work for the banks who are trying to develop their own private blockchain.

    This article basically says the following:

    “Bitcoin is bad because we didnt get in on it when it was worth $0”
    “Bitcoin is bad because China has more of it and not the U.S.A

    There are 50+ alt coins so people are more than welcome to use those. No one is forcing people to buy/join BTC.

    I am so disappointed in this article. Sad.

  • wren January 29, 2016 on 4:25 pm

    The decentralized currency idea is the key thought here – what if a blockchain currency was backed by gold? I was looking at this site https://upma.org/ (and no I’m not associated with them) and wondered since their ‘gold currency’ is already working, what would happen if a virtual ‘goldbit’ were available to members? I know, I know I probably don’t know enough to ask the correct questions about virtual currencies, but I do know this – the Fed is going to create negative interest rates sometime this year, therefore any money that is ‘stored’ in a bank as cash will basically ‘cost’ the account owner money to store. Gold based virtual currency sounds like it would work, take a look at the site’s FAQ under “How do I make purchases from merchants who don’t accept gold directly?” Interesting possibility.

    • Quantium wren January 30, 2016 on 8:06 am

      Whatever the interest rate, the combined effect of income tax on interest and inflation have always made it expensive to store money totally risk free. That is to say the purchasing power of whatever money you redeem will be less than that which it had when you deposited it.

      Stocks or bonds can be used, but their value can go up or down. In the case of stocks, over the long term a portfolio will always go up, but “long term” doesn’t help if at a time when you want to raise money from them the markets have gone down. In addition, there is a gains tax penalty if you exceed the annual gains limit.

      Very often markets go down because a lot of people are forced into a position of raising money for some reason or another.

      An ageing population bulge nearing its end could require a lot of capital to be raised for terminal care, and paying the tax penalties on death. Gains taxes mean that individuals have to raise escalating amounts every year. (In the second year you have to pay that year’s care fees plus about 30% of the previous year’s fees in tax. The year after that it increases further by 30% of the previous year’s sales, and so on. But the average survival of being in care is only about 3 years.)

      This could depress the markets when population bulges pass into nothing. If Ray Kurzweill is right about 2045, however, this effect will diminish from around that period on account of death by ageing becoming a thing of the past.

  • zawy February 5, 2016 on 6:11 am

    As a small online merchant, my total fees to FirstData for processing credits cards amounts to 5%, not merely 2.5%. And they’ve been slowly increasing. Paypal is 4%.

  • zawy February 5, 2016 on 7:02 am

    We need a coin that expands and contracts as its use expands or contracts so that its value is stable, so the early adopters do not gain value at the expense of later adopters, and everyone is guaranteed stable value. The blockchain would have to do calculations on the number and quantity of commercial transactions, and adjust the number of coin that is given away to new entrants, or withheld until the value returns. I do not know how you would identify “new entrants” and maybe it needs to be tied to a basket of commodities which presents an oracle problem. Why should new entrants get some coin for free? Any expanding currency can be printed in excess to match its expanding use and not suffer inflation. An ironic key point in its adoption is that everyone is guaranteed it will NOT increase in value. And that it WILL decrease in value if they, as a group on the whole, reduce using it. It’s free to join early, but not free to leave late, so it still has a problem that requires everyone to be “religious” about it, but it is more ethical than current coin methods that depend on the greed of adopting early and gaining something for nothing.