Bitcoin's 'war' could threaten its survival

Bitcoin, the digital currency technology with an ecosystem attracting hundreds of millions of dollars in investment, is struggling through an existential crisis.

And what may to outsiders seem like petty squabbling about a single number actually has major financial implications and could even threaten the very survival of the cryptocurrency.

The argument—which is pitting Chinese constituencies against largely Western developers, the business community against the often ideological early adopters, and programmer against programmer—centers on a simple number in the global bitcoin system. But if the various parties can't come to an agreement, the whole network could splinter, wrecking its major selling points of security and decentralization.

"There is literally a war going on right now in the bitcoin world," Marco Streng, CEO of Genesis Mining, told CNBC last month.

There are two major questions facing the technology: Who is bitcoin for? And who gets to decide?

Most of the early adopters saw appeal in bitcoin as a decentralized digital currency—(to over-simplify the promise) a sort of virtual gold that could not be touched by governments, banks or corporations. But in seeking to create the perfect system for such a currency, bitcoin's early creators also created a technology that has wide-ranging applications.

That technology is called the "blockchain" (CNBC has gone in depth into how it works), and this is basically what it does: It can record any information in a secure way, and make that information both public and unchangeable—doing this without relying on any central authority. Banks, stock exchanges, payment companies and others have already begun exploring how this can be used in their own businesses.

The issue at hand is about the structure of bitcoin's blockchain (which is composed of "blocks" of data with each block referring back to the preceding chunk of information—thereby creating a chain). The community is arguing about how big the maximum block size should be: The current max is one megabyte, which only allows for about seven transactions per second—far too few for most businesses currently investing in the technology.

This speed is a "roadblock to bitcoin growth," Jeff Garzik, one of five bitcoin core developers who have taken over maintenance of the technology, wrote in a recent paper. (Visa, for comparison, says its network can handle more than 24,000 transactions per second.)

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"Any responsible business projecting capacity usage into the future sees the system reaching an absolute maximum capacity, with this speed limit in place," he wrote. "Increasing or removing this limit will encourage businesses to view bitcoin as scalable and capable of supporting millions of new users."

The block size limit may also negatively impact bitcoin's original currency use-case: As the number of transaction requests exceed the limit, the user experience degrades: The pools of "miners" who help inscribe data onto the global network will begin charging ever-higher fees for processing, eliminating some of the appeal over other payment methods.

But there are reasons for limiting the size of a block. For one, it provides security for the system by constraining available space, and therefore making it costly to maliciously flood the network with spam.

Miners are generally against increasing the size too much: They would have to do more work on each block, but they'd still reap the same benefit per block (while transaction fees remain negligibly low), said Pete Rizzo, the U.S. editor for cryptocurrency site CoinDesk.

Also, some early adopters who plan to hold bitcoin for extended periods of time as an investment may prefer to keep the block size limit low—unbothered by transaction fees or business prospects, Garzik explained to CNBC.

But even if more interests seem to point to increasing the block size, there's no agreement what size is ideal—balancing present-day security and future promise—or how a change should be made.

Gavin Andresen, one of the most important developers of the technology, proposed increasing the max size to 20 megabytes. (He did not respond to request for comment.)

A powerful constituency of Chinese miners—who also object to increasing the size of the block, saying their nation's Internet connection to the rest of the world would not allow it—made a counter proposal suggesting an eight-megabyte maximum. Andresen has since backed a version of this plan.

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For his part, Garzik proposed a sliding cap with a change to the bitcoin code allowing for periodic block increases (or even decreases) based on global miners' votes.

Different sources told CNBC that the most important parts of the community were variously leaning toward Garzik's proposal, an 8-megabyte increase, or just a small "can-kicking" measure to wait for technologies that might allow them to bypass the question.

But as a totally decentralized system, bitcoin has no clear way to weigh these disparate opinions and interests—in other words, no way to make a definitive decision.

Garzik called the block size debate the first major alteration to bitcoin policy since it began in January 2009. When other changes have been made, the core software has been changed, and the players on the network have quickly updated (anyone who doesn't follow the current protocol gets booted from the network until they comply).

But with a contentious issue like this, the developers risk splitting the network into those who want to follow one set of rules, and those who want another. If someone were to push out a global update without ensuring near-total consensus, a split could occur.

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"That would be the worst of all possible options," Garzik said.

Bitcoin runs on a blockchain that is more secure and decentralized than any of its competitors because of its large user base and its comparatively lengthy history. If those users were to splinter, then the entire enterprise could be compromised.

So what's at stake? Hundreds of millions of dollars have been invested in bitcoin and blockchain-related companies, and the current value of all the bitcoin in existence is currently about $4 billion.