The Problems Bitcoin May Face in the Nearest Future

06/05/2015 12:23 pm ET | Updated Jun 04, 2016

If you know what Bitcoin is and have been following its development, you've probably heard the news. Stock exchanges have begun to take bitcoins seriously. This looks like a breakthrough, especially considering the fact that the NYSE now uses Bitcoin-like mechanisms when issuing securities. What is more, the NYSE has even announced the launch of the first bitcoin index (NYXBT). Isn't that a sign that the currency has been accepted at the highest levels of world economy?

But it's only one side of a coin. The real issue is the inner problems of the Bitcoin project. And they simply can't be ignored if the system is to scale up and continue to work. The Bitcoin architecture itself has some features that will eventually become major hurdles as Bitcoin popularity continues to grow. If these fundamental restrictions are not addressed, Bitcoin may practically cease to exist.

The first and most important problem is the number of transactions it can complete within a certain timeframe. To understand this problem, you need to know how the Bitcoin system works. Clients send each other different sums of money. There's a common list of money transactions (known as "Bitcoin public ledger"), where all such transfers are recorded and verified using the miners' signatures. The transactions are not recorded individually, though. Instead, they are added to the ledger in bulk -- approximately every 10 minutes or so. And here's the rub: each block has a size limitation, which is currently set at 1Mb. This limitation was set by Bitcoin founder Satoshi Nakamoto with the purpose of protecting the system from abuse.

Due to this limitation, only so many transactions per second (TPS) can occur. Some simple math shows that the maximum Bitcoin TPS capacity is 7. In practice, 3 TPS is more realistic. While it wasn't a problem in the beginning, today the typical capacity is already at 1.3 TPS. If the trend continues, next year the system won't be able to process the increasing amount of transactions and will simply grind to a halt.

The most obvious solution to this problem is to raise the limit. Gavin Andersen, one of the current leaders of the Bitcoin movement, claims that this is possible. The limitation can be increased up to 20 Mb at the moment without serious problems to the system. However, if further increases in capacity are required, the miners' technical capabilities would most likely have to catch up first.

And now we've come to the second big problem, which is even more serious than any technical limitations. Today, the Bitcoin project is controlled by technicians and computer scientists -- a group of enthusiasts who can do whatever they want with the crypto-currency. The sources are open: if you don't like anything, just fork it away!

This way of development follows into the footsteps of the Linux project. While working great for Linux itself, this methodology may not be an ideal match for Bitcoin. With Linux, users are free to install any update any time they like. With Bitcoin, serious technical solutions (like raising the TPS) require almost synchronous software update on every user's computer. If you don't update, you fall out of Bitcoin's favor, and your transaction won't be accepted. It's easy to see how a situation like this may lead to a serious crisis, as thousands of people, companies and organizations depend on proper Bitcoin functioning.

In other words, the processes within the Bitcoin system should be regulated, and relying on a group of enthusiasts for that is probably not the best option. In my view, the best strategy is to establish a non-profit regulatory organization that would include all the interested parties. The Bitcoin Foundation does not fit this role, as it is in trouble with the authorities in the US, where the foundation is headquartered, and even among the members of the organization there's no unity.

To sum it up, I'd say that the creation of such an organization should therefore be the primary goal of the entire Bitcoin community.