Cryptocurrencies’ crowd source incentives prevent collapse into one crowd

by Steve Blum • , , , ,

The disruption in cryptocurrency markets this week, when Bitcoin sorta split into two, was the result of disagreements between different interests about the technology and crowd-sourced methods used to run it. It was also inevitable and purposeful – cryptocurrencies are intended to rise and fall according to the cumulative decisions of millions – eventually, billions – of sovereign, individual users, who won’t always agree with each other.

Bitcoin’s underlying software can’t keep up with the growing number and speed of transactions between its users. The limits of the software has been a known problem for years, but the urgency of solving it has increased in the past few months as the strain on the system began to slow down transactions.

The solution is simple: upgrade the software. But sometimes simple things are supremely difficult, and so it is with Bitcoin.

It’s nothing like updating a commercial application like Excel or iTunes that’s owned by a single company – Microsoft or Apple just do it. It’s not even much like Linux or other widely used open source software that can comfortably exist with many different versions – distros – floating around. Linux might be open source, but any given installation is a closed system – so long as you’re satisfied with the way your preferred version runs on your hardware, all is well. Operationally, it doesn’t matter if the person sitting next to you uses a different distro.

But if you’re exchanging information with other people – which is what Bitcoin is all about – then everyone has to format and process the data in the same way. Email works because everyone has more or less settled on a set of open standards that are periodically updated by industry groups that include big companies, like Google and Microsoft. If enough of the major players agree then pretty much everyone else has to follow along, or risk being shut out.

The same principle applies to cryptocurrencies like Bitcoin, but because schisms like we saw this week produce competing versions that, so far, have added value to the overall market and can be freely exchanged within their respective universes, there’s also an incentive to not standardise. By preventing consolidation into a single, monopoly platform, that balance has kept an ecosystem of independent cryptocurrencies alive.