There are problems with the Bitcoin algorithm. Put simply, without changes to the block size it offers too little throughput for the number of transactions that users would like to make. Now a prominent Bitcoin developer, Mike Hearn, has left the project and provided a long and detailed critique of why Bitcoin isn't going to work.
The tone of the blog post in question is very negative and this has provoked equally negative reactions against it and an approximately 8% drop in the price of Bitcoin since the post was published.
There are many complaints about the way the Bitcoin community organizes itself, but the key technical problem is the number of transactions that can be processed per second.
In the original Bitcoin algorithm this is fixed because the block size is fixed and the difficulty of the proof of work is adjusted so that the same number of blocks are completed - about one every 10 minutes. As every block is 1Mbyte means that at best there are around three payments per second. This isn't enough to allow Bitcoin to continue to grow and the proposed solution was to increase the block size.
This was the plan, but it seems that the community has rejected the idea for a very strange set of reasons.
Mike Hearn summarizes the current state of BitCoin saying:
Think about it. If you had never heard about Bitcoin before, would you care about a payments network that:
Couldn’t move your existing money
Had wildly unpredictable fees that were high and rising fast
Allowed buyers to take back payments they’d made after walking out of shops, by simply pressing a button (if you aren’t aware of this “feature” that’s because Bitcoin was only just changed to allow it)
Is suffering large backlogs and flaky payments
… which is controlled by China
… and in which the companies and people building it were in open civil war?
You can read the long justification of each point, but on balance what is important is that they are all true.
The Bitcoin transaction network is overloaded and the only mechanism being used to reduce the demand is a hike in transaction fees.
This also brings in another problem which is replace by fee. This is intended to allow users to get transactions moving if the fee increases. Unfortunately, it also allows a user to replace a transaction with one that sends the Bitcoins back to them. This makes it difficult to use Bitcoin to buy things because you have to wait for the original transaction to appear in the block chain and this is a slow process.
Most of the problems described result from the fact that the Bitcoin community can't seem to function in a way that makes good decisions. Part of the problem is down to personalities and part is due to the recent domination of mining by Chinese mining companies. Currently just two Chinese miners control more than 50% of the hash power.
At a recent conference it was remarked that the handful of guys on the stage controlled 95% of the hash power and this is not the way a decentralized system is supposed to work. To quote:
"Even if a new team was built to replace Bitcoin Core, the problem of mining power being concentrated behind the Great Firewall would remain. Bitcoin has no future whilst it’s controlled by fewer than 10 people. And there’s no solution in sight for this problem: nobody even has any suggestions. For a community that has always worried about the block chain being taken over by an oppressive government, it is a rich irony."
The rest of the blog post explains all of the fine detail, but the bottom line is that the Bitcoin experiment has failed.
Mike Hearn sold all of this Bitcoin, presumably before his blog post appeared, and has now gone to work for a company putting the block chain technology to use. The point being that the technology still has a lot to offer even if Bitcoin is having some problems.
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