DAVID KESTENBAUM, HOST:
A little while ago, I heard something really interesting about bitcoin. We've done a bunch of podcasts about bitcoin. You know, it's this entirely new digital form of money. But this thing I learned, it made me think about the whole project in a completely different way. Bitcoin - it is having some problems. We did this little experiment. A friend of mine tried to send me some bitcoin.
All right, so what website am I going to here?
NATHANIEL POPPER: So you're going to blockchain.info.
KESTENBAUM: Blockchain.info - little rocket ship with a B on it. It's fast. Oh, just say who you are.
POPPER: I'm Nathaniel Popper, a reporter at The New York Times.
KESTENBAUM: OK, password - wallet created.
POPPER: So you have a bitcoin wallet.
KESTENBAUM: Great so far - faster than setting up a bank account. Now you're going to try to send me a bitcoin?
POPPER: I'm not sending you a bitcoin. That's, like, $500.
KESTENBAUM: Right, so send me, like, a teeny fraction of a bitcoin.
POPPER: How's five bucks? Five bucks I can do. Let's send you $5. Send transaction.
KESTENBAUM: It beeped before you were done saying that. Bam, you've just received bitcoin. Hang on, wait. It says - it says pending, with, like, a question mark.
POPPER: Yeah, bitcoin's having a bit of trouble lately.
KESTENBAUM: Do I have...
POPPER: You haven't actually received the bitcoins yet.
KESTENBAUM: How long might it take?
POPPER: Well, right now, I guess there's a few hours of transactions backed up in the network.
KESTENBAUM: Hours for me to get my digital money from you?
Nathaniel, after we did that, you went back to your office at The New York Times, and we waited for the money to come through. You told me there were these problems sending bitcoin. I wanted to see how long it was going to take. How long did you think it was going to take?
POPPER: I thought this was going to take maybe a few hours, maybe a day.
KESTENBAUM: Hours went by. I went to bed that night. I woke up the next morning. It still had not arrived. Finally, days later, I looked at my digital wallet, and there was just no sign of the transaction at all. It just disappeared.
POPPER: I was not expecting that. This is, like, the most basic thing that the whole bitcoin system is supposed to do.
KESTENBAUM: You thought it was going to come through eventually.
KESTENBAUM: We looked into this, and we were not the only ones who were trying to send bitcoins and having them not go through. Bitcoin has been this grand experiment. Yes, it's an attempt to create an entirely virtual form of money, but it's also a big experiment in another way. Bitcoin is set up so that nobody is in charge.
POPPER: There are no banks behind it, no governments.
KESTENBAUM: That means, of course, no one to call and say, hey, why didn't my money come through? Can you fix this? The idea's always been that the group, the collective, would fix it, but that is not happening. In fact, behind the scenes, a kind of civil war has broken out. Hello, and welcome to PLANET MONEY. I'm David Kestenbaum.
POPPER: And I'm Nathaniel Popper.
KESTENBAUM: Today on the show, bitcoin is a test of the Internet dream - a world with no leaders. But can that work?
(SOUNDBITE OF MUSIC)
KESTENBAUM: If you know one thing about bitcoin, you probably know that it was invented by Satoshi Nakamoto. This is a mysterious person - maybe a group of people - who basically disappeared from the Internet a number of years ago, leaving behind this very interesting system that is, really, not run by anyone. For instance, Nathaniel, when you tried to send me $5 in bitcoin, the request did not go out to some bank. It did not go out to bitcoin headquarters in New York. There is no headquarters. The request went out to a giant network of computers.
POPPER: There are literally thousands of them around the world. A lot of those are server farms in places like Iceland and Georgia and Washington state and China.
KESTENBAUM: We call up this guy you know in China, Bobby Lee. Bobby oversees this pool of computers that process bitcoin transactions. His offices are in Shanghai, right next to this shopping mall.
BOBBY LEE: There's a McDonald's. There's a bakery store. There's that ice cream store. What is it called - the Warren Buffet ice cream company?
POPPER: Dairy Queen.
LEE: Yeah, Dairy Queen. Yeah, yeah, Dairy Queen. That's right - DQ.
KESTENBAUM: Nathaniel, when you were there, didn't you say there was, like, a no-smoking sign in the hallway and everyone was standing right by it smoking?
POPPER: Smoke was just pouring out of this fire exit.
KESTENBAUM: So explain what the computers there are actually doing.
POPPER: These computers in China and everywhere else in the world, they are taking in all of the transactions from around the world, including that $5 one that I sent to you. They're making sure that everybody has enough money to complete the transactions, and then they're adding them to the list of all the Bitcoin transactions that have ever happened.
KESTENBAUM: So there's this shared, public ledger that lists every single transaction that has ever occurred. And they're adding it to that.
POPPER: And those computers, they're the accountants.
KESTENBAUM: And if you're wondering why Bobby Lee would bother to do this - I mean, he's got to buy all these computers. He has to pay for all this electricity. The answer is that doing this earns him bitcoins. The way it works is that, every 10 minutes, a bunch of new bitcoins are created on the network. And those coins are randomly given to one of the people like Bobby, whose computers are doing the actual work to keep the bitcoin system going.
POPPER: What Bobby is doing is called mining - like mining for gold. You do some work, and you hope to turn up something valuable. In this case, it's bitcoins.
KESTENBAUM: Bobby told us that you want to set up mining computers in a place with cheap electricity since that is one of your major costs. And in China, there is a lot of cheap electricity. In some places, he says, it's subsidized by the government. In other places, you can - you can borrow the electricity. Maybe you have a friend who works at a power plant with a long extension cord. You set up your mining computers in a shack.
LEE: Instead of formal computer racks, you would have just planks with metal rods, you know? And then you have, you know, these machines just placed there with hundreds of power cables running out and stuff like that.
KESTENBAUM: Have you seen one of those?
LEE: I have. I have seen several like that.
KESTENBAUM: Where? Like, located - are they located next to power plants?
LEE: Yes. I've been to an installation next to a power plant in this province of Sichuan next to a hydro plant that's very much like that.
KESTENBAUM: Nathaniel, I love the idea that our $5 transaction might have been processed by a computer by a hydro plant in China.
POPPER: That is actually where bitcoin is happening - next to hydro plants in China.
KESTENBAUM: That is how the system's supposed to work, right? And, in fact, this unregulated, decentralized network of computers all over the world - it has worked incredibly well for a long time. Like, bitcoin was a success. The number of transactions took off. Venture capitalists started investing money. A few years ago, Jacob and I here bought falafel sandwiches with bitcoin. It wasn't easy, but we did it. Have you ever bought anything?
POPPER: I bought my own book.
KESTENBAUM: (Laughter) Your own bitcoin book?
POPPER: Of course.
KESTENBAUM: (Laughter). The number of transactions just kept growing and growing.
POPPER: But at some point, this became a problem. This was like a highway with too many cars on it, and the traffic started to back up. And it was taking hours for transactions to go through. Sometimes, they weren't going through at all, as we found out.
KESTENBAUM: And this was not a surprise. People had seen this coming, of course. And there were programmers who had been trying to find solutions. We talked to one of them. His name is Mike Hearn. Mike is a serious programmer. Before devoting himself to bitcoin, he'd worked at Google.
MIKE HEARN: I worked on Maps and Earth. I worked on Gmail.
KESTENBAUM: Oh, Gmail. Thank you for Gmail.
HEARN: You're welcome.
KESTENBAUM: As Mike saw it, there was a relatively simple way to deal with the traffic jam. The system had been initially set up with a kind of built-in speed limit - about seven transactions per second. That was just to make the computational load sort of manageable. But Mike argued we should just increase the speed limit. Computers have gotten faster since the early days. The Internet has gotten faster. The system could totally handle it. It's what Satoshi originally intended, he said - a simple, easy fix.
POPPER: But nothing is simple in the world of Bitcoin. Everyone has an opinion. Some people worried that, if you raised the speed limit, the fastest computers would take over. And if the fastest computers took over, only big companies would be able to take part.
KESTENBAUM: That, they said, was at odds with the original idea of bitcoin - that it wasn't supposed to be controlled by anybody. This deep, philosophical divide had opened up over what bitcoin should be, and the programmers could not agree. At some point, Mike Hearn and another coder, Gavin Andresen, decided, enough; we've got to tweak the bitcoin software to fix this.
HEARN: Together, myself and Gavin put together kind of a competing version of the software and released it and said, you know, OK, these guys - the original guys aren't going to do this, so people are going to have to switch to this new version of software we've made.
KESTENBAUM: An updated version of bitcoin, basically.
HEARN: It was almost identical to the original software, except with, you know, this number changed, effectively.
KESTENBAUM: Oh, it was that small of a change?
HEARN: It's not literally one line of code. Because of the nature of the change, it has to be coordinated globally. So there's code to manage that and one or two other minor things. But yes, it was essentially that.
POPPER: It was called Bitcoin XT. Now, Mike Hearn couldn't force anyone to adopt this new code because there is no central authority in bitcoin. It was up to the community to decide.
KESTENBAUM: And if enough people operating the computers in the United States and Iceland and China, et cetera - if enough of them adopted Bitcoin XT, it would take hold, and the congestion problems would go away. But after Bitcoin XT came out, things got really ugly. People accused Mike Hearn of trying to stage a coup. There were allegations of censorship. And then, this happened.
TONY: I noticed one day that my Internet connection seemed to be very, very, very slow.
KESTENBAUM: This is Tony. He asked us not to use his last name. He's a tech guy living in a small town in the United States. He had set up a version of Bitcoin XT - the new bitcoin code - on one of his computers. It was all going fine. And then, all of a sudden, his Internet connection just kind of froze. He couldn't load a web page or send email.
Were you like, huh? What did you think at the time?
TONY: I said, oh, something's wrong somewhere, so I don't really care. I'm going to - it's a nice day. I'm going out.
POPPER: He found out when he got back that his computer was under attack. Some hacker upset about Bitcoin XT had directed a flood of Internet traffic his way. And it wasn't just affecting him. The hacker had knocked out his entire local Internet provider.
TONY: And it's pretty much the only service provider for these four towns.
KESTENBAUM: So four towns lost Internet because of your little computer there?
TONY: Because of my little computer, correct.
KESTENBAUM: Tony says he went out to this local restaurant he likes to go to, and the bartender was like, yeah, I couldn't watch my TV show on Hulu.
TONY: This was when I realized that this was not a game. This was a war.
KESTENBAUM: Like, it had - like, this bitcoin controversy had, like, spilled out into the real world.
TONY: It had spilled out into the real world. It was doing real harm - what you would call collateral damage, if you will.
KESTENBAUM: Strong words. People have strong feelings.
POPPER: Which is sort of what you'd expect. Bitcoin was set up to be a sort of leaderless democracy.
KESTENBAUM: And in democracies, people are always shouting.
POPPER: Always saying the other side is ruining everything.
KESTENBAUM: But at the end of the day, there is a vote, right? In this case, would enough people decide to adopt Bitcoin XT?
POPPER: But here, this is where bitcoin's democracy differs from what we know. It's not one person, one vote.
KESTENBAUM: Remember, the bitcoin network is basically this collection of computers all over the world that, together, provide the processing power for all those transactions. And if one person controls a lot of those computers, that person effectively has a huge vote. You know who has 15 percent of the vote? Bobby Lee, the guy in China with the offices next to the mall with the Dairy Queen in it.
POPPER: Bobby, he runs a mining pool, which is basically a collection of miners who pool their resources. And Bobby's operation has 15 percent of the computing power on the entire network
KESTENBAUM: The entire network? So it's, like, if this were the presidential election, he would have more votes than the entire state of California.
POPPER: And Bobby Lee, he was skeptical about Bitcoin XT. If this was the right thing to do, why wasn't it coming through the usual channels - from the normal group of programmers who issued updates? Why was there this split?
LEE: We felt that was a bit strange to be asked to switch over to something different. So we actually did not end up supporting it, even though it did get the support of several industry companies.
KESTENBAUM: Mike Hearn, one of the people behind it, told us this was, like, the most innocuous upgrade you can think of. It was just a way to deal with the traffic problem.
LEE: Yes, I can see how he would have described it that way. But the - but in there, there was some conditions that potentially could be disruptive in the future.
POPPER: Bobby decided to vote no. He was not going to adopt Bitcoin XT. Bobby told us he opposed it for technical reasons. It would create problems for the whole system.
KESTENBAUM: But some people suspect there is another reason that miners like Bobby do not want to switch, which is that a little bit of congestion might be in their financial interest.
POPPER: One way to get a Bitcoin through the system when things get jammed up - you pay a little bit to get to the front of the line. That fee gets handed over to the miners.
KESTENBAUM: A lot of the miners in China decided they did not want to adopt Bitcoin XT. And you might think, well, OK, China - that's just one country. But over the years, a lot of miners have popped up in China. There's the cheap electricity, but the computer chips are also quite cheap there. What are the numbers these days?
POPPER: Right now, something like 70 percent of the transactions are running through China.
KESTENBAUM: And all through, like, four mining pools, right?
POPPER: Four of them.
KESTENBAUM: So despite the idea that this was supposed to be some distributed network, a lot of the power was concentrated in China. Mike Hearn, who put out Bitcoin XT, told us that he got on the phone with miners in China. He tried to convince them, but he just could not. And after one very frustrating call, he decided, that's it; I give up.
POPPER: After five years of working on bitcoin, Mike Hearn quit - if you can quit something you're not being paid to do. He wrote a long post online. Bitcoin, he said, had become a system completely controlled by just a handful of people and on the brink of technical collapse.
KESTENBAUM: I asked him how it felt to write that.
HEARN: Well, it was a little sad, but it was also a relief because it was a way of drawing a line. You know, I'd spent six months on a - on a debate that I felt shouldn't even have happened at all. And I'd seen that community, you know, become progressively crazier. And, you know, I felt relieved that I was just like, I'm done with this, you know? It's a clean divide, and now I'm going to move on and do something else with life.
KESTENBAUM: Is bitcoin dying?
HEARN: Well, to me, a system that has no future is not interesting. Maybe it's not dead, but it's not interesting.
KESTENBAUM: I feel like that is the harshest thing a programmer can say. Worse than dead - not interesting.
POPPER: There is still no fix for the congestion problem. People are trying. A group of American companies have put together something called Bitcoin Classic, which is basically a scaled-down version of Bitcoin XT. And this spring, they flew to China to try to convince the miners there to buy into it. Once again, though, the miners, including Bobby, said no.
KESTENBAUM: You've been texting with them. Did they tell you why?
POPPER: They seem pretty frustrated with these American programmers who keep coming over and trying to tell them what to do. One of them said, they come to order us to do something they want.
KESTENBAUM: Not to discuss.
POPPER: Not to discuss.
KESTENBAUM: There are basically two ways out of this. One is that somebody could come up with some brilliant solution that everybody thinks is great, or somebody maybe somehow persuades everyone to put aside their differences and find some way forward for the good of bitcoin, which made me think of Satoshi Nakamoto, bitcoin's mysterious creator. I asked Bobby Lee in China about this.
If Satoshi came back now, do you think he or she could make peace?
LEE: (Laughter) Make peace with who?
KESTENBAUM: Within the bitcoin community - between all these different factions. Yeah, you know, and...
LEE: Oh, yeah, yeah. I think - I think, oh, yeah. I think we all respect him so much. I mean, there's no religion named after him yet, but - but all - I think I would - I can easily say, for a lot of us in the community, we respect him so much that, if he came out and say, thou shall use XT or thou shall use Core or thou shall use Classic, I think we'd get in line. Yeah, but he probably wouldn't do that...
LEE: ...Knowing what we know about him.
LEE: Well, the reason is, if he did that, the very action of doing it is counter to bitcoin because bitcoin was developed to be decentralized, to be not controlled by someone.
POPPER: That's bitcoin's strength, and perhaps also its weakness.
KESTENBAUM: It has been said that bitcoin is money ruled by math, but the truth is bitcoin is ruled by people. Money is always about people, and people are much more complicated.
(SOUNDBITE OF MUSIC)
KESTENBAUM: There is a lot more to this story, which you can read in Nathaniel's New York Times piece, which is up online now. It's all about that secret meeting between the American programmers and the Chinese miners in China. And it also explains how China came to be at the center of this whole thing. Or, Nathaniel, they could read your book. What's it called?
POPPER: "Digital Gold: Bitcoin And The Inside Story Of The Misfits And Millionaires Trying To Reinvent Money."
KESTENBAUM: Can you still buy it with bitcoin?
POPPER: Of course.
KESTENBAUM: Let us know what you think. You can send us e-mail - email@example.com - or tweet us - @planetmoney. Our episode today was produced by Jess Jiang. Thank you, Jess. And we have some news. Invisibilia is back. If you do not know Invisibilia, it's NPR's podcast about the invisible forces that shape human behavior. It is back, and it's really good. You can find it at npr.org/podcast. It's also on the NPR One app. I'm David Kestenbaum.
POPPER: And I'm Nathaniel Popper. Thanks for listening.
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