Jan 2, 2019, 12:29 AM ETInterview, Fireside Chat

a16z Podcast | Bitcoin's Growing Pains -- and Possibilities

Block Size Limit: Bitcoin's original code imposed a 1 MB block size limit, resulting in a theoretical maximum transaction rate of roughly 7 transactions per second, as blocks are generated every 10 minutes.
Urgency of Capacity: Core developer Mike Hearn warns that current traffic is approaching 50% of the block size limit, suggesting capacity constraints will likely be hit within the next year.
Consequences of Inaction: Failure to increase block capacity could lead to a systemic crash or the exclusion of users who cannot afford the rising transaction fees required to prioritize their transactions.
Proponents of Increase: Gavin Anderson, the former main maintainer, and Mike Hearn advocate for raising the limit to ensure continued functionality and prevent network congestion.
Opposition Concerns: Critics argue that increasing the block size raises the hardware requirements for running full nodes, potentially centralizing the network by forcing smaller participants to rely on third-party servers.
Alternative Proposals: Some opponents suggest that transactions should move "off-chain" through other infrastructure or services rather than expanding the core blockchain's direct capacity.

Product Definition: Lighthouse is a peer-to-peer crowdfunding application built on the Bitcoin protocol, allowing projects to raise funds without requiring a trusted third party to hold funds.
Mechanism of Control: The system uses Bitcoin's native scripting language to allow users to pledge funds that remain under the pledger's control until the project reaches its full funding goal.
Transaction Logic: Funds are only transferred to the project creator once the target amount is met; until then, the transaction remains a "partial payment" that is invalid until merged with others.
Technical Foundation: The app utilizes the complex scripting language embedded in Bitcoin's protocol from the beginning, a feature largely overlooked because Satoshi Nakamoto never documented it in the white paper.
Development Timeline: The application was developed over a seven-month period, with complexity arising primarily from user interface design and network plumbing rather than the limitations of the scripting language.
Unbundling Model: Unlike centralized platforms (e.g., Kickstarter) that bundle payments, hosting, and discovery, Lighthouse unbundles these functions to allow competing services (e.g., lightlist.io) to handle project discovery and verification while the protocol handles the money.

Growth Trends: Bitcoin transaction traffic has settled into a standard seasonal growth pattern typical of online services, though Hearn notes adoption in the West is hindered by the lack of clear use cases compared to credit cards.
Low-End vs. Non-Consumption: Hearn applies Clay Christensen's disruption theory, noting that while Bitcoin currently serves as a cost-saving alternative for existing payments, its true potential lies in "competing as non-consumption" by enabling new behaviors like machine-to-machine micro-payments.
Fee Obfuscation: A key driver for adoption is the elimination of hidden credit card fees (typically 1–3%), which are currently socialized among consumers through chargebacks and decline transactions.
Developing World Potential: In regions like Kenya, Bitcoin offers a decentralized alternative to M-Pesa, bypassing Western anti-money laundering (AML) regulations that often restrict financial inclusion for populations without formal IDs or bank accounts.
Device Penetration: The availability of low-cost smartphones (e.g., $34 Android devices in India) combined with a global population of 3 billion (growing to 5-6 billion) smartphone users creates a massive, previously unbanked addressable market.
Merchant Incentives: Hearn advocates for driving adoption through merchant discounts (e.g., avoiding $11-$12 card fees on flight tickets) and micro-tipping, which provide immediate, tangible financial benefits to users.

Protocol vs. Service: The discussion posits that open protocols (like SMTP or HTTP) enable greater innovation and competition than corporate silos, allowing developers to build on a safe, standardized foundation without fear of being shut out.
Historical Parallels: Defenders of the Bitcoin protocol compare current criticisms to past debates where encryption (SSL) and home video (VCR) were dismissed as tools exclusively for criminals or pirates before becoming standard infrastructure.
Security Trade-offs: Expanding Bitcoin's scripting language to be Turing-complete (like Ethereum) is viewed with caution due to the increased risk of security vulnerabilities, suggesting the existing limited language is sufficient for many use cases.
Future Roadmap: Hearn aims to build reusable code from Lighthouse to lower the barrier for future applications, treating the Bitcoin scripting language as a research area rather than a static feature.