Unlike traditional financial systems, Bitcoin is decentralised. Instead of relying on central banks to maintain a private ledger, the blockchain operates via a network of participants storing and verifying data. This allows anyone to independently verify the full transaction history since Bitcoin’s creation.
However, this same design choice introduces a key constraint. Changing Bitcoin's rules doesn't require approval from every holder, but it does depend on widespread adoption by network nodes. By contrast, a centralised financial system can alter rules or software independently, leaving users to comply or leave.
As decentralised systems depend on many decision-makers with different incentives, coordination between participants is slower, making it more likely that change is stalled or blocked. If there is a split consensus, a fork may occur where new code splits off from the old code, creating a different cryptocurrency.
This limits evolution, as even small players can delay changes from occurring. So early decisions can become a persistent feature throughout the currency's evolution, reducing its ability to adapt.
Bitcoin's resistance to change has been a key reason for its growth, yet as its size increases, will this lack of adaptability continue to drive its growth?
Early Bitcoin was much smaller, with far fewer people using or building on it. This allowed for more direct communication, making changes easier to coordinate and less likely to face resistance. As a result, making changes to the network was easier.
As Bitcoin has grown to a market cap of over $1 trillion, changing its underlying rules has become far more difficult. With far more network nodes and holders involved, coordinating an agreement is harder to achieve, as different groups now have competing interests.
A significant attempt at change occurred in August 2017. This was due to concern over transaction fees and transaction speed. A larger block size was proposed as a way to address these issues. However, no agreement was reached, leaving Bitcoin’s rules the same.
Instead, the dispute resulted in a hard fork (a split into two different networks), creating Bitcoin Cash. Bitcoin’s price fluctuated, but at the time, it had a much lower market value of around $50 billion.
As a result, the amount of capital at risk was far smaller than it is today. If similar changes occurred now, the risks involved may no longer be outweighed by the potential rewards. Rather than evolving through consensus, Bitcoin has historically split when agreement cannot be reached.
Bitcoin's founder, Satoshi Nakamoto, prioritised stability over adaptability, creating a clear trade-off in the system’s design. By contrast, Ethereum has taken a different approach, prioritising adaptability. It undergoes frequent upgrades enabled by relatively efficient, network-wide coordination.
One example of this is the change to Ethereum’s mining rules. Ethereum evolved from Proof of Work to Proof of Stake, whereas Bitcoin still uses Proof of Work.
Proof of Work operates by having your system guess a new number (the nonce) associated with the most recent block until it meets a required condition. This trial-and-error process requires a substantial amount of computational effort and electricity.
Proof of Stake requires validators to deposit cryptocurrency as collateral. This grants them the right to propose the next block and earn a reward.
Ethereum’s change was done in part to reduce energy consumption by around 99.95%, reducing the overall environmental impact associated with mining.
If Bitcoin were to attempt a similar fundamental change, it would require a majority agreement across the network, increasing the risk of another hard fork. Such a split could put a very large amount of capital at significant risk due to mistrust in Bitcoin's code and governance, leading to a loss of investor confidence.
As the scale of Bitcoin increases, it brings advantages such as greater credibility, but it also limits its ability to adapt. Smaller cryptocurrencies may innovate more freely, but Bitcoin's stability, security, and sheer size continue to position it as the market's most dominant player.