Bitcoin Hard Fork Delayed
We mentioned last week the upcoming hard fork of Bitcoin for the Segwit2x software upgrade and it potentially being one of the catalysts for the recent price surge. Segwit2x was about doubling the block size and improving Bitcoin’s scalability. As we reported, that fork was due to happen around 16 November. Bitcoin is a decentralised network and therefore you need to get consensus amongst the major players to enact such a change as each miner or node needs to change to the new software proposed. It’s kind of like democratic money, the opposite of all the centralised versions we live with today.
However this morning the lead team developing the Segwit2x software released a statement:
"Our goal has always been a smooth upgrade for Bitcoin. Although we strongly believe in the need for a larger blocksize, there is something we believe is even more important: keeping the community together. Unfortunately, it is clear that we have not built sufficient consensus for a clean blocksize upgrade at this time. Continuing on the current path could divide the community and be a setback to Bitcoin’s growth. This was never the goal of Segwit2x. ... We are suspending our plans for the upcoming 2MB upgrade."
Bitcoin immediately surged to US$7,800 on the statement indicating broader support for leaving it as is, although at the time of writing it has retraced those gains but bouncing back up.
Where the price goes from here is hard to predict, for many it is welcome news as it is removing uncertainty and for others it removes the speculative prospect of maybe getting a free spin off coin. Either way we could expect some price volatility during the day.
If you want to understand what the hard fork means we found the following from coindesk.com a reasonably simple and balanced explanation (though clearly authored before the delay announcement...).
“Bitcoin is gearing up for what could be the biggest (and least understood) change to its software to date.
Often called simply a "digital currency," bitcoin is best viewed as a protocol (a set of code) that delivers data (in this case bitcoins) in defined quantities (called blocks) that are then stored in a sequence (called a blockchain) on a distributed set of global computers. Bitcoin is decentralized – in that many people help make the network function, and in choosing to run its software, users all agree to abide by the same rules to keep it operational.
It's these qualities that make the proposed change particularly divisive.
Called Segwit2x, the plan calls for a very specific fork (or a change to bitcoin's rules), one that would make certain rules valid that weren't valid before. Specifically, Segwit2x would change the size of the blocks passed regularly around the network and stored in the blockchain from 1 MB to 2 MB.
Some users think this is a good idea, others don't.
But to begin, it's important to note how this fork differs from others. Coming on the heels of the bitcoin cash and bitcoin gold forks, bitcoin users might be accustomed to certain outcomes – ones that might not be guaranteed in the case of Segwit2x.
With bitcoin cash and bitcoin gold, for example, bitcoin users could have paid little to no attention and it wouldn't have impacted their transactions. If you held bitcoin on certain exchanges (or your own wallet), you received new cryptocurrency.
This smooth outcome, however, isn't guaranteed with Segwit2x. Complicating matters is that in many ways, Segwit2x sounds (and is) similar to other bitcoin forks.
Like other recent forks, Segwit2x is:
- An alternative software – A modification of the bitcoin software run by network participants and that enforces the protocol rules. In this case, Segwit2x's code is called BTC1.
- An attempt to increase the block size – Most forks focus on one specific rule of the network (block size), despite other possible optimizations that could lead to capacity boosts.
- A hard fork – Anyone whose software is not upgraded to the new rules will no longer be a part of the network.
It's the differences, however, that stand out this time around.
First and foremost, whereas bitcoin cash developers appeared content to create a new blockchain (with new rules), Segwit2x's goal is to keep all bitcoin's existing users on one blockchain.
In this way, Segwit2x could have different outcomes.
- Bitcoin's rules change. Most (or all) miners upgrade their software. The bitcoin blockchain continues to function but features larger blocks. Segwit2x's rules become the rules of bitcoin.
- Two bitcoins are created. Only some miners upgrade their software. This creates two blockchains – a so-called "legacy" bitcoin, and a "Segwit2x" bitcoin, both with different rules and unique cryptocurrencies.
- Bitcoin's rules do not change. No significant miners run the new software, and the network continues to run the current rules.
For or against?
However, it's the second outcome that might be of most concern to users, given it appears possible.
The reason is that those who support the change, and those who do not, both appear to have support from different parts of the community. In short, while Segwit2x claims to have a super-majority of miners and exchanges, it can't be said that 100% of network users support just one side.
Segwit2x draws the most support from:
- Miners – The network users who run hardware necessary to secure the blockchain and profit from bitcoin's block rewards.
- Startups – The businesses that profit by providing a service to bitcoin users, allowing them to spend, store or purchase cryptocurrencies.
- Bitcoin should be digital money. It should compete with the U.S. dollar or other fiat currencies, and thus, a priority should be put on its use as a means of exchange.
- Competitors are gaining because of bitcoin's inaction. They believe protocols other than bitcoin have continued to gain traction because they're useful for payments; those protocols are currently capturing value that otherwise would have been bitcoin's.
- Existing upgrades aren't enough. They say the addition of code to the blockchain in August hasn't brought about the capacity increases promised.
Other groups oppose this thinking.
- Developers – The voluntary group that maintains bitcoin's code; this group includes a number of people that have arguably worked on the bitcoin protocol the longest.
- Node operators – The bitcoin users who store copies of the blockchain's full transaction history (with bigger blocks, they will see rising storage costs).
- Bitcoin is a store of value, not a payment network. Though, they seem to think the latter is possible in the future as the technology advances.
- Segwit2x is risky. Should bitcoin break or fail to deliver transactions, they believe this could undermine the project as a whole.
- Segwit2x gives miners and business too much power. They argue that this effectively centralizes decision-making for a decentralized network, undermining bitcoin's strongest value proposition.
How likely is a split?
For now, it’s perhaps too early to say for sure. But with that in mind, we do have some indications given the mechanics of how Segwit2x has been coded.
This is because:
- Segwit2x uses BIP 9 activation. This means that the rule change is governed by the percentage of miners running the new code.
- Miners mostly support Segwit2x. 1Hash, Bitfury, Bitmain, Bixin, BTC.com, BTCC, BTC.Top and ViaBTC all signed the original agreement, reached in May.
On paper, the plan boasts roughly 80% of the network's miners as signatories, a group some believe is big enough to switch the majority the network over to the Segwit2x chain, and quickly (for fear of being left on an unprofitable software).
The reasoning here goes like this – the Segwit2x chain will quickly accumulate the most mining power, making the original bitcoin unprofitable (or unmanagable) to mine, and ensuring a total migration.
Yet, that's not to say all these miners will eventually run the code.
While more complex, the reasons why include:
- Many back bitcoin cash. Bitcoin's China-based community tends to be more invested in this bitcoin alternative, which already increases block size to 8 MB.
- Miners aren't likely to act unilaterally. Signatories like ViaBTC and BTC.Top are mining pools that primarily sell software subscriptions to other miners. This means that they will likely give users the option to mine Segwit2x, but all of their users aren't guaranteed to switch over.
- Some miners aren't supporting. This includes F2pool (which governs 5.6 percent of the network) and Slushpool (responsible for 7.3 percent), both of whom have said (with varying degrees of certainty) that they won't run the code.
Also of importance here will be the perceived value of a Segwit2x cryptocurrency.
Already, exchanges are experimenting by listing a version of the coin – one that lives only on their order books – as a way to test the value.
At press time, the value of the new version of bitcoin was estimated at just over $1,000, double the price of bitcoin cash ($450) and much higher than bitcoin gold ($130).
When will all this occur?
But while there remain many ifs, one thing we do know is the fork will occur on or around Nov. 16.
However, an exact date can't be pinned down. This is because the change will be enacted at a specific block (number 494,784), at which time miners will be able to run the new software.
Still, those involved with the project are adamant that it is moving forward, with the project's lead developer stating just last week that the updated code will be released based on the mid-November plan.”