The Possible Outcomes Of A Segwit2X Hard Fork On Bitcoin

11/07/2017 - 14:17 UTC
The Tree Possible Outcomes After Segwit2X Hard Forks Bitcoin

UPDATE November 8, 2017: Segwit2X Cancelled - No Bitcoin Hard Fork Will Occur On November 16

Bitcoin is closing fast to a highly controversial upgrade on November 16 and people invested in the cryptocurrency need to have a complete understanding why this upgrade is different than previous upgrades and where it might lead us. JustCryptoNews.com explains like you are a five year old.

For those of you that don’t know, Segwit2X (S2X) is a working group, lead by Jeff Garzik, tasked to implement and deploy the Bitcoin client software required to upgrade the Bitcoin network. Garzik and co did not started S2X out of their own. Rather, they are a group of developers following the provisions of the so-called New York Agreement (NYA), an agreement reached on May 21, 2017 in New York between significant Bitcoin companies all of which want to see the cryptocurrency “scale” (more on this below).

They signatories of NYA (mostly miners as well as exchanges and wallets) promised to support a bitcoin transaction format optimization, called Segregated Witness (or SegWit). SegWit has been proposed by the developers of Bitcoin Core (the reference Bitcoin client at the moment) a long time ago, but never gained enough support to be activated by itself. It was finally activated on August 2017, after the NYA signatories delivered on their promise. But in return for this promised support, they also agreed to increase Bitcoin's hard-coded block size limit from 1MB to 2MB in November 2017.

Bitcoin Block Size Or How To Scale Bitcoin

Why and how does block size mater in Bitcoin? Well, the size of each block limits the maximum amount of Transactions Per Second that the Bitcoin network supports. The people behind S2X (also called “big-blockers”) argue that if we want Bitcoin to scale enough for mass adoption, i.e., to be used as digital money, the network needs to support more TPS. To do that, we need larger blocks. Therefore we need a change in the block size limit.  Thus they propose to increase that limit from 1MB to 2MB.

Note, however, that there is already another Bitcoin offspring, Bitcoin Cash, which has raised the block size limit even more: at 8MB. So one has to wonder: if block size does matter, why not choose Bitcoin Cash which is alive and kicking as we speak instead of the S2X Bitcoin? Well, that’s food for thought to you...

But as most things tend to be in a consensus-oriented network as Bitcoin, the proposed change is not something easy and without complications. S2X plans to implement this block size increase through a so-called “hard fork”, scheduled to take place after block height 494,784, which will be around November 16. A “hard fork” basically means a change in the rules so profound that everyone needs to upgrade their software to the new rules or use the client developed by S2X, called BTC1. Those who don’t upgrade in time, they will no longer be part of the upgraded network.

In order to apply this hard fork, S2X has said it needs the support of at least 80% of bitcoin miners. At the moment of writing, 76% of all miners "signal" their intention to follow S2X (during last 24h - this rises to over 82% if we take account the whole last week).

So, basically, S2X is supported mainly by large miners and mining pools such as Antpool, BTC.top, BTC.com, BTCC, Bitclub, Bitfury, etc, as well as bitcoin service providers such as Coinbase, Xapo, Blockchain, Bloq, Bitso, etc.

Read more: Plan to support S2X? Read this to be prepared!

You should note, however, that “signaling support” for a change in the rules of a game is not the same as actually “implementing the change”. Miners and mining pools can signal what they want at the moment. They have nothing to lose. The real deal is what they will do once the hard fork occur on November 16. Another piece of food for thought for you...

But S2X has no consensus. Wait. What is consensus?

Except the uncertainty about which miners will indeed support it after the hard fork, the S2X project has other and possibly bigger headaches too. Enter the so-called “scaling debate” nightmare.

You see, on the other side of the “scaling debate” you have lots of long-time developers of Bitcoin, and especially the whole current development team of the Bitcoin Core client, who say “no to S2X”. Note here, that a lot of these developers are employed by a single company, Blockstream, co-founded by Adam Back, Pieter Wuille, Gregory Maxwell, Austin Hill and others. Most of these people are experienced developers and cryptographers. For instance, Adam Back is the inventor of Hashcash, a proof-of-work and denial of service counter-measure system that inspired Bitcoin's creator, the famous but obscure Satoshi Nakamoto, to come up with Bitcoin’s own Proof Of Work (PoW) functionality – in fact Back’s work was one of the eight references Nakamoto had on the original Bitcoin paper.

These experienced developers argue that the proposed upgrade S2X is “risky” and “rushed” while giving miners too much power. In effect, the argue, the S2X hard fork will centralize a network which Nakamoto indented to be decentralized.

Furthermore, Bitcoin Core developers and their supporters, like Litecoin's Charlie Lee, seem to have a different vision about Bitcoin’s future. Rather than a payment network, thus in need of much higher TPS, these people envisage Bitcoin as an asset to store value. Thus, they argue, Bitcoin does not need rushed upgrades, but the careful deployment of on-chain improvements such as Segwit and off-chain solutions or sidechains, such as Lightning Network.

For these reasons, the Bitcoin Core developers have not only said they will not upgrade their reference client to the Segwit2X rules, but also declared that the coming Segwit2X upgrade is a "hard fork... not supported by the majority of the Bitcoin users and developers and is therefore a contentious hard fork". Furthermore, they say, the supporters of the NYA agreement "are shifting their users to an alternative currency (an altcoin) which is incompatible with Bitcoin."

In their support, the Bitcoin Core development team have lots of node operators. At the moment 7,930 bitcoin nodes run a version of Bitcoin Core, whereas only 1938 nodes are running the alternative BTC1 by S2X group. And both of these numbers tend to increase as we are getting close to November 16.

So are we heading for a split?

Yes, a chain split is highly probable. To be precise there are three possible outcomes from this stand-off:

  • S2X activates on November 16 and prevails. The new rules (2MB blocks) are enforced in the whole network. For this to happen, all miners (or at least the vast majority of them) must upgrade their software to be BTC1 compatible. If this happens, the bitcoin will continue to function but with larger blocks. The current 1MB chain (or “legacy”) will not be viable and it will cease to exist.
  • S2X activates but fails to secure majority support by miners. Only some miners upgrade their software. In this case, we have a chain split and two bitcoins are created: the "legacy" bitcoin, and the "Segwit2x" bitcoin, both with different rules and counted as separate cryptocurrencies.
  • S2X activates but with very limited support. No significant miners upgrade or run the new software, thus the network continues to run as today. In this, admittedly, low-possibility scenario the rules of Bitcoin do not change and Bitcoin blocks continues to be limited to 1MB.  

How likely is each possible outcome?

Well, no one really knows. People in the S2X appear certain that their planned upgrade will execute flawlessly. Their optimistic argument is that they have linked S2X activation on an internal Bitcoin mechanism called BIP9. In simple words, BIP9 says that the rules of the bitcoin game can change when a majority of miners support new rules.

Given that most miners and mining pools have signed NYA and are now signaling support for S2X (see image above), Garzik’s team is confident the majority of the network will follow the new chain. If all these miners deliver on their promise, they argue, the S2X chain will have much greater “hashrate” (think of it as the computational power to solve the cryptographic problem requested by Bitcoin’s PoW algorithm). If this happens, then the S2X chain will accumulate more “difficulty” and blocks than the current chain. This, in turn, will render the latter unprofitable as rational miners will jump on the new chain to stop losing money. Thus, a total migration to S2X will happen.

The same is true for the third scenario. If a small percentage of miners follow S2X, then the current chain will have much more hashrate, thus it will be unprofitable to mine on the new chain. And Bitcoin will stay as it is. At the moment, this scenario seems the least possible. But do note what we said earlier: intention does not mean action for sure. Miners loose nothing for signaling something, but in the end they will have to take a decision counting many factors.

For instance, a number of the same big-blockers in the S2X camp are already supporting the 8MB Bitcoin Cash, which is alive and kicking. So, they might decide not to go for S2X upgrade if they rationally see it more profitable to let “legacy” bitcoin at 1MB and mine on the Bitcoin Cash with even higher block size limit than S2X.

Another factor weighing in the final outcome is that there are already 20% of miners and pools that do not support S2X at all. For instance, F2Pool and Slushpool command over 10% of the current global hashrate. Add to that the fact that a mining pool is just a pool of individual miners, thus the pool operator cannot enforce his views on all these people.

Who Will Be Called Bitcoin?

As you may have already noted yourself, the most problematic of the three scenarios above is the second, which at the moment seems to be highly probable. Given that the two opposing sides have very different views on the future direction of Bitcoin, in case we end up with two chains they would both want to be called the “real bitcoin”. And to make things even more complicated, neither side has taken steps to protect users from transactions being valid on both chains (called “replay protection”). Now you get to see what a nightmare lies possibly ahead of us.

JustCryptoNews.com has already published a guide to survive the hard fork. Read it, fasten your seatbelts, withdraw your bitcoins from online wallets and exchanges to your personal wallet in your computer and wait. A few days after November 16, the hard fork dust will settle, more info will emerge and you will be able to decide what to do with your precious coins.

Disclaimer: This article should not be taken as, and is not intended to provide, investment advice on Bitcoin, Cryptocurrencies or finance in general.