This is a short excerpt from my far longer post, and I am posting this section separately for the Bitcoin community to read SegWit activation from a game theoretical perspective… Make your own mind up…
Bitcoin Scaling Debate Update – BIP 148 UASF
It has been two months since my Bitcoin Scaling Debate post, the price of Bitcoin has more than doubled as have the costs of fees as Bitcoin’s growing popularity severely pressures scaling solutions, which in my opinion is a good thing… I have read a few “experts” declaring that the only solution to a scaling debate is a precipitous drop in market cap and price which would panic users and miners to agree before users ditched Bitcoin as a platform for good! However if you actually use your brain, it should become apparent that a rising price and rising transaction fees increases the scale and pressures and tests the scaling limits, so with interest and use of Bitcoin and it’s chronically slow and expensive fees increasing, this increasingly acute scaling problem will force some method to resolve the scaling stagnation… As I described in my last post there is currently a mexican standoff between factions of the Bitcoin community with threats of hard forks and two Bitcoins and all sorts of other myths and fear and boogiemen peddled by click bait merchants and self described experts, but strip away the noise and look at the reality and there is only one current solution to our scaling woes, and that is SegWit… And the clock on SegWit and a short and longer term scaling solution has just escalated big time!
As I explained in my last post on game theory and the governance of Bitcoin, the game theoretical endpoint and nuclear option to the scaling debate was an User Activated Soft Fork, and force Segwit upon the intransigent and stalling mining community… Well the pin on the UASF hand grenade has finally been pulled with BIP 148, a Bitcoin Improvement Proposal that allows Bitcoin users (and user interfaces) to upgrade to SegWit and bypassing the need for a Miner Activated Soft Fork… As I described at length Bitcoin’s real leverage and power belongs with its users and the software they run so if users have had enough of slow and expensive fees (and who hasn’t?), they can decide to run the Segwit ready software and signal for the soft fork… This soft fork will be activated on the 1st August giving the community the next two months to digest the UASF and how to prepare for it, and I would stress not to worry about this, as confusing and complicated as this sounds UASF discussion and noise is about to become deafening in the Bitcoin space so you will know everything you need to know in the coming two months, but I am doubtful if there will be any UASF in any form… In this game of chicken between Bitcoin and its mining community this UASF is putting your foot through the accelerator and staring down hard on your opponent as they come rapidly closer into view… The miners have now been notified that SegWit will activate on August 1st, so to use a tennis analogy, the ball is solidly in their court… How do the miners return serve?
Bitcoin Miners – Conservatives To The Core
I briefly mentioned in my last post how it was perplexing how hot the mining community was on Bitcoin Unlimited and a progressive hard fork to Bitcoin’s underpinnings and how this uncertainty could ever be even considered by an intrinsically conservative mining community, some of whom had made millions or even billions of dollars securing Bitcoin’s blockchain… Indeed, the thought of miners activating a hard fork is actually an absurd concept since your average miner has far more invested in Bitcoin and its price than your average user, and are therefore far more conservative in nature than users… If Bitcoin were ever to split into two then confusion and instability would abound that would dilute the value of one coin into two and would throw into chaos the whole development and in some cases industrial production of Bitcoin mining equipment and miners would be far more severely affected than the average user who only invests in the currency, so I cannot ever see a miner activated hard fork that would sever its roots and remove all backward compatibility to Bitcoin… To put some kind of figures to Bitcoin’s mining, since the halvening miners have been mining 1800 bitcoins per day that today at around $2500 means a mining revenue per day of $4.5 million, $31.5 million per week, $126 million per month, a half a billion dollars per year! Transactions currently are about 250,000 per day at a dollar or more average is another $250,000 per day, so transactions although making miners very wealthy in the short term is still only six per cent of total Bitcoin mining revenues, so what would you predict the miners would sacrifice for scaling purposes, mining revenues or transaction fees? What they lose on transaction fees in the short run by activating SegWit and solving short term on chain scaling problems, they gain from long term mining revenues as Bitcoin off chain development scale Bitcoin as a medium exchange… If Bitcoin were to double from here to $5,000 on SegWit activation then mining revenues would double to $9 million dollars a day, a billion dollars a year, if Bitcoin reached $10,000 Bitcoin mining revenues double again… SegWit is merely the mining community losing the battle (transaction fees) and winning the war (mining revenue)…
If there is one thing that could ever be less likely than Bitcoin miners activating a hard fork, it would be miners allowing users to either hard or soft fork the Bitcoin network… While I think any contentious hard fork in any coin working at scale would be terminal for the longevity of that coin (especially for Bitcoin) for that reason while there will continue to be a lot of noise and proposed hard fork “deals” agreed going forward, the chances of an actual User Activated Hard Ford (UAHF) are zero in my opinion, but an user activated soft fork is already a certainty… So why would miners not want an UASF? If this UASF were to go swimmingly then it would set a precedent for user hegemony over the mining community and that any contentious scaling solution from now on would take the form of UASF, sidelining the mining community that in my opinion could lead to unbalance and marginalization of mining which as a reminder is actually critical to Bitcoin’s security and needs at least some semblance of balance… For that reason I cannot ever see the miners allowing this BIP 148 UASF to activate, so from a game theory perspective we have our answer to what happens next…
SegWit Activation – Before August 1st By Miner Activated Soft Fork (MASF)
Using purely game theory and analysis of incentive structures I predict that the miners will activate SegWit before August 1st and indeed BIP 148 specifically states that the UASF will be cancelled as long as SegWit is activated by MASF, which resolves the scaling debate with Bitcoin users and developers getting a conservative but substantial improvement to Bitcoin’s on chain scaling while also paving off chain scaling layers, and the miners get to stymie an UASF and save face in what has been the most fractious scaling debate in the history of Bitcoin… The more noise that the community makes in the next few weeks over this UASF and the more users we can convince to signal BIP 148 then the faster the community forces the miners to blink and capitulate, so the next few weeks will be very interesting to watch in how the BIP 148 is used as leverage by Bitcoin’s community… If the big exchanges, wallet providers and even a significant section of Bitcoin’s mining community (which is not as monolithic and far more fractious than portrayed) signal for BIP 148 activation, then the remainder of the miners will have to capitulate to avoid both an UASF and possible split of Bitcoin, none of which is in their long term interest… BIP 148 after all the myths and hysteria of a highly emotional and irrational space is at the end of it simply user leverage and hype to force the miners into a MASF, which maintains Bitcoin’s roots and tradition of Miner Activated Soft Forks while also denying the Bitcoin user and developer community an UASF precedent, which in itself is important in harmonizing leverage between rival factions as this project continues to grow…
Conclusion
SegWit will activate before August 1st and we will at last have a substantial scaling solution and a much needed fix for transaction malleability also removing the transaction signatures from the block that will give roughly a fourfold increase in block capacity for the network’s surging transactions while reducing fees, and will also significantly enhance off scale micropayment layers that can scale Bitcoin as a low cost medium of exchange which increases Bitcoin’s market cap and value, and mining revenues… All of the hard fork embrace of BU and the stalling of SegWit by the miners is pure bluster and exertion of leverage and milking of transaction fees of what until recently had been a lean few years for the Bitcoin mining community… As game theory predicts a Miner Activated Soft Fork the history and tradition of Bitcoin’s governance is maintained, the Miners denying the User Activated Soft Fork that would set a precedent of ignoring Bitcoin mining on future protocol upgrades, and I just cannot see the miners letting this happen… To use a poker analogy BIP148 is going all in on the hand therefore forcing the miners to either reveal their hand or fold, and folding on this hand is far more prudent for Bitcoin’s intrinsically conservative mining community than the risk of losing all your chips and the game in the event of a contentious hard fork…