When we see big price swings in the cryptosphere as a whole, it has to be because of Bitcoin. Bitcoin is the largest, the oldest, and the most well known blockchain in existence. So if we are seeing big price ticks up and down in the overall crypto marketcap, we should start looking at the largest blockchain itself. No other altcoin could cause the entire cryptosphere to lose $10 billion USD in value in one day like we recently saw on July 25th, 2017. And Bitcoin is certainly going through some political turbulence. Some of you trying to follow the news may have seen a lot of jargon thrown around - we have “BIP 91” and “BIP 148, “Segwit,” “Big Blocks,” “Blockstream,” “Core,” “Bitmain” and many other terms being used on online forums and social media in recent months. I am going to try to explain quickly what Bitcoin has been experiencing, why the price has been so volatile in recent weeks, and what to look out for in the coming week.
So how did we get here?
Bitcoin is popular. So popular, in fact, that people are using it to its current full potential. Many people did not expect bitcoin to grow in popularity this fast and the protocol was not ready to absorb the demand. It is difficult for a decentralized group of people spread all over the world with sometimes contrary incentives come to a scaling consensus that balances the maintenance of decentralized political power amongst the community, ensures the protocol is stable, and keeps up with demand from a growing user base. The debate has been heated. So let’s start at the beginning. The blocks have been hard coded by developers years ago to only be one megabyte in size. Each transaction writes a varying amount of bytes to the block depending on the complexity of the transaction, and this bytes are written to the chain, up to one megabyte per block. Each block is ten minutes of transactions. Once a block is filled up to its one megabyte limit, the block can no longer fit anymore transactions on the blockchain, and the leftover transactions must wait to fill up the next block. This creates a backlog on the network, raises fees as users must compete with each other for miners to process their transactions, and puts pressure on nodes to retain this backlog which decreases node reliability. This has been the reality for Bitcoin for months, with fees reaching as high as $5 at the worst points. However, while this one Megabyte limit is the focus of Bitcoin’s current scaling debate, this limit was not added to Bitcoin by accident. Let’s take a look at why the 1 MB limit can be seen as a good thing.
For the 1 MB limit
There are a few arguments developers are claiming for maintaining the 1 MB limit. An argument for this hard limit is that with larger blocks, solutions would take longer to propagate amongst the network. Take for example a miner in rural China with slower a internet finds a block. 2 MB would arguably take twice as much time to penetrate the great firewall of China and propagate to the rest of the node operators than 2 MB’s would, which, in the case of a larger block, means that a miner with a slower internet speed has double the change that his block is orphaned and rejected by the network in favor of another miner’s solution that was found after, but propagated faster. The implication here is if we increase the blocksize perpetually, it may make for miners to start to migrate towards areas with lower ping and access to large internet hubs to ensure their solution gets propagated faster than the distant miner. This allegedly makes things unfair for two people with the same hardware in different locations. Another argument is that the more resources a full node operator has to devote to running its node, the fewer full nodes would be run, further diminishing the decentralized nature and security of the network. Because of these concerns, Bitcoin Core, the largest bloc of Bitcoin developers, thought that “offchain scaling” via their BIP (“Bitcoin Improvement Proposal”) 141 (Segregated Witness or “SegWit”) was the best bet for Bitcoin to scale moving forward. SegWit can be implemented via a “soft fork,” which means (among other things) it can be activated with a lower threshold of support, and it provides a number of technical improvements, but the contentious issue was Bitcoin Core’s “Lightning Network” that allowed two entities to trust one another act create payment channels and allow for “off-chain transactions” or transactions that cannot be verified via the blockchain, but only thoe entities who are a part of the open channel. This is a pretty big shift in what Bitcoin originally was; from a decentralized e-cash to a settlement layer.
On-Chain Scaling.
However, some people don’t buy these arguments pertaining to the 1 MB limit, and simply want blocks to be larger in order absorb the demand. Big Blockers argue that the network can easily handle block larger than 1 MB, and that the aforementioned arguments are not actually issues at all. Since when has 1 MB every 10 minutes been stressful on a router? Larger blocks equals more transactions per second, but can only be achieved through a hard fork, which requires a larger % of the miners to be on board to activate. A strong argument was that off-chain scaling was too dramatic of a change to Bitcoin’s protocol and that it was too untested to put on the largest blockchain in existence. There are 800 other blockchains that could have been used as a testbed. Similar to SegWit, there were a few attempts to push large blocks through Bitcoin’s consensus rules: Extension Blocks and Bitcoin Unlimited were two big ones. But a change to the blocksize requires a hard fork. Users want larger blocks so their transactions go through cheaply and miners like Bitmain want larger blocks to earn more fees, and off chain scaling, if successful may diminish their profits in favor of node operators running lightning network.
So now we have these two camps, the “Big Blockers” and “Small Blockers” (Pro SegWit/Core Supporters) debating each other over how Bitcoin is to scale when something nefarious happens. Bitcoin forums are censored. Any mention of other implementation of Bitcoin other than Core’s SegWit is scrubbed off of forums: Reddit, Bitcointalk, and others. People are banned left and right. Developers quit the Bitcoin development team. People then began to form their own online communities outside of these forums. You may wonder why there is an /r/bitcoin and /r/btc on Reddit, and you’ll learn quite quickly that they bicker and rant and talk past each other much like Democrats and Republicans do in the US. You may also wonder why there is a bitcoin.com and a bitcoin.org which are proposing users download different software to run bitcoin. The censorship and subsequent creation of online echo chambers creates a deep, personal divide within the community and Bitcoin as a protocol stalemates for more than an entire year while the current 1 MB blocks fill up, and users are punished through high fees and no solution in sight.
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BIP 91: UASF Forces Everyone’s Hand.
After about two years of stalemate, Bitcoin Core advocated for what is called a “User Activated Soft Fork” which was a change to the protocol which would activate SegWit by allowing node operators to deny any blocks from miners that were not SegWit compatible. This was an underhanded way to achieve the soft fork without achieving the consensus needed for activation. If enough node operators ran the UASF code, they could deny enough miners’ non SegWit blocks and therefore achieve a soft fork activation because a number of non SegWit blocks were orphaned, increasing the likelihood of a SegWit blocks activating and therefore activating SegWit. This change was slated to go forward on August 1st. Despite the fact that Bitcoin was already relatively unusable for small transactions and UASF created a lot of fear, uncertainty, and doubt around the coin, it continued to get good press and the price kept going up. Bitcoin topped out at $3,000 per coin. However, as the steam from good news such as Japanese and Korean adoption let up, the bad news started to come to light, and the blocksize debate, UASF uncertaintly, full blocks (and also Ethereum’s ICO woes), crashed the whole crypto market, bringing Bitcoin well below $2,000 per coin.
Enter Bip 148: SegWit2x.
Due to the Consensus Convention in New York, an agreement dubbed the “New York Agreement” was struck by a majority of the community to activate SegWit via a soft fork before the August 1st UASF date, and then code a 2 MB increase in the block size 3 months later in November of 2017. Also coupled with this deal was a vote in no-confidence in Bitcoin Core’s leadership as the head dev team of Bitcoin. The deal rapidly gained over 90% support by a majority of the pools, node operators, exchanges, etc. SegWit was activated on Bitcoin in late July. And the price ticked back up to near $2,800. However, as I said earlier, the divide within Bitcoin runs deep, and some people were already calling to not honor the block size increase in three months. Which leads us to where we are now.
Bitcoincash.com goes online.
Bitcoin cash is also called the “UAHF” or User Activated Hard Fork. There are disgruntled users who do not want SegWit and still prefer on chain scaling. They have announced they will fork off the Bitcoin network on August 1st; the same day as the UASF goes into effect. If you missed the latest fork of Ethereum over TheDAO which was a contentious hard fork that created Ethereum Classic, buckle up because its about to happen to Bitcoin. This is a full chain split. Every Bitcoin holder who controls their private keys will find they have a balance of BTC and BCH. Move your coins now to a wallet where you control the keys if you want you Bitcoin and Bitcoin Cash.
A fork by definition means that everyone with a BTC balance also gets BCH. However, the main question is what will happen to the hashrate. Since Bitcoin runs SHA-256 which is driven by ASIC’s, miners have limited options regarding what chain to mine. Observers will keep an eye on which chain has how much hashrate. No one is sure how much hashrate will abandon Bitcoin (BTC) for Bitcoin Cash (BCH), and there is some concern for dramatic decrease in hashrate can affect the usability of Bitcoin. Many exchanges are halting Bitcoin transaction during August 1st, and some exchanges have already pledged support for BCH. Since the announcement of BCH, price has dropped back below $2,5000, and then bounced back up to $2,700 as of this writing as the markets wait to see just how large this miner and user bloc creating Bitcoin Cash really is.
There is more to the story, but I did my best to pull out the important parts. August 1st is split day for Bitcoin. Mark your calendars.