Bitcoin – Potential Network Disruption on July 31st

EDIT: Quick reference https://medium.com/@wintercooled/the-road-to-segwit-activati...

But it also reinforces for me just how not ready for primetime BTC is, and it makes me think the appreciation over the past year is truly insane.

Can you explain how this jives with miners supporting Segwit2X, which brings both segwit and bigger blocks?

Another aspect of the riddle is that SegWit will eliminate ASICBoost - which is an optimization developed by one of the biggest ASIC miners producer - so he is probably also against it. There is also the thing that ASICBoost is probably patented - so it has a lot of opposition in the community.

----

Right now there are 3 implementations of Bitcoin in the wild, and each of the 3 will react differently to different network events. The network is essentially splitting apart, with each fragment driven by a different faction.

If you don't know what the different factions are, you probably don't need to. Its needlessly involved, highly political, and full of echo-chambers and shouting matches.

What happens largely depends on how much support each faction has. Unfortunately, there's no real way to measure how much support each faction has until the fork actually occurs. Each faction thinks that its the largest by a significant margin, and thinks that the other factions have used underhanded techniques to bolster their visible support.

When the rubber meets the pavement, we will know though. If the network splits into three pieces, likely the coin price for each piece will move around violently, and one portion of the network will probably end up with a much higher coin price than the other parts. Or maybe it'll be an even three-way split, which will make things in the Bitcoin world very confusing.

----

As a huge Bitcoin fan, I hate to say this, but if you aren't clued into the various events, and you can't name the three factions or explain the beliefs of each, you should just stay away for a while. If you get pulled into the split without knowing what's going on, you are very likely to lose money. There will certainly be opportunists trying to take advantage of the situation, and you, being ignorant of the situation, will be the one who gets taken advantage of.

----

If you do know what's going on, you can name the factions, etc, then what you should do is pretty simple. When the split happens, sell all of your coins on the forks that you disagree with, and use the resulting money to buy coins on your preferred fork.

----

For anyone who cares, my alignment is with the status quo. I feel great animosity towards the hardfork faction (confusingly called Segwit2x), precisely because they have forced a situation where people who don't know what's going on are able to get hurt. They have also repeatedly, repeatedly, ignored very sound advice from the technical experts of the industry.

The UASF faction (confusingly, a 'pro Segwit' and 'anti Segwit2x' faction) has my spiritual support, but I don't think they have the numbers behind them to make a difference. I don't think running the UASF software is the right move.

I personally believe that overwhelmingly, the vast majority of people who use Bitcoin are probably largely unaware of what is happening, and are running the status-quo software (confusingly, the 'Segwit' software, or the 'Bitcoin-core' software). I'm guessing when the forks all happen, it'll be pretty dominantly vanilla Bitcoin with the highest price, and then a few weeks later it'll all be a bad memory, and nothing will have happened at all.

I guess we'll find out.

This is an unfortunate misunderstanding on the part of the miners, and the math is really simple: imagine a network on top of Bitcoin, e.g. lightning.network, which can process 10 million transactions off-chain and settle it on the Bitcoin blockchain using only a single transaction. Imagine if every one of those 10 million off-chain transactions paid just 0.01 cent in fees... this would earn the payment processor $1000, which can only be realized by publishing a Bitcoin transaction, in competition with everyone else making a lot on off-chain fees. The result is that off-chain profits (in the form of fees) would allow off-chain payment processors to pay huge blockchain fees, because they can deduce it from the profit they've made on off-chain fees. Nothing, in my opinion, will increase Bitcoin fees more than layer 2 protocols creating more users and transactions (because fees are paid per off-chain transaction).

The point some miners are missing is that one billion off-chain transactions each paying a 0.01 cent fee is more profitable than 2,000 on-chain transactions paying $1 each. And if everyone is able to earn $100,000 in fees by publishing a single Bitcoin transaction, this must push up Bitcoin fees, since people will be competing on getting into the chain with the bidding power from their earned profits.

SegWit was not created toward the end of increasing the blocksize, it was created to fix transaction malleability along with various other improvements. That it arranges the partitioning of witness data from transaction data to sort-of not count against the block size was a bonus, especially since a lot of dubious attempts at forking to a larger block size we're being given decent backing in terms of funds.

The point of fixing transaction malleability is that it allows for more robust smart contracts that depend on transaction validity. Once you enable these smart contracts, you start scratching at the surface of scaling methods that shift risk to the willing participants. As every Bitcoin transaction must be validated by every Bitcoin node, the entire network must inherit the risk of attempting to satisfy demand for transactions. Not just in terms of hardware requirements, but also in terms of the viability of paying for security of the network against a diminishing block creation subsidy.

The maintainers of Core, and plenty of other people in the Bitcoin community, see the scarcity of block space as a positive and as an inevitability. It's a positive in that it provides the incentive for security as the subsidy gets reduced, and inevitable as any 'spare' space in blocks can incentive superfluous transactions. There's plenty of development on the front of moving bitcoins between other chains with different consensus rules that would allow for better scaling, and for better development and testing of solutions that could eventually make their way to the main blockchain.

I'm personally of the opinion that once you allow for the transfer of bitcoins to and from second order chains, that Bitcoin can essentially enter a version freeze.

Segwit will disable ASICBOOST as a side effect of improving the protocol. Therefore, BitMain has been launching FUD campaigns and numerous attempts to propose alternative software to stop segwit (XT, BU, BTC1, BTCABC etc.)

Segwit2X is a compromise-- but Bitmain does not like it because it activates segwit.

So BitMain has announced they plan to do a forcible Hard Fork of Bitcoin, splitting off into another chain, that they will privately mine-- and they intend to neutralize segwit on it.

They have publicly complained that segwit offers lower fees for transactions that use less resources.

The entire conflict (including the "scaling problems" which have recently been proven to be due to spam driving up transaction costs) is Bitmain attempting to increase and protect their near monopoly.

Please be aware that their fork, which will have nearly unlimited block size will increase their monopoly. Due to the great firewall of china, large blocks have trouble getting transmitted, so whenever a chinese miner finds a block, when the blocks are very big, they have a significant competitive advantage in finding the next block. Thus simply activating a spam campaign (which they have been doing the past 3 months or so already) will allow them to centralize mining in china because the chinese miners will start getting 2-3 blocks ahead. Further on their hard fork they can easily lower the difficulty and get many blocks ahead while private mining (but make it look like the difficulty is higher) -- admittedly a speculation but given their past exploits and announced plans to engage in further shady behavior I would not be surprised.

Here's the blog post where they announce their (very sketchy) hard fork: https://blog.bitmain.com/en/uahf-contingency-plan-uasf-bip14...

I've used the fee prediction engines to try to avoid low fees and still ended up waiting eight days for a transaction to process. I gave up on it during that week, only for it to go through after I paid another way.

I don't really get the debate, I mean maybe implement the solutions from both sides at once? I don't care, my local solution is to just avoid it as a payment network for now. That's its own kind of vote I guess...

I'm sure there will be a camp arguing that I just wasn't smart enough, with the corollary that UX as a discipline coddles whiners like me.

Maybe so.

The game theory of fees and congestion is still interesting, with miners always interested in an incrementally more painful network for users, until the tragedy of the commons hits and it collapses.

Bitcoin has a first mover advantage, which led to some network effects increasing its popularity. Miners are extracting some rents from that popularity right now. But there may be a weird game theory here, where users are driven to prefer newer bitcoin clones with smaller (less secure) networks, simply because the fees demanded are far lower and (more importantly) more predictable. Price volatility of newer networks is a major a downside, but there's an equilibrium. Everything has a price, even volatility/stability. If you're doing one transaction and not storing value, then your risk on a new network is bounded by how long it takes you to get money in or out of the network and process the transaction. BTC will bleed off support, under some values of: BTC fee, BTC tx processing time, processing time variation, velocity in and out of smaller network, and volatility of smaller network. (This might be asymptotic and leave BTC the leader though, no guarantees.)

While creating a lot of confusion about long term coin viability, these forces could provide a useful equilibrium on power consumption, a downward force on how much power we want validating transactions. I've been worried about the power cannibalism scenario, where BTC becomes a payments standard but we're racing to commit all new power generation simply to verifying the network. But power use puts a floor on tx fees, and users with available alternatives put a ceiling on them, so... maybe we won't build a dyson sphere dedicated only to powering one payment network after all.

The level of inefficiency here is mind-boggling. Surely this must be one of the least efficient, least environmentally-friendly computing ventures ever?

Scalability has improved somewhat during the past two years and most developers believe it is time to increase capacity as well. The question you refer to is how to increase capacity, within the scaling constraints.

I understand the ambition to be neutral in a contentious issue but one must be careful as not to spread misinformation. "Discarding less useful data" is not how segwit works at all. Segwit does away with the fixed blocksize and uses instead a flexible block size of up to four times the previous fixed limit.

The discarding you refer to is the backwards compatible aspect of segwit where it can communicate with older nodes that do not implement this feature by not sending them the data. It is not discarded and a supermajority of the network must use the full larger blocks in order for this to be secure. It is merely a transition method to allow for upgraded and non-upgraded nodes to briefly share the same network.

So what you refer to are two methods for larger blocks. One must be upgraded with a flag day where everyone upgrades or you lose money, and one allows for a transition with a certain amount of backwards compatibility.

It is also misleading to describe this as two "sides". The sides are mostly within social media. The technical debate has been had and there was overwhelming consensus among the developers that the backwards compatible way should be deployed first.

If the technology takes off and solutions such as Lightning prove viable, most developers agree that the non-witness part of the blocks probably needs to be upgraded as well.

That is false, nowadays.

> Let's not forget that anybody can be a miner!

Even if you repeat a lie a thousand times, it's not going to become true :) Bitcoin's mining algorithm is so simple that mining industry has specialized too much, and now the best technology for it is ASICs. You cannot mine (or rather, it's nowhere near profitable) if you don't have access to this kind of hardware.

And of course, claiming that anybody can have access to this hardware is very very debatable. The best indicator of how this is not accessible by everybody is how centralized this industry is nowadays (just look at the correlation between ASIC manufacturers and owners of mining pools).

How about Bitcoin owners instead? Your vote is proportional to how much you have.

"He who has the chips, makes the rules."

The problem with your understanding is two-fold: first, "one CPU, one vote" sounds very egalitarian, but in practice it just means people buy vote share and therefore control.

The second is the idea that democracy is a perfect consensus system. That's only true if nobody agrees to fork.

No social contract is written in stone (despite millennia of efforts to do so).

I don't have much time right now, because I am at work, but maybe later I either post more or a better link.

To be very short: Bitcoin has not been thought to give miners all the power. In the contrary, their main function is timestamping the transactions! And not much more. Full nodes (or hopefully in the not too distant future advanced-spv-nodes) that should be run by many people (at least the conomic important ones, like exchanges, ...) do also verify the correctness and reject miners if they lie or don't behave in the economically-majority intended way! Miners are there so that we know what we (full nodes) should verify (and not blindly believe). Without miners we would not know which blocks to verify (there would be near infinite opinions/blocks). Miners make the choice what to verify just smaller, it doesn't make it automatically the truth.

Here a comment that shows that it was written from day 1 like this in the whitepaper:

https://www.reddit.com/r/Bitcoin/comments/6hefd8/comment/diy...

(not the best link, but ok for now. And of course economic majority is not a clear thing, but that doesn't mean that miner alone have the power. Beside miner there are the exchanges, the users, the api-providing companies, ... often grouped in 4 categories if you look at videos from Andreas Antonopoulos)

How the software functions is the subject of the old-fashioned open source project. This is also the weak spot. If you want to increase the number of available Bitcoins, your first step is to convince all developers on the project.

You are missing one of the key economic components of Bitcoin. Mining costs a lot of money. Nobody mines for free or at a loss, because 'at a loss' means to the tune of hundreds of millions of dollars.

Miners unquestionably mine the chain that has the highest block reward. Historically, hashrate has always been a function of $hardware_efficiency * $block_reward. If the block reward goes down, hashrate goes down (except where hardware efficiency is increasing fast enough to compensate). This is a lot more visible in the altcoin world, where miners can easily jump from coin to coin, and do as the coins fluctuate in value.

So what determines the price of the coin? Well, supply and demand. If people don't like your fork, there will be low demand, and your fork will have a low coin price. This will result in low hashrate, because miners aren't going to be willing (or even capable) of mining your fork at a loss.

Consensus ends up being fundamentally driven by the economics, and the economics follow the userbase.

Nobody can steal your gold, but lets say the entire world gets together at once, and decides that gold is worthless and that they are moving over to lead as the new currency. But they are keeping the name "gold". Everyone now uses the name "gold" to refer to what was previously known as "lead".

Your pile of "real gold" wasn't stolen, but it may as well have been, because now it is just a bunch of heavy, worthless, shiny, rocks. (yes, yes, there are industrial uses, but the price is way way higher than what industry justifies alone)

And it really doesn't matter that you are strenuously arguing about how this "new gold" is actually lead, because nobody cares about your opinion.

That is a similar enough analogy to how bitcoin forks work.

In reality, our banking system is much more chaotic than what the end-user sees it because central authorities are keeping the whole system together. and their authority is just what all of us believe in. Now, some people, for better or worse, started believing in something new.

We are doing a hardware presale using Bitcoin, and we're going to have to stop accepting Bitcoin at that time (it's a cryptocurrency miner, 90% of our sales are in Bitcoin), and that's going to hurt us.

This whole situation is frustrating.

No, that's exactly what Visa says, they call it chargeback. That's why it is hard to buy bitcoins with bank cards.

If you as a business accept(ed) Visa payments in Zimbabwe's currency in 2008, or Venezuelan bolivars over the last few years, you absolutely can have its value disappear from you.

No one is betting that the current version of Bitcoin is the future of currency. They are betting that the version of Bitcoin that exists in 20 or 30 years is the future of currency.

I don't think it'll replace currencies, but I think it will serve a purpose as a means to transfer value when authorities don't want you to transfer value.

Not saying if this is a good or bad thing, but it is a real value proposition.

because using sha256 for proof of work was a mistake - it's too easily implemented in specialised hardware.

now mining power is centralising and small groups can manipulate blockchain policies in their own interest.

bitcoin should PoW-chain to a memory-hard hashing algorithm.

You talk about decentralization but it's not shown, and may not even be possible, how the LN should work without relying on centralized hubs.

That said- this is a legit notice and is probably good advice. This is a contentious upgrade.

If the soft fork fails, Core developer Luke-Jr said they'd change the Proof of Work algorithm and possibly create an altcoin (or bitcoin if enough follow).

This is like a Russian Roullete situation. The gun's loaded, all signs point to neither side conceding. It's the cypherpunks vs the corporate miners (plus some former devs and very credible people).

There are currently two main ideas on how to scale Bitcoin. One camp is the called Bitcoin Unlimited and it's a proposal that allows the miners to adjust the block size as needed.

The other idea is called Segregated Witness or Segwit. This is a change in the way bitcoin transactions are counted towards the 1MB per block limit. It will allow slightly more transactions per block but also adds functionality that could allow other types of transactions. Those will be useful in some situations, e.g. paying the same entitiy many times over the course of the relationship.

Some people in the Segwit camp are tired of waiting so they are attempting to force the issue without the support of most miners. The date they picked is Aug 1.

Since very few miners support this move, it's not likely to succeed in my opinion, but nobody knows for sure.

Both sides have proposed ways forward, only to be rejected by the community. A large number of companies and miners in the space came together recently in New York to agree on a compromise. The New York Agreement (NYA) was to combine two of the proposals- Segregated Witness, a soft-fork that provides some new features and a modest capacity increase, and a 2-MB hardfork.

In response, extremists on the "small-blocker" side have declared that they'll likely force a chain-split on August 1st via a so-called "use-activated soft-fork".

Now it's time to see what the market thinks :)

The limitation is in the protocol, or rather, its current implementation with the 1MB blocksize limit. It was originally implemented to make growth a little more predictable in the beginning, nothing else. Satoshi himself said that it's only to prevent spam, which was at a time before growth, when it wasn't obvious yet how well the self regulation with TX fees works.

After Satoshi disappeared, other people took over the development, and disagreements over how to continue began. What was mostly a technical argument at one point, became a political argument after Blockstream formed, which had taken investments from banks and had most of the core developers under them.

These then not only pushed for other means of scaling than just removing the blocksize cap, but also actively pushed against that, which split the community in half.

Now we have people who (very simplified) just want the blocksize cap increased, and others who support the scaling methods of Blockstream, namely segwit and, down the road, lightning.

This endless debate with both parts of the community calling the other's solution unsafe is what is currently crippling Bitcoins potential.

1) currently, only about 6 blocks can be verified by the network per hour. That is fixed, any faster and the difficulty rises. Any slower and the difficulty declines. With the current code in use, it will always be about 6 blocks per hour.

2) currently, blocks are limited to 1MB in size. This means that only a certain number of transactions can be processed per block (apx 1200 to 2500).

Thus, only 24 * 6 * #txns_per_block => 170k to 350k transactions can be processed per day. It doesn't matter how many computers are verifying new blocks in the blockchain. This is an... issue.

Note, a "transaction" is moving BTC from one wallet to another wallet.

Remember though- if you don't have any Bitcoin under your own control (non-custodial wallet) you might not be able to trade between chains if there's a split. There are only two exchanges with announced pairs AFAIK- BitFinex and ViaBTC both have futures contracts set up.

So, as long as the combined value of every version is approximately around the value of the original version, you haven't lost any money.

Then, wait for the dust to settle, sell the coins for the versions you don't like, buy coins for the versions you do like, and then resume using Bitcoin like you had originally.

The altcoin market is pretty upside down right now, even more than Bitcoin is. It's probably less safe to move to an alt than it is to just ride through the bitcoin storm.

The threat is that BitMain, the controller of a very large amount of hashing power, something like %70 is threatening a hard fork into their own, non-segwit chain:

https://blog.bitmain.com/en/uahf-contingency-plan-uasf-bip14...

Just suspend your trading near the date until this kerfuffle sorts itself out and you should be fine.

Note that the page has "2017/08/01 00:00 UTC" in the source, but uses a "Localize dates" JavaScript function to change that to your configured time zone.