“What’s in a megabyte?” About $100bn.
No matter how you dress it up (and my word this has been dressed up), the Bitcoin fork – due to occur on November 16th – comes down to a 1mb change in the block size. After several years of debate, a plan to scale the network emerged with the “New York Agreement” in May 2017. The agreement, which was contentiously led by Barry Silbert’s Digital Currency Group, set out a path to increase the transaction throughput of the Bitcoin network by first implementing Segregated Witness (a software upgrade to increase block size to an effective 4mb) followed by a hard fork to edit the rules of Bitcoin and change the hard limit block size from 1mb to 2mb.
For a hard fork to be implemented in a smooth manner (Ethereum’s Byzantine hard fork from last week is a great example of this), it requires consensus from users, exchanges, merchants, nodes and miners. Each of these respective groups vary in their importance – although the network requires them all – and measuring said importance is awkward and subjective. In the case of the miners, 85% are signalling agreement with the 2mb hard fork whilst users on Twitter and Reddit will have you believe that there is broad-scale community outcry over “CorpCoin” – one of the many references to the merchants who have shown an interest in the 2mb hard fork. User concerns do appear to be corroborated on the Bitfinex exchange where 2mb futures (BT2/BTC) trade at 0.15. With so many different groups signalling very different behaviours, how will this all play out?
The current state of play
Before examining the outcome of November 16th’s Bitcoin hard fork, let’s first address a few key factors in the lead up to today.
- The first factor to understand is that there are no white knights. Everyone is in it for themselves. Whether that’s Core developers wishing to remain in control of the Git repository, merchants making the maximum profit from their userbase; miners mining the most profitable chain; users hoping for the best outcome in the price of BTC or exchanges receiving the most fees possible.
- Secondly, social media is censored in favor of the status quo. This is not a conspiracy. Comments and posts that discuss Bitcoin’s future with a 2mb block size are removed and the user is often banned. Bitcoin itself was conceived largely for the purpose of censorship resistance, it is deplorable that those who have the power to censor opinions are doing so and on a massive scale.
- Beyond censorship is the lobbying. Hundreds of users on Twitter have appended “NO2X” to their handles and now regularly brigade business leaders who indicate even the slightest support for 2mb blocks. When it comes to a 2mb hard fork, everything is an “attack”. Bitcoin.org now lists a warning at the top of their website “Beware of Bitcoin’s possible incompatibility with some major services”. Propaganda and persuasion are the name of the game.
On the opposing (2mb) side? Very little. There’s no conversation on Reddit (it’s banned), no hashtags on Twitter, and just a few business leaders who are now trolled every time they speak. Business leaders who – I should add – have done a great service to the ecosystem as a whole.
The reason as to why an individual might choose to lobby, brigade or censor content will be nuanced (no doubt driven by an honest belief) and speculating on motive would be equally as distasteful. The main cause for concern here is the number of red flags that this type of activity throws up; a swift jettisoning of this vitriol would be in the interests of everyone.
What will happen when Bitcoin forks on November 16th
For simplicity, we will refer to Bitcoin Legacy as the existing chain, and Bitcoin 2 as the newly forked chain with the 2mb increase.
Current signalling shows that 85% of Bitcoin’s mining hash power will mine the Bitcoin 2 chain. Assuming miners act as they signal (they are not bound by any agreement), block times on the Bitcoin 2 chain will increase by a couple of minutes before resetting to 10 minutes 2 weeks following the fork (interested in Bitcoin difficulty? See the explainer). Put simply, those who choose to transact on the Bitcoin 2 chain will not notice much of a change in transaction speed.
On the same assumption, Bitcoin Legacy will have 15% of the total hash power. As a result, blocks on this chain will be mined every hour before resetting to 10 minutes a little over 80 days later. Given that a typical transaction requires at least 3 block confirmations, those transacting on Bitcoin Legacy will need to wait 3 hours – until mining difficulty resets nearly 3 months later.
These are all simple assumptions which disregard the minutes and hours post-fork when game theory takes hold and users, merchants, exchanges, nodes and miners all have the opportunity to change position. Immediately post fork we may see something quite different:
15% hash power will be disruptive to users (several hour transaction times), but not enough to kill the chain quickly. Merchants are stuck in the middle; customers will have to wait several hours before they can receive any goods, but they’re also loudly signalling on Reddit, Twitter and by email that Bitcoin Legacy is Bitcoin. Merchants will be able to deal quickly on Bitcoin 2, but Legacy is still in demand by some users. Exchanges then enter the picture. One of the largest – Bitfinex – has stated that they will list Bitcoin Legacy as “BTC” and Bitcoin 2 as “B2X”. Bitfinex has also stated (somewhat vaguely) that:
“This will remain the case unless and until such time that market forces suggest an alternative.”
Other exchanges will take their own path and an imminent announcement from Coinbase is likely to have huge implications on the outcome of the fork. The confusion will be massive for everyone involved; that is until one side buckles and the outcome quickly unravels. As the economics of this game of chicken play out, transactions on the network as a whole are likely to grind to a relative halt in the days following the fork.
If Bitfinex and other exchanges are sticky with the ticker “BTC” as a means to list Bitcoin Legacy and users/merchants are willing to put up with significant disruption for a few days, then Bitcoin Legacy is likely to win out. This can all happen a lot faster if miners switch to mine Bitcoin Legacy. If on the other hand, Bitfinex is honest in having no political affiliation, and chooses to follow hash power as many other exchanges and merchants will, then it may disrupt Bitcoin Legacy enough to swing things the other way.
Unlike the Bitcoin Cash hard fork, which was considered a “dividend” by many Bitcoin holders, it seems unlikely that we will end up with two coins. In the case of Bitcoin 2, there is very little interest in becoming an “alt coin” where the only difference in the software is a 2mb block instead of a 1mb block. An “emergency difficult adjustment” would also be needed to bring block times back to normal which has problems in and of itself. Going through all that effort for a 1mb increase when the market has already turned its back seems unlikely. And ironically if Bitcoin 2 did continue to function with a small fraction of the userbase, it wouldn’t need a 2mb block anyway.
Sadly, what started as a fulfilling technical debate has descended into something pretty foul. It’s hardly surprising that when there’s $100bn at stake those in power will find a moral excuse to censor opinions; even if the market in which they do so was built for the opposite.
Further reading: Keeping The Community Together
Note: This piece cannot possibly discuss in detail the merits of both sides of the debate. There is a legitimate concern that 2mb blocks create a more centralized system. The problem that this article is attempting to shine a light on is that far from genuine technical considerations, it is the relinquishing (read sharing) of power that the status quo is unable to stomach.