The scaling debate, Bitcoin forks and potential disruptions
Werner van Rooyen
twenty six Jul two thousand seventeen • five minute read
“Bitcoin is dying!”, “Bitcoin will crash!”, “Bitcoin may fork!”, “BIP148 vs BIP91”, “August one is D-day!“ are some of the confusing articles and comments you might have seen or heard in latest weeks. In this article, I’ll attempt to unpack what is most likely (and most likely not) happening to your Bitcoin in the coming weeks and what’s behind the latest headlines.
Note, we have published an updated article focusing on Bitcoin Cash: The Bitcoin Cash fork: update
For many years, the Bitcoin community has been locked in what is known as the good scaling debate. What might seem like a ordinary problem (Bitcoin is becoming slower and more expensive to use), with a elementary solution (increase the block size or implement another way to transfer Bitcoin altogether) quickly becomes complicated, technical and even political.
Bitcoin is an “open” technology: it’s not managed by any single individual, company or government. This means you need broad agreement inbetween various stakeholders before any switches can be implemented.
Some of the main stakeholders in the Bitcoin ecosystem are:
- Bitcoin miners : those who verify Bitcoin transactions and get rewarded for doing so
- Bitcoin developers : those who propose and implement switches to the software
- Bitcoin users : people who buy, sell and use Bitcoin, those who hope it will become more useful, hold or increase in value over time
- Bitcoin platforms : various companies like Luno; they may provide Bitcoin services like storage, sending, receiving, buying, selling and trading
Each of the groups above has some authority in matters, but not a single group has accomplish authority. Users may want one thing (say, quicker transactions) and developers could build it (write the code and specification: a Bitcoin improvement proposal to permit for quicker transactions), but if not enough miners support the proposal, it won’t get implemented. This still doesn’t mean miners have accomplish authority, for without users, Bitcoin won’t have value and if it has no value, the prizes miners earn will be worthless.
Despite different stakeholders wanting different things, this democratic model of consensus is one of the very core reasons why people trust and believe in digital currencies like Bitcoin.
Scaling issues & proposals
Bitcoin has skyrocketed in popularity in the past few months. The record-breaking exchange rate, enhanced interest, signups, and transactions per day are all reasons to feast Bitcoin’s success. Along with that success, however, is the fact that Bitcoin use became so popular that the network became very congested and slow to use. The only way for customers to speed up their Bitcoin transactions is to pay a significant network fee (the reason why platforms like Luno introduced sending fees ).
Bitcoin improvement proposals and forks
As mentioned earlier, developers can make a proposal for improvements to the Bitcoin software. This is known as a Bitcoin Improvement Proposal or BIP (you can see the utter BIP list here ). Miners then vote on these proposals, signalling if they will support it or not (you can see the miner support for proposals here ). If there’s enough support signaled, it then gets implemented according to some timeline or other agreement.
If a proposal is significant enough, it may require switches to the software that will make it incompatible with the original version. This results in something known as a fork, whereby the software branches off from the original rules and is operated by the freshly implemented rules. Miners and platforms then may have to make updates to treat the fresh software.
The various stakeholders may collectively agree that the original version of the software was flawed (or otherwise outdated) and the fresh version gets uniformly adopted. Bitcoin had a fork like this back in two thousand thirteen and support for the old branch fell away.
Sometimes, however, there may be significant support for the original version and the fresh version of the software. This is what happened with Ethereum’s hard fork in July 2016: there was significant support for the original software, a rejection of the freshly forked blockchain. We now have Ethereum and Ethereum Classic operating as separate digital currencies, each with their own exchange rate, miners, developers and platforms.
After a hard fork (or the creation of two distinct currencies) you will, in theory, hold an equal amount of the original currency as you have of the fresh one.
Latest proposals and near-forks
There is mostly an agreement in the Bitcoin community that an increase in transaction capacity should be implemented, but there is a debate about how it should be implemented.
In March this year, a Bitcoin hard fork seemed somewhat likely with Bitcoin Unlimited’s proposals, which called for larger, pliable block sizes. Many miners signaled support for it (we wrote about it here ), but despite the build up in popularity, it didn’t reach sufficient support to happen.
Another way to increase transaction speed is through something called “Segregated Witness” (or “Segwit”), which liquidates some information from a block of Bitcoin blockchain transactions. Instead of making the block size thicker (as proposed by Bitcoin Unlimited), Segwit switches the way that transactions fit into the block, which in turn increases the transaction throughput capacity.
In the past three months, there have been three major proposals to implement Segwit:
- Segwit2X (sometimes called the “ Fresh York Agreement ”)
- BIP148 (also known as the “user-activated soft fork” or “UASF”)
- BIP 91(also known as “Segsignal”)
These are rather technical matters, but in a nutshell, we’re presently at a point where BIP ninety one and Segwit2X gained enough traction to be “locked in” by Bitcoin miners. The most significant takeaway from this is that as long as enough miners keep supporting it:
- Segwit will be integrated; and
- There will not be a fork now
- A fork may happen at a later date
It does not mean that there won’t be contentious debates, forks (or near-forks) in future, but it means, for the moment, it doesn’t seem like there will be a split .
Often when technical and opposing proposals get amplified, it confuses the market and has a negative influence on the price, as it has in the past few weeks. The price of Bitcoin rebounded right after BIP ninety one was locked in, as the market regained some confidence in the Bitcoin community solving the scaling debate.
So, what’s happening on one August 2017?
Even however Segwit permits for enhanced transaction throughput, not everyone is blessed with its implementation. After BIP ninety one was locked in, a group of developers, miners and users all of a sudden announced that an altcoin known as Bitcoin Cash (or BCH*) will be created, a fork from the current Bitcoin branch and it will (among other things) not support Segwit.
At this time it is very unlikely that Bitcoin Cash will have significant support from all the right stakeholders — miners, developers, platforms and users.
Most Bitcoin platforms, including Luno, will not be supporting Bitcoin Cash. Customers who want access to Bitcoin Cash tokens will have to withdraw their Bitcoin from Luno to a Bitcoin Cash-compatible platform before one August 2017 . We can’t make any recommendations for any third-party platforms.
Note, we have published an updated article focusing just on Bitcoin Cash: The Bitcoin Cash fork: update
What’s happening next?
Luno’s main objective is to keep your money safe and to maintain an orderly Bitcoin market in our countries of operation.
You may want to consider the following:
- We will proceed to support the superior version of Bitcoin with the majority support from all stakeholders (otherwise just known as “Bitcoin”)
- Despite restoring some silent in the markets, you can still expect some volatility in the coming weeks
- We presently requiresix blockchain confirmations for incoming transactions, as opposed to the usual three. This is a improvised precautionary measure while we are monitoring BIP ninety one implementation and Segwit activation
- We may temporarily halt Bitcoin deposits and withdrawals, whenever we deem necessary, to help protect the funds stored on Luno
- You don’t need to withdraw your Bitcoin from Luno (unless you want your funds available on a forked blockchain like Bitcoin Cash), but as always you’re welcome to do so at your own risk
Bitcoin is a fresh technology with a lot of promise.
At its core, it does two things: due to its limited supply, it makes for an alternative asset class (a store of wealth), reflected in the price ; due to its open properties and worldwide acceptance, it is also a medium of exchange (a means of payment). The debate isn’t over, but with the latest developments, we’re witnessing strong signals that it soon could make for a quicker and more affordable means of exchange than a few months ago.
As with any fresh technology, you can expect to see short-term volatility, confusion and exaggerated headlines, but this shouldn’t divert from the long-term potential that Bitcoin holds.
Werner van Rooyen
Werner goes up Business Development and Marketing at Luno. His passions include payments, e-commerce, technology, marketing and design: something that he has been fortunate enough to do on three different continents. Werner has lived and worked in South Africa, the United States, Indonesia, Taiwan and China.
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