Bitcoin has faced turmoil in the past but nothing like this. In two weeks, a massive fight taking place among bitcoin insiders could produce a ruinous schism--undermining the integrity of digital currency and threatening its sky-high value.
The fight is over a so-called fork in bitcoin’s software, known as SegWit2x, that will create two competing versions of the currency and lead to disagreement over the “real” bitcoin. There’s even a battle over who gets to use the popular BTC ticker symbol.
The fork will also mean a payout to existing bitcoin holders, though any windfall could be overshadowed by larger turmoil. To understand what’s at stake, here’s a plain English Q-amp;A to explain the controversy.
Why is bitcoin going to split?
There is a disagreement between key stakeholders over how to update the core software that runs bitcoin. You can learn more about the technical details below, but the crux of the fight is over whether to double the size of bitcoin blocks.
The blocks, which are added every 10 minutes, serve as a record of all bitcoin transactions to create a permanent blockchain ledger. The current controversy means there is likely to be two bitcoin blockchains--one that uses smaller 1MB blocks and one that uses bigger 2MB blocks--and temporary uncertainty over which is the “real” bitcoin.
While bitcoin has experienced these sort of forks in the past (most notably with the creation this summer of rival currency “Bitcoin Cash,”) the market has never regarded such splits as a replacement for the original bitcoin. This time could be different.
When will the fork happen?
It is supposed to take place soon. This website offers a more precise moment --specifically Nov. 16 at 5:42 am--based on the number of blocks being added to the bitcoin blockchain. The fork is supposed to go into effect for block number 494784. (Once again, technical details on blocks and forks are further below).
Who is supporting the split?
The main advocates for the bigger blocks, aka B2X, are consortiums of bitcoin miners who use specialized computer rigs to compile transactions on the blockchain--and earn bitcoins (currently valued at around $7,400) while doing so. They argue the bigger blocks are needed to accommodate the rapid growth of the bitcoin network, and to reduce the rising transaction fees that have come with this growth.
The mining consortiums are being backed by many of the companies that provide the financial eco-system that supports bitcoin. These include certain exchanges, wallet providers, market makers, and storage vaults. The positions of these companies, however, is inclined to shift based on the market and popular sentiment.
Who is opposing it?
Opposition is led by a group of developers who maintain the core software that has so far defined bitcoin. Many of them consider the proposed fork as a corporate takeover of bitcoin, and say there are other solutions to accommodate bigger blocks. Here is how Samson Mow, a longtime developer, describes the big block advocates:
“[Big block] ringleaders are still pushing for a hard-fork now purely due to ego and escalation of commitment at this point. If you look at the history of contentious forks, starting from Bitcoin XT in 2015, it’s the same group of people. Either they are technically incapable of conceive of scaling methods other than block sizes increases, or they are trying to set Bitcoin on a path of centralization by making it more difficult for people to run nodes.”
The developers are supported by certain companies and mining groups, and by many amateur bitcoin enthusiasts who get together at meet-ups worldwide.
What version of bitcoin will prevail?
No one is really sure. If most miners get behind the proposed split--and stay behind it--that will likely make the big block version the de facto official version of bitcoin.
But if the market continues to place more value on the original bitcoin, miners could get cold feet and go back to the small version if it is more profitable. Indeed, for now, certain futures markets are predicting the price of the original bitcoin will be significantly higher post-split than the big block version (it’s unclear how reliable these are).
It’s also likely that big exchanges like Coinbase will serve as king-makers after the fork, in part by deciding which version of the currency gets to be “BTC”-- the ticker symbol everyone currently uses to define bitcoin. For now, most exchanges are not openly supporting one bitcoin version or the other. (You can read a rundown on where the 20 biggest ones stand here). Here is what Greg Dwyer of the exchange BitMEX has to say:
“There is a lot of passion from both sides in the community as to why we should have a fork and as to why we should not, especially now with Bitcoin Cash (and its ability to mine larger blocks), a number of Bitcoiners do not see the need for 2X anymore. With bitcoin at [its current valuation of $7,400], there is a lot of money at stake to ensure the coin you support succeeds.”
How long will it take to clear up?
That’s also unclear, though it’s probably best for bitcoin if a winner emerges sooner than later. A prolonged battle could spread confusion among investors and trigger a crisis of confidence in the booming crypto-currency market.
Meanwhile, some fear the big block version of bitcoin will fail to contain adequate technical measures (known as replay protection) to ensure transactions on both chains don’t become muddled. This would likewise spread uncertainty.
Finally, there is speculation that, even if the big block version of the chain proves less profitable, some big miners will keep mining it anyway in order to impair the small version. If that sounds like civil war, you’re right, and the fallout could be ugly.
What about those payments for current bitcoin holders?
If the big block version of bitcoin goes forward, it will contain an exact replica of the existing bitcoin blockchain--including a record of who owns all of the existing bitcoins. This also means every existing bitcoin holder will also hold those bitcoins on the new chain.
Coinbase and other big exchanges have already confirmed they will accommodate both versions of the chain, meaning a client who holds five bitcoins will also soon hold five B2X (or whatever they call the new version). This is potentially good news for bitcoin holders because, hey, free money! They will wake up with digital assets they didn’t own the day before.
Those waiting on a windfall should, however, take note of two caveats. First, there is uncertainty about how much liquidity there will be for both versions of bitcoin after the fork (note that Bitcoin Cash, which arrived after a fork in August, is fairly illiquid). Second, the arrival of B2X bitcoin could trigger a crisis of confidence in the digital currency market--and cause the combined value of both currencies to fall below today’s bitcoin price.
So what are the technical details behind the B2X update?
Before explaining B2X, it’s helpful to realize bitcoin works a bit like the operating systems in your iPhone or Android phone: Every so often the developers push a code update containing features or security updates for everyone to install.
Typically, bitcoin miners and others install the updates without fanfare and carry on. If they don’t, it’s not a big deal since the updates are backward compatible--meaning new and old versions of bitcoin software can recognize each other, including the all-important blockchain transactions.
The B2X update, which aims to increase the size of a bitcoin block from one megabyte to two, is different. It involves a “hard fork” that will create incompatible versions of the existing blockchain. To use the phone analogy again, imagine an iOS update that resulted in an iPhone user only being able to message other iPhones that had also added the update.
Finally, note that the technical measure itself--doubling the block size--is rejected by core bitcoin developers as necessary to accommodate the transaction growth on the network. These developers point out a recent technical solution (known as “SegWit”) that fits more transactions on a block is already in place, and that other easy-to-implement congestion solutions will arrive soon.