The Next 24 Hours Will Decide Bitcoin's Fate
Here’s what you need to know.
For two years, the digital currency bitcoin has been deadlocked by a caustic debate—some call it a "civil war"—about how to best scale the technology up to allow for worldwide adoption. As the two opposing sides argued their positions, the rancor became so intense that at one point a former lead developer declared the entire bitcoin experiment a failure.
It's all been leading up to today, Monday July 31. In the 12-hour period between 8 PM on Monday (midnight in the UK) and 8:20 AM on Tuesday (all times EDT), the fate of bitcoin and its promise of a more libertarian kind of cash will be decided.
Here's what's at stake, and what could happen.
The 'Civil War'
Bitcoin is a digital currency, and every transaction is recorded on a public ledger called a "blockchain" for all to see. Right now, however, the bitcoin blockchain is facing a crisis of congestion. The "blocks" of bitcoin transaction data that are continuously being added to the blockchain are full, slowing everything down. Bitcoin transactions that should take 10 minutes to be included in a block, "confirming" them as legitimate, can now be stuck in limbo for hours or even days. Imagine paying for a donut with a debit card, but you have to wait four hours until it's approved.
This situation, if left alone, would be bad for bitcoin. Because there's less space in the blocks of transaction data, there's more competition to have your transaction included in the next block to speed up the confirmation process. So, the fees that users can attach to their transactions in order to incentivize "miners" (people who run huge server farms to do the work of adding blocks to the blockchain for a reward) to have their transactions included in the next block are getting more expensive. This could effectively price certain uses of bitcoin for normals, like buying a $2 coffee, out of the system.
Read More: The Two People at the Heart of Bitcoin's Current Crisis
The congestion kicked off what is essentially a battle for the very soul of bitcoin. If the size of blocks isn't increased substantially, some believe, then the blockchain will mostly be a tool for established institutions that can afford to pay the high fees. For example, the blockchain could be used to instantly settle stock trades, and some folks think that's just fine.
However, the opposition maintains that if the block size is increased significantly, then bitcoin can fulfill its destiny to become a low-cost, global payment system—an alternative to the banks and credit companies. A libertarian dream.
For the last two years, bitcoin users have been wringing their hands over the possibility of a "hard fork" that would irreversibly split bitcoin into two versions, one to suit each of the two warring camps.
Imagine this: bitcoin is a potato. Most people want to use the potato to make mashed potatoes, because mashed potatoes are great. However, a smaller group wants to use the potato to make french fries. While much work has been done to keep the potato together and on track to make mashed potatoes, some people want to cut the potato in half so that the people who want mashed potatoes can have that, and they can have their french fries too.
The latest and most successful attempt to avoid such a split is called "Segregated Witness." Segwit, as it's called, is a rule change that affects how bitcoin transaction data is stored, and would free up a good amount of space inside blocks. To ensure that segwit is adopted, the bitcoin community rallied together with the threat of a "user-activated soft fork," or UASF. Under this scheme, any miners—the people who keep the bitcoin network running by creating bitcoin blocks for a reward—who don't support segwit will have their blocks ignored by users enforcing the new rules after 8 PM on July 31.
The situation could become dangerously unstable if anti-Segwit miners continue to work under the old rules after 8 PM while their blocks are being rejected by users. Holdout miners' blocks would build on each other, creating two different chains locked in a race to become the longest. But since this is a "soft fork," remember, these chains are essentially temporary and one could "wipe out" the other—literally causing the less dominant chain to stop existing, wiping out its money and gains.
To mitigate the risk of a hairy soft fork, Chinese bitcoin company Bitmain, which runs the largest mining pool in the world, proposed a "hard fork" alternative. This hard fork would make the chain split permanent, and create two versions of bitcoin. This, the company argued in a blog post explaining its decision, would be the only way to have two chains that do not endanger each other and the millions of dollars invested in them.
This hard fork was initially a contingency plan that Bitmain planned to activate at 8:20 AM on August 1, just about 12 hours after the soft fork activates. Bitmain will also allocate some of its mining resources to the hard forked chain, but only if bitcoin is at significant risk of having two competing chains.
This hard fork contingency plan quickly became Plan A for a disparate group of developers and users who think segwit doesn't go far enough.
They're calling it "Bitcoin Cash," and it would increase the size of blocks to eight megabytes, up from the current size of one megabyte. According to Bitcoin Cash supporters, the only way to ensure bitcoin becomes a global payment system, instead of merely a tool for the financial sector, is to make blocks larger and to do it right now.
So, bitcoin will fork after all. The only question is: Who will go along with it? If nobody does any work on the Bitcoin Cash chain, then it will wither and die. But if people rally around it, there will be two different versions of bitcoin.
A Nail-Biting Day
The thing to watch after 8:20 AM will be "hash power," a term for the percentage of mining power in the bitcoin network that one firm controls. If Bitcoin Cash gets enough hash power to work on its chain, it has a shot of sticking around.
Nobody knows how much hash power will go to Bitcoin Cash. Right now, 100 percent of blocks created by miners are signalling their support for Segwit. This means that after 8 PM, we can probably expect the large majority of miners, if not all of them, to commit to the new segwit rules. If 100 percent of hash power—meaning every miner—conforms to the new rules, then the hard fork will likely be dead in the water when it happens at 8:20 AM.
Bitmain, which controls the largest bitcoin mining pool in the world, supports segwit but has committed to mining the Bitcoin Cash fork if the soft fork isn't resolved in an orderly fashion by 8:20 AM on Tuesday. According to a blog post, the company initially planned to privately mine a forked chain for 72 hours after 8:20 AM before publicly releasing the new chain for people to build on top of. However, the post states, if people are mining the hard forked chain publicly after 8:20 AM anyway, Bitmain will simply dedicate their mining resources to that effort.
If Bitcoin Cash gains enough early support to convince Bitmain to start mining the chain publicly, then it would be a huge boost to the new blockchain. Other miners may follow Bitmain's lead, as they control a full 21 percent of bitcoin's global hash power.
Bitcoin Cash will be immediately bootstrapped by some in-built value. A hard fork creates an identical blockchain, which will mirror people's bitcoin wealth in Bitcoin Cash. So, if you own 10 bitcoin, you'll magically own 10 Bitcoin Cash too. The new currency will likely have some value right away: Futures trading values the currently non-existent digital currency at $275 USD. This may create an incentive for people to sustain Bitcoin Cash.
Ultimately, though, nobody knows what will happen when bitcoin forks on Tuesday morning. It could be a massive coup, or it could be a total failure. Watching to see how much hash power conforms to Segwit overnight may be an indication of whether or not Bitcoin Cash stands a chance by morning.
It's about to be an interesting few hours.
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