The Bitcoin scaling debate has been a hot topic for quite some time now and has been very present on all social media, youtube and every crypto forum out there, so let’s have a quick recoup on the key points that have been discussed so far in the community so that we can decide what are our options and what to be aware of.
First, let me outline where the problem lies and why we are facing a forking.
For quite some time now the Blockchain backlog of transactions is overwhelmingly large, at times exceeding 100 000 pending transactions, often waiting for days to receive confirmations and be completed. This results in a bidding-style competition between users, all trying to speed up their pending process and many choose to pay higher fees in order to “jump the queue”. Over the last year alone have seen the fees rise from $0.12 to $0.30, $0.70 and all the way up to $2.30 (and a number of reports point to a whopping $10 per transaction recently), something that threatens the user-adoption of Bitcoin as a currency and subsequently its future growth. One of its key USPs was cheaper and faster cross-border transacting but with the advance of the Alt Coins industry the usability dominance is seriously threatened in the longer term. The alts are out in full force and it’s only a matter of time until one or more of them take advantage in that area. If Bitcoin is to keep its place as the dominant crypto for both store of value and means of transacting, it needs to scale-up. Currently the size of each block is just 1MB and it has been so since the early days of its conception when the network was nowhere near the size it is today.
So, with that in mind, there have been a number of different proposals addressing the scaling issue but because of the decentralized nature of Bitcoin, it has been quite a challenge to implement any of them yet.
In 2015 one of the key Bitcoin developers Pieter Willier found a way to “squeeze” more transactions into a block by reducing some of the data that is being attached to each transaction and this became known as the Segregated Witness proposal. The way it works is by removing some signature data from the transactions hash. The data is not lost or omitted, but the way it is counted in a way that It essentially introduces a new transaction format, thus freeing more space on the blocks and resulting in bigger number of transactions being recorded on each block. Segwit and the subsequent proposals that were building upon it, was first designed as a hard fork but later it was decided to be implemented as a soft fork which would allow backward-compatibility. However, the users community and the miners haven’t been very unanimous about it to date and the amount of nodes signalling for Segwit has not reached the necessary majority in order for it to be activated.
Back in November last year (2016) a proposal (BUIP) for a bigger block size started gathering a growing community of miners and later that became known as the Bitcoin Unlimited camp. Their proposal is for a bigger block size that can be determined by the needs of the network and allows for a gradual upgrade of the block size over time. It has been a popular proposal with a number of influential figures in the industry – Roger Ver of Bitcoin.com but it also did not capture a majority of the nodes and it was met with a strong resistance by the Bitcoin Core team which created a divide in the community.
Overall, it seems that Segwit became the popular choice among both users and developers alike. Only the miners so far have resisted it and because the Bitcoin network requires that 95% of the nodes signal for Segwit before it can be activated under the previous proposal (BIP141) we haven’t yet seen it coming into effect.
And here comes BIP148 – a UASF (user-activated soft fork) which calls for Segwit to be activated by Aug 1st. This is the first proposal that sets a fixed date with such a short notice and it will in effect cause a hard fork. It will exclude any nodes that are not signalling for Segwit and their blocks will not be added to the Blockchain thus splitting the chain to Segwit-activated and non-Segwit activated nodes. This is why BIP148 has been making waves in the community and causing a panic among users and miners on both ends of the argument.
The big fuss is mainly due to the fact that in a case of a hard fork, the chain is split into two separate divisions and the question will be which one will become the dominant chain. The one that attracts the majority of the nodes and users, therefore will become the longest and with the most hashing power and ultimately winning the race. This would mean a temporary price devaluation and great uncertainty in the market which inevitably will cause many losses and panic selling… all events that are not in the miners or users’ best interest. This is why BIP148 is in my opinion not the best solution. Segwit was intended as a Soft fork, one that will allow nodes to upgrade over time and was backward compatible, while BIP148 is calling for a hard fork by definition.
So far, it seems that Segwit itself is not the issue. Most of the community agree that Segwit is going to be beneficial and want to see it happen. The part they still disagree on is the block size. Many are calling for a bigger block size and this was precisely the focus on the latest proposal that was discussed at last month’s Consensus 2017 – where a compromise proposal came into light, now known as SEGWIT2X .
Sehwit2x is possibly the best scenario, at least in my eyes. It combines activation of Segwit with a larger block size (twice the size of today’s 1MB) and it comes as a bolder and widely agreed-on project that aims to be implemented by July 21-24th which is a bit too close and to many it seems unrealistic. I for one prefer to see this happen and with as little truce as possible. We have already seen Bitcoin and the overall crypto market suffer 15-20% price correction in this last week, so the sooner we get over the Segwit debate, the better.
In the mean time, make sure you hold your Bitcoin in a safe place, most importantly, a wallet that gives you control over your private keys and hope for a quick passing of the storm. Even if the chain is to split, it will not be long till we find out which of the two is the more popular fork is and if it doesn’t split… then be ready for a quick price jump too. It can go either way, so watch the news and the forums daily and may the force be with you 😉