Bitcoin split and the Segregated Witness

Bitcoin is growing rapidly. As we wrote two years ago, Bitcoin’s future was uncertain. The scalability of the network was at the centre of a dispute among major Bitcoin developers. Several solutions were fighting for primacy. Two years of harsh words and failed compromises finally reached closure last week, in a quite unusual twist.

Block size debate

In order to grow its payment network, Bitcoin needed a solution to increase the size of the blocks in a blockchain. Blocks carry information about transactions (sender/receiver/amount/transaction fees, cryptographic key of sender and receiver, hash of the block, etc.). They are merged into the blockchain. In the original idea, their size was set for 1MB. This is enough for only four transactions a second, too narrow for the worldwide network. For core Bitcoin supporters, changing how blockchain works was considered as abandoning Satoshi’s original idea. In 2016, a solution called ‘Segregated Witness’ (SegWit for short) was presented as an argumentum ad temperantiam for increasing the network without changing the block size. This great mathematical solution enabled keeping the large bulk of data outside the block, but still have it bound to it. For part of the Bitcoin industry, mainly Bitcoin mining and tech firms from China, this was not enough. They wanted an actual increase in the block size as a confirmation of the Bitcoin network scaling up. So, in 2017, they introduced the SegWit2x solution, aka ‘The New York Agreement’. This solution would implement SegWit and increase the actual block size up to 2MB. This change in the blockchain design is called ‘Hard Fork’ (‘Fork’ is an improvement, update, or change in software that requires a new way of execution. It can be ‘soft’ without changing the design, or ‘hard’ completely changing how the software operates). A  third group of developers announced their solution for an increase in block size. No, they don’t propose doubling to four, but making it  8MB. They call these blocks BXT. Of course, this is a hard fork solution also. 

Decision making in decentralised systems

All changes and decisions to Bitcoin and blockchain can only be implemented through the consensus of the users. This is not done in a ‘one man – one voice’ manner, but rather by voting with the hashing power of your equipment. The miners, ‘defenders’ of the blockchain, are leading this race. They are the ones invested heavily in the industry and those who stand to  benefit the most if Bitcoin remains stable in the long run. If the number of users rallying around the consensus is not high, there is a fear of ‘forking out’ a large portion of the community, and ruining the trust in the network itself. To avoid this scenario, SegWit introduced the mechanism requiring the 95% of the network to vote for SegWit, thus signalling that it is ready to change. SegWit2x proposed 85% of users as a threshold for  implementation. Implementation of scaling solutions is done through  a ‘User Activated Soft Fork’ mechanism ‘… a mechanism where the activation time of a soft fork occurs on a specified date enforced by full nodes, a concept sometimes referred to as the economic majority’. The clock for the SegWit implementation was set for 1 August 2017.

SegWit implementation

As 1 August approached, the uncertainty around proposals grew. As usual, the media declared ‘the end of Bitcoin’, and harsh words were exchanged among main actors. Bitcoin Org issued an announcement on possible disruption in the network There was a fear of parallel incompatible systems, non-functional Bitcoin, and/or a loss in value. Under pressure of fear, uncertainty, and disillusionment, ‘full nodes’ (users who run the full version of blockchain on their computers) and miners did what only a few predicted: declared both sides the winner. Two days prior to 1 August, they voted to accept both SegWit and SegWit2x solutions.

As 1 August passed by, the soft fork implementation of SegWit started. SegWit2x is set to start implementation in November 2017.

You might wonder what happened to the 8MB BXT idea? Yes, they kept their promise and hard forked the blockchain on 1 August when everyone else was drifting towards a soft fork SegWit. In this way, a new cryptocurrency called Bitcoin Cash was created, attributing every Bitcoin holder the same amount of Bitcoin cash. This hard fork served as a great social experiment in creating  money  out of thin air, which is becoming the trademark of cryptocurrency. Bitcoin cash supporters, however, argue that ‘unlocking the value’ is the proper term to describe what happened.

Future of the Bitcoin payment system

As an outcome, the secured and certain scaling of the Bitcoin payment system resonated in its value in exchange for fiat currency, which soared towards a record high of $4000 for one Bitcoin. SegWit and Bitcoin Cash continue to run their own versions of blockchain, both claiming to spread the original decentralised vision. Overall, the prospects are looking good. The future SegWit2x implementations moved tension forward November this year. On the other hand, clever solution of ‘side chains’ and Ethereum solutions proved to be the way forward for the new version of decentralised companies and solutions. The usability and widespread use of these features are still to be proven on the market. Setting the system is an important part.

Stay with us for our next blogpost when we will describe a new way to fund crypto companies: ICO (Initial Coin Offerings).