Will Bitcoin Network Split to Two on August 1st? All the Things You Need to Know About it

The probability of a blockchain split on August 1^st has abated somewhat in the final week of July, though uncertainty remains over what is actually going to happen in a matter of days that could change sentiment for Bitcoin and cryptocurrencies in general, on a permanent basis, depending upon the outcome and impact on Bitcoin holders.

Volatility in Bitcoin’s price is reflective of the uncertainty ahead and the possible ramifications of a hard fork, with Bitcoin prices having eased in recent days as different groups shift support, adding to the uncertainty ahead of Monday’s anticipated Bitcoin fork event.

Holders of Bitcoin will ultimately be rightly concerned over the possibility of a blockchain split, leading to two different Bitcoins.

The tug of war between miners and core developers also raises the possibility of the Bitcoin Cartel being wiped out and, with the quantum of fees earned by the Cartel and the current grip on the blockchain, the Cartel is not wanting to go quietly, while also mindful of things going against them.

A risk to Bitcoin itself, if Bitcoin Cartel is wiped out, is limited over the longer-term with a return to a decentralized blockchain ultimately the favoured outcome for the core developers and the wider Bitcoin mining population. A split in the blockchain into two and the possible loss of Bitcoins as a result are the greater concern, though from a core developer perspective, it is easy to understand why there is such disagreement over agreeing to simply increase the blockchain storage capacity on demand. After all, without any regulatory oversight, some degree of policing is required particularly with the Bitcoin Cartel’s current grip on the blockchain itself and hashrate concentration.

So What is it all about?

Ultimately, the issue facing Bitcoin is related to blockchain capacity, with the ever increasing number of miners and transactions stemming from a surge in demand for Bitcoin, attributed to the exponential gains seen in recent times and leading to a disagreement in the way forward on how to address capacity issues that have slowed transaction times to as long as 10 minutes.

Without the increase in capacity, the general consensus held by Bitcoin miners is that income opportunities will begin to recede as increasing transaction volumes slowdown the entire blockchain process. That could ultimately lead to a shift towards other cryptocurrencies or, worse yet, a return to the known phenomena of central bank and government controlled currencies.

On the other side of the fence are the core developers of Bitcoin, considered the founding fathers, who are trying to avoid a further centralization of the blockchain, with a small number of Bitcoin miners accounting for the vast proportion of hashrates at present, creating an element of control over how Bitcoin will evolve in the years ahead.

It’s a tug of war between the founders who envisaged a decentralized cryptocurrency, giving the decision making process to the wider Bitcoin world, and the small number of miners who have caused the much talked about centralization of power, which is in principal against Bitcoin founders’ vision, not to mention of those governments and regulators that have begun to embrace and recognize Bitcoin as legal tender, leading to merchants accepting Bitcoin in transactions in certain geographies across the world.

By simply allowing Bitcoin blockchain to be increased, the issue of centralization not only remains but is likely to be exasperated, with the mining few having the capability and hashing power to eat into the increased capacity, in the interest of increasing transaction fee income.

How to address the capacity issue remains unanswered. On the one hand transaction fees are at stake for the mining community and a few in particular, with the ethos of decentralization at risk, this being the priority of Bitcoin’s core developers.

Eventually, two solutions have been suggested – 2MB Hard fork or Soft Fork SegWit.

Forks – Hard Fork vs Soft Fork

With the principal of decentralization, Bitcoin users essentially vote on which way to go, by deciding which software to run.

There are a multitude of possible scenarios that can play out in the coming months, not to mention in the coming days and it comes down to which of the proposed solutions are accepted by the required majority and, if the necessary numbers in support of a particular protocol are not achieved then the degree of support for each.

The most preferred outcome for Bitcoin is its known today would be for the majority of users and miners to accept the proposed protocol, removing the possibility of a fork and an increased probability of a blockchain split.

Other possible scenarios, which has led to the increased uncertainty and volatility in the cryptoworld and Bitcoin in particular include:

Miners sit back and do nothing, with the majority of users accepting the proposed protocol, which would ensure a single blockchain and Bitcoin, but if the number of users in favor of the protocol ends at below a majority 51%, then the split is likely, with users going one way and miners the other. In the event that users eventually reach a majority, following the split, the majority blockchain would remain valid, essentially wiping out the miners.

Despite the ”strongarming” by the smaller, but more powerful miners referred to as the Bitcoin Mining Cartel, the possibility of the miners sitting back and doing nothing is reasonably high, with miners likely to want to avoid the possibility of a blockchain split.

Depending upon where you sit, the pros and cons are essentially whether capacity can be delivered to the blockchain without further centralization and in tandem, Bitcoin managing to avoid a blockchain split.

Miners will likely be looking for the increased capacity that would ultimately deliver greater control over the blockchain, whilst core developers look for a balance between greater capacity and greater decentralization, giving the decision making process to the users and not leaving it in the hands of miners

User Activated Soft Fork, UASF

The two hotly debated topics of late have been the use of soft and hard forks, more formally referred to as User Activated Soft Forks and User Activated Hard Forks.

A soft fork is a process through which activation of the protocol embedded into the soft fork is supported on a specified date by the network nodes. The soft fork essentially delivering a change to the software protocol, where previous blocks are invalidated by nodes using the new blocks through a majority of more 51% or more.

The fact that the activation of a UASF is dependent upon the support of the majority, not just miners, is considered a reinstallation of the decentralized ethos under which Bitcoin was created, the power going to the exchanges, wallets and businesses who are running the full nodes, who are also responsible for the validating of blocks.

UASF vs UAHF

The issue facing Bitcoin is a disagreement between proposed protocols, the disagreement being between Bitcoin’s core developers and Bitcoin miners over capacity issues that the Bitcoin blockchain has faced as the number of miners and transactions continue to increase, leading to what’s considered snail’s pace transaction completion times.

Bitcoin’s core developers are of the view that by increasing the blockchain, proposed by the USHF, the network would become further centralized, with the hashing power concentrated to an ever decreasing number of miners, which is in stark contrast to the ethos of cryptocurrencies and the concept of decentralization, the small number of miners now being referred to as the Bitcoin Cartel.

A possible outcome to a hard fork is a splitting of the Bitcoin blockchain and also mean that people’s preferred programs will cease to function or coins or contracts will no longer be honoured under the new protocol.

At present, Bitcoin blocks have a storage capacity of 1MB and while both sides have acknowledge capacity issues by developing protocols to address it, miners and core developers have failed to reach common ground, leading to the much talked about Bitcoin Civil War.

Separation of the Bitcoin network is something that both sides are likely to want to avoid, with the possibility of Bitcoin holders seeing their version of Bitcoin falling to zero or on the other side of the fence, miners being wiped out, should Bitcoin users prevail in the aftermath of a soft fork.

The core developers are likely to want status quo but with the increased centralization to abate and certainly not wanting to see Bitcoin go down the path of a fork split that could ultimately bring an end to Bitcoin and other cryptocurrencies that have been the beneficiaries of Bitcoin’s success.

What are the Consequences of Bitcoin Network Separation?

In the 2^nd quarter of last year, an Ethereum based project named The DAO entered an ICO to launch an investment fund without a fund manager, with  investors being involved in all of the investment decisions upon launch. The ICO raised almost US$150m, almost 70% of 2016’s total capital raised through ICOs. By mid-2016, hackers managed to get away with more than US$40m from the DAO, bringing the project to a grinding halt and the value of Ether down with it, Ether’s price falling from US$19 to under $12 in just a matter of days.

As a result of the hacking incident, there were 3 solutions offered:

• To accept the theft and the losses and take no further action.
• Deliver a hard fork and reverse the blockchain event to prior to the hacking event.
• Deliver a soft fork, accepting all transactions to the hacker’s wallet as false and return the money stolen.

In the interest of market capitalizations and protecting the investors, Ethereum created a new blockchain and ultimately reversed the theft, leaving the original Ethereum blockchain, now known as Ethereum Classic behind, a small minority continuing to support and assign value to the old blockchain. The split took place because of some users unwilling to accept the hard fork, accepting the soft fork instead, leading to the blockchain split that continues to exist today.

In the event of a split, should a Bitcoin holder not have control of the keys during the split, there are a few possible outcomes to the Bitcoin holder:

• The value of the Bitcoin held will reduce to zero do to the wallet selecting the wrong chain from the split.
• The value of the Bitcoin will remain unchanged and it is business as usual.
• The wallet holder will be given an option to keep their Bitcoin balance on both chains or to opt for one chain.

Having control of the keys is certainly the way forward, though the general view is that Bitcoin value will fall as a result of the split.

If you don’t have your Bitcoins in a private wallet over which you have control of the private keys, making the move in the days ahead and well before the end of the month is certainly advisable, with it being wise to hold Bitcoins in a private wallet until the dust settles over the first few days of August.

While the Bitcoin world will need to continue considering the possibility of a hard fork, there is also the possibility of a replay attack, in the event of a hard fork outcome, such an outcome considered to have dire consequences to Bitcoin.

A Bitcoin replay attach would enable an attacker to steal a user’s coins, ultimately emptying Bitcoin wallets on the alternative blockchain.

So, in the event of a Bitcoin blockchain split that results in 1BTC and 1BTU, 1BTC being the original blockchain. When purchasing Bitcoins on the new Bitcoin blockchain with the 1BTC Bitcoins, the balance on the alternate blockchain falls to zero, with the coins going to the 1BTU wallet.

An attacker is able to intercept the broadcasted transaction on one chain, and relay it to a node on the other chain, with both nodes accepting the transaction, since the transaction on both blockchains are considered valid.

Both blockchains in the event of a fork split would need to ensure that coins cannot be moved twice, which is considered to be a challenge by the Bitcoin world. The only solution being that a transaction on one chain can only be considered valid on the chain in question, such a precaution avoiding the broadcasting of transactions on the other blockchain.

Such events would certainly add to the negative sentiment towards Bitcoin, a blockchain split having already caused significant damage.

The Bitcoin New York Agreement

With all the ongoing disagreements, the New York Agreement evolved to look to resolve the differences between the miners and the core developers.

The agreement was put together in New York and involves the activating of SegWit with an 80% threshold and includes the 2MB hard fork within 6-months of the successful activation of SegWit, SegWit eliminating the prospects of an immediate activation of SegWit2

The Agreement was developed to achieve two goals:

• Roll of SegWit, an upgrade proposed by the Bitcoin Core development team.
• Deployment of the much talked about hard fork, which would increase Bitcoin’s block size limit

The issue with the New York Agreement is with regards to the necessary support required to activate SegWit and the remaining possibility of the SegWit2x being activated.

At present the support for the New York Agreement stands at 86% and has managed to hold above 80% levels since early July, which meets the minimum hashpower for SegWit to go into effect, with SegWit expected to deliver users with faster processing times, while reducing transaction fees.

Supporters of SegWit ultimately changed tact in order to force miners into submission, changing the software to refuse to accept blocks created by minors who were not in support of SegWit, with the deadline set at 1^st August.

Uncertainty remains over whether the Agreement will form the basis of a more co-ordinated, decentralized approach to expand the Bitcoin network, with some speculating that the warring parties are in agreement to bide time in what is becoming an ever more diverging vision on how Bitcoin should develop.

The battle may be won, but judging by the events leading into what is likely to be an acceptance of the NY Agreement, the war may yet have a few more battles before the a Bitcoin victor emerges.

So, what is the Right Thing to Do?

Bitcoin users will need to be particularly cautious in transacting after 1^st August, with scenarios in place where transactions can lead wallets being cleaned out, irrespective of the fork chosen.

As suggested earlier in the Article, there are some must dos ahead of Bitcoin fork event, which are:

• Having control of the keys is certainly the way forward, though the general view is that Bitcoin value will fall as a result of the split.
• If you don’t have your Bitcoins in a private wallet over which you have control of the private keys, making the move in the days ahead and well before the end of the month is certainly advisable, with it being wise to hold the Bitcoins in the private wallet until the dust settles over the first few days of August.
• One thing is certain and that is not to leave Bitcoins on an exchange.
• The more risk averse Bitcoin holders may consider selling and reentering the market once clarity prevails, though this would ultimately depend at what point the holder entered the market, 2000% gains certainly warranting preservation of gain over desire for more.