Free Market Forks? Bitcoin Startups Love the Idea But Brace for Reality

Alyssa Hertig
Nov 2, 2017 at 10:00 UTC
FEATURE

You've probably heard the phrase "let the free market decide."

It's the concept that consumers and businesses determine the prices of services and products and whether they gain traction; an expression of the idea that the economic system should be one wherein supply and demand are unhindered from any government, authority or monopoly intervention.

More than an ideal, it's also the very real lens by which bitcoin's startups are looking at Segwit2x, a proposed change to the bitcoin software that's just weeks away from being introduced to the network.

Some users, namely many Bitcoin Core developers (and the miners and businesses that ideologically support their work) don't plan to go along with the changes, and so it seems more and more likely that the mid-November fork will lead to the creation of a new bitcoin cryptocurrency (yes, another one).

That said, the Segwit2x group has managed to secure two important blocks of supporters: miners and bitcoin businesses, and they continue to claim that these entities are broadly representative of users.

Those claiming to go along with the upgrades include mining pools (representing around 80 percent of bitcoin's computing power, though the figure is a bit misleading) and many bitcoin companies, including two of the most popular consumer wallet providers – Blockchain and Coinbase.

Segwit2x opponents have tended to demonize the companies involved in Segwit2x, arguing they're trying to "corporatize" or "take over" bitcoin in that the proposal tries to push through a bitcoin rule change that not all users agree with. But, as to be expected, many startups don't see it that way.

Firstly, startups feel they're merely advocating for a change that at least a subset of their users are behind. And secondly, startups don't see themselves as all that powerful.

"The truth is this is a material event which may demonstrate where the 'consensus' center of gravity lies between miners and the development community; not all actors in the ecosystem are as influential as those two groups," said Hugh Madden, CTO of bitcoin exchange ANX.

He added:

"Most users and businesses can't do much beyond stating a view, stepping back and waiting for the dust to settle."

Planning for a split

This view is also reflected in the policy updates bitcoin startups have released ahead of Segwit2x.

Again, although the goal of Segwit2x is to upgrade bitcoin, not split it – it's a contentious proposal, and it's looking quite possible that not all users will move over to the new blockchain.

With that in mind, bitcoin companies that support Segwit2x are gearing up for this possibility.

"There is a significant possibility that the planned hard fork will result in two bitcoin blockchains," a post from bitcoin wallet provider Blockchain reads, outlining further how it will deal with user funds in the event of a split.

In the post, the startup explains it will follow the chain with the most accumulated difficulty (a metric meant to denote the number of computers securing the blockchain) and refer to that as "bitcoin." If the cryptocurrency on the so-called "minority chain" has significant value, it will be made available for customers to hold or trade.

The post goes on to make clear that outgoing bitcoin transactions could be temporarily suspended for a period of time during any network instability that results from the hard fork.

Updates from other bitcoin companies outline similar steps to be taken in the event of a split.

Over email, Ripio founder and CEO Sebastian Serrano indicated much the same – that its wallet will follow the chain with "the most accumulated difficulty."

And BitPay, the network's largest transaction processor for payments, followed suit, announcing on Wednesday that it would "suspend payment acceptance, payment disbursement and debit card reloads approximately 24 hours prior to activation of Segwit2x."

Opportunity knocks

While startups seem on the same page about how to deal with a split, they have mixed views about whether a split will actually occur.

Yours co-founder Ryan X. Charles, an ardent support of Segwit2x believes Segwit2x will win out due to the commitment from miners and businesses.

But, other startups (and even some miners) don't share the same outlook.

"As of now, it seems relatively unlikely that Segwit2x will emerge as the major token," said Crypto Facilities co-founder and CEO Timo Schlaefer, citing prediction markets and node counts as the reason.

But that's not a problem for all startups. Some see a Segwit2x-induced split as a way to grow their business amidst what could be a volatile time for the network. GoCoin founder Steve Beauregard, for instance, said the payment processor will "likely" accept tokens from both chains "provided the liquidity is satisfactory" for each.

Still other firms, even original signees of the Segwit2x agreement, plan to take a wait-and-see approach.

ANX's Madden told CoinDesk:

"It is a mess. We will schedule a significant outage and monitor the situation carefully, before deciding which, if not both, chains will be supported."

Free market devotees

But apart from pragmatism, ideology is also at play.

For the companies that signed the Segwit2x agreement, bitcoin should be considered a payment mechanism, one that would flourish with a larger block size capacity that would allow more transactions per block and lower fees for users.

"I am convinced that we need greater capacity to reach the next 100 million bitcoin users, and by the time the New York Agreement took place, most of us we were sure that Segwit2x was the best way to break the lock on the bitcoin project development," Ripio's Serrano said.

In this way, Shapeshift CEO Erik Voorhees, too, believes the agreement has already helped move the network forward, evoking the original intent to pass SegWit and increase the block size.

"We remain committed to our agreement to upgrade the bitcoin protocol to both SegWit and a 2 MB base block size. It is our opinion that SegWit activated because of this very agreement (after failing to achieve even 40 percent of mining support on its own), and we will honor our part to carry it to completion," he said.

But, Voorhees is also attempting to be diplomatic to potential customers, suggesting – similarly to Beauregard – that businesses are keen to ensure that their decisions now don't harm their future growth.

"We understand some people disagree with this approach, but this is an open, decentralized protocol, and we will work to help it move in the direction we believe to be in the best interest of bitcoin's long-term development and growth," he continued.

Still, in the end, many of the industry's startups remain devout to the idea the market should decide.

Voorhees continued:

"If the market prefers the status quo, we will accept that, and we'll happily continue building along with consensus. If the market prefers the Segwit2x upgrade, our preferred outcome, again we'll happily continue building along with consensus."

Disclosure: CoinDesk is a subsidiary of Digital Currency Group, which helped organize the Segwit2x proposal, and has an ownership stake in Blockchain, Coinbase, Crypto Facilities and Shapeshift. 

Money with bullet hole image via Shutterstock

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StartupsScalingHard ForksSegWit2x

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