In this opinion piece, Deschapell argues that an upcoming proposal for changing the bitcoin software will fail to achieve its desired results.
With two weeks remaining until it's slated to launch, all eyes are on the imminent hard fork of the bitcoin software: Segwit2x.
Its significance? The fear that it could initiate the largest and most contentious chain split that bitcoin, and perhaps any cryptocurrency, has yet seen. Such an event could have devastating consequences for the ecosystem and its wider perception.
However, a close analysis of the dynamics at play shows that these fears are largely overblown. More likely is the avoidance (or quick resolution) of such a split, one that will also serve as an important test that bolsters the perception of bitcoin as a secure store of value.
A number of factors have contributed to escalating this situation and making it a completely unprecedented, and therefore one understandably shrouded in uncertainty.
The first is in its substantial backing. The scheduled 2x fork is the result of the "New York Agreement" between an impressive collection of major industry players including miners, wallets, exchanges and payment processors.
At its inception, the agreement claimed the participation of 58 companies located in 22 countries including many of the largest in the ecosystem, and 83.28% of miner hashing power. This represented the most significant push for any hard fork to increase the block size by far.
And while the agreement has lost a non-negligible amount of that support since it was first announced, the majority of its original signatories have not officially indicated a change in position.
The second and most important difference (one made even more significant by its aforementioned backing) is the NYA's break from the traditional conventions regarding changes to the bitcoin protocol. This has been the source of much of the contention and protest in the community.
Unlike previous attempts to change the bitcoin core protocol, Segwit2x was not introduced as a Bitcoin Improvement Proposal, but rather through the New York Agreement.
This is significant because bitcoin and all blockchains are strictly opt-in, consensus-based systems. For a backwards incompatible change to be implemented like a block size increase, the whole peer-to-peer network of bitcoin nodes must synchronously update its software to avoid splitting the blockchain and ecosystem.
For this reason, it is a standard and reasonable expectation for advocates of hard forks to attempt to do either one of two things. First, they can build widespread consensus in the ecosystem around the need for a backwards-incompatible change so as to avoid a confusing chain split. Or, if they cannot create such consensus, then they can enact replay protection – as bitcoin cash did – in order to cleanly split into a co-existing minority chain with minimal disruption to the ecosystem.
Segwit2x breaks this trend by declining to enact replay protection and also failing to publicly seek and build wider community support for the adoption of the software.
This is explained by the language of the original NYA announcement itself, which reveals a deeply flawed premise: that a consensus for such a change was already obtained since, "The group of signed companies represents a critical mass of the bitcoin ecosystem."
Far from consensus
While the many large companies that originally signed on to Segwit2x may seem to represent a clear consensus amongst the majority of the ecosystem, new developments have proven this is anything but the case.
Firstly, the doubling of the block size that Segwit 2x solely exists to implement has been rejected by the vast majority of the open-source development community on technical grounds, and as such, is not being merged into Bitcoin Core, the most widely used and supported bitcoin client by far.
Several original signers of the agreement have since formally dropped their support. Most notably amongst these are the mining pools Slush and F2Pool, which together account for nearly 13% of hash power at time of publication.
Exchanges have also largely recognized "legacy" bitcoin, and after the fork, that Segwit2x coins will be treated as separate units of value. This is opposed to Segwit2x's original intention and goal, which was to seamlessly replace the current bitcoin protocol and the corresponding unit of value.
These developments alone are enough to, in my view, ensure 2x has little chance of ever overtaking and replacing the legacy chain for any considerable length of time. Let's explore why.
Regardless of original intentions, if the Segwit2x fork took place tomorrow, with all its remaining signatories, the result would be a needless and ruinous debacle for bitcoin. With the strong contention of the fork between nodes, users and developers, two chains are guaranteed to co-exist and maintain monetary value.
This alone isn't normally a cause for alarm. However, this isn't a normal case. Without replay protection and with two chains maintaining independent monetary values, the loss of funds for many users on the network will literally be unavoidable due to accidental replay spending, replay attacks and sudden and widespread incompatibility between various software and services.
The only thing that is uncertain is how severe and continuous such a state of affairs proves to be and how much reputational damage bitcoin incurs as a result.
Needless to say, such a debacle would be immensely detrimental to the ecosystem and all its stakeholders, and is likely a far cry from what the Segwit2x signers originally envisioned and signed on to. Fortunately, the NYA is not only not binding, but its associated "support" and "signaling" equate to little more than flag waving.
Whether such supporters are ultimately willing to accept the economic consequences of following through with the split given the clear division regarding the fork is a separate question entirely.
These companies are ultimately profit-oriented and will live or die with the ecosystem, and it is doubtful that the repercussions of a deeply contentious fork without replay protection is lost on the majority of them. That this is being risked for a simple block size increase makes it an even more unsavory deal. To put it simply, circumstances have changed dramatically since the participating companies agreed to what then likely seemed like a safe and straightforward commitment.
That is why it is likely that the Segwit2x agreement will only continue to lose more support prior to the activation date. Indeed, perhaps the only reason that we haven't seen more of this already is that there is little incentive for these companies to be among the first to back out of their agreement while there remains time before they are required to actually act on it.
By virtue of this, should Segwit2x launch at all, it will likely debut with much less than currently advertised support. Thus, signers are faced with the actual risk and cost of following through given the clear division in the ecosystem.
The market will decide
Should Segwit2x emerge in any way besides being accepted by users and the market as the "new" and superior bitcoin as it originally set out to do, it will be reflected in its market price. The best indication of how that price might look like are coin split futures markets on several exchanges like Bitfinex, which roughly value a future Segwit2x coin at about 15% of the value of a bitcoin.
Regardless of initial miner signaling, a battle for hash power would quickly play out between the two chains that can ultimately only be determined by profitability. Because miners ultimately have large sunk and ongoing costs, hash power must ultimately follow the chain that is the most profitable to mine.
But how can we be sure that this continues to be the case and that the market will continue to value the legacy chain over Segwit2x, especially if an initial exodus of hash power renders transaction times painfully slow? What if, to add to this worst-case scenario, all the originally included companies actually went through with the agreement regardless of the risk to the ecosystem's and their own reputations, and are even willing to incur some amount of financial loss to do so?
A deeper analysis of the dynamics at play reveal that the NYA was flawed from the start by not only misunderstanding the nature of the network, but by also directly ignoring what makes a bitcoin valuable in the first place.
As such, Segwit2x could never have a chance at successfully overtaking bitcoin in market value regardless of the amount of corporate backing.
A flawed outlook
The New York Agreement was just that: an agreement among the involved parties. The error was in believing that they collectively had the ability to change the bitcoin protocol without any additional support as they represented a critical mass of the bitcoin ecosystem.
There are two important components to this erroneous conclusion.
Firstly is an overemphasis on the importance of hash power in measuring consensus and in achieving a successful fork. Miners provide an essential service and are large stakeholders in the ecosystem, but they are far from the only ones. Ultimately, the preferences of the rest of the ecosystem are aggregated and reflected in market prices, which miners can ignore but at a high cost that can't likely be incurred for long.
Secondly, and even more problematically, is the implicit assumption of Segwit2x that third-party services like Coinbase and BitPay can speak for their users, and can actually decide for them what token they would like to hold and use. Such thinking assumes the implicit consent of the users of all of these services to change the very definition of what a bitcoin is.
This goes against the very ethos of bitcoin, which was from its inception meant to do away with the need for participants to delegate this kind of trust and power to third parties.
Segwit2x was organized and advertised as a compromise in bitcoin's scaling debate. But it is only a compromise in an antiquated political sense, which understandably remains our only source of reference for when it comes to decentralized governance. But those same ideas and practices have no applicability in voluntary and consensus-based systems.
Blockchain protocol changes demand explicit, not implicit consent. So long as the cost of validating the network is low enough for most users to at least have the option to do so this will remain true.
Third parties may believe they can leverage their role as service providers and custodians to side-step this through attempts like Segwit2x, but they ultimately cannot force the network’s fully validating nodes to follow their new rules. Nor can they force their users or the wider market to demand their new token.
What necessarily follows from these facts is a new model of governance where politicking is supplanted by voluntary association, and the concept of representation is rendered obsolete by self-sovereignty. Segwit2x is a compromise the participants simply never had the power or authority to make.
If Segwit2x were to succeed in being collectively labeled as bitcoin, it must be despite the disagreement of the ecosystems vast majority of validating economic nodes.
This would mean that the coordinated actions of a few of the ecosystem’s large and visible players can unilaterally change the rules of the bitcoin protocol, a fact which would render bitcoin's reputation as a censorship-resistant store of value all but worthless.
Simply put, if these companies are successful in unilaterally changing the network rules without widespread consensus, then bitcoin would have failed.
For if such a contentious change can effectively be forced on the rest of the ecosystem then other changes can also be introduced despite protest, and States who are or become hostile to bitcoin will take notice. Pressuring those visible and key businesses in order to influence and control the network would be a straightforward and trivial attack surface.
Segwit2x seeks to provide temporary transaction fee relief by doubling the base block size. But without the underlying confidence in its security, resistance to change and continuity, the cost of a bitcoin transaction becomes irrelevant.
It would have lost the very thing that makes it worthwhile to transact in the first place.
The great experiment continues
While at first glance the difficulty in changing bitcoin seems to many to be a flaw, this couldn’t be farther from the truth.
Bitcoin’s resistance to change is what makes it so valuable in the first place.
Every time this property is demonstrated, it builds confidence in bitcoin’s reliability and security and reinforces its soundness as a store of value. That the economics of the network actively incentivizes this is what gives it the potential to become the most secure and trusted store of value in history. But it will only fulfill such potential if it can continue to demonstrate these properties in the face of ever larger threats to them.
2x isn’t the first such test, and it won’t be the last.
The choice between the legacy bitcoin and 2x is a choice between a continuously proven and non-censorable store of value, and a provenly compromised store of value with temporarily lower transaction fees.
If futures markets are any indication, then choice for the market is an easy one – and the result is clear: the Segwit2x hard fork is doomed to fail.
Disclosure: CoinDesk is a subsidiary of Digital Currency Group, which helped organize the Segwit2x agreement.
Wastebasket image via Shutterstock
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