Another Bitcoin hard fork: SegWit2X

Update:

I had originally planned to release this article on Nov 6th but held it off since B2X’s fork was called off.  While B2X’s cancelation is a victory for Bitcoin as a decentralized asset, the hidden agendas behind B2X will not simply disappear into the night.  A small number of miners still attempted to fork B2X in the early mornings of Nov 16th, endangering Bitcoin’s ecosystem with a surprise fork attempt despite B2Xs failure to gather enough support.

I’ve decided to share this now to as reminder that Bitcoin’s decentralized and consensus model should not be taken for granted.  As Bitcoin becomes mainstream and its value surge higher, the greater likelihood for more corporate-style takeover attempts to control the Bitcoin Network.  Bitcoin’s future depends on its community, so let’s stay diligent in our research into Bitcoin’s development.

SegWit2X – The Latest Controversy to hit the Bitcoin Community

SegWit2x, also known as B2X, is about one week away from becoming the 3rd   fork of Bitcoin’s protocol in the past 3 months.  Unlike the previous forks that created Bitcoin Cash (BCH) and Bitcoin Gold (BTG), B2X is the most controversial and contentious chain split that Bitcoin has faced to date.

B2X aims to overthrow Bitcoin (BTC) as the dominate chain by offering a bigger block size and gaining majority miner support.  The project was agreed upon behind closed doors among Bitcoin investment conglomerate, Digital Currency Group, and a group of prominent Bitcoin corporations in what is known as the “New York Agreement”.  B2X is a corporate takeover attempt of Bitcoin.  Which side will come out victorious is anybody’s guess.

Bitcoin’s Scaling Debates

Scaling debates are not new to Bitcoin or cryptocurrencies in general.  (One of) Bitcoin’s scalability problems is a consequence of the 1mb block size limit set by Satoshi, originally to prevent DDoS attacks on the network.  As Bitcoin grows in popularity and use cases, the increased number of transactions occupy blocks faster than the network can process, resulting in network slowdown and increased transaction fees.  This debate ultimately comes down to two sides: Big Blockers who want bigger block size so more transactions can fit in a block and Small Blockers who would rather improve network efficiency through optimization of code (SegWit) and second layer solutions (Lightning Network).

My goal with this article is not to debate the different ideologies between Big Blockers versus Small Blockers.  In my opinion, there are different tiers of Big Blockers: those with good scaling intentions and those with hidden agendas and malicious intent.  B2X hides its financial motivations and political agendas behind an emotionally charged scaling discussion, in order to divide and conquer BTC’s community.

My article is split into two parts.  I will share an overview of how we arrived to B2X in part 1.  Following that, I will dive deeper into B2X’s selling points and uncover B2X’s self-interests.

How did we get here?

Back in February 2016, the “Hong Kong Agreement” set forward a scaling plan to release SegWit via soft fork if miner support reaches 95%, followed by a hard fork to increase block size.  After a year of heated debates, the agreement fell apart.  As it turned out, the official Bitcoin Core team never agreed to the HKA or were even part of the conversation.  Those participants who signed off as Bitcoin Core members were a couple of occasional Bitcoin Core contributors with no knowledge of the team’s roadmap.

For those unfamiliar with Bitcoin Core, it is the “official” software client of Bitcoin.  Core’s roadmap was to increase transaction capacity through SegWit and a second layer solution called the Lightning Network.  Lightning Network allows for off-chain payment channels that utilize Bitcoin’s blockchain as a settlement layer.  Core argues that block size does not solve scaling in the long run and recording every single transaction on Bitcoin’s blockchain is inefficient.

Bitmain, the largest Bitcoin mining company led by Jihan Wu, along with other miners such as ViaBTC, rejected Core’s roadmap and stalled SegWit activation. They argued that block size must increase because a 1MB block size constrains Bitcoin’s potential and creates high transaction fees that deter Bitcoin adoption by businesses.  Unable to agree on how to proceed, percentage of miner support for SegWit hovered in the 30s.

Frustrated with this deadlock, a majority of users voted to activate SegWit via UASF (User Activated Soft Fork).  When it became evident that a hard fork to increase block size would not be executed, a group of Bitcoin companies in May 2017 decided behind closed doors, and without Bitcoin Core’s team, to push forward SegWit2X as a hard fork (B2X), as part of the “New York Agreement”.

B2X is a combination of two distinct upgrades:

  1. Segregated Witness, a change in a bitcoin transaction’s data structure to free up space
  2. Increased block size from 1MB to 2MB
    S.A. This might be a little confusing but take note that SegWit alone will increase transaction capacity to a maximum size of about ~4mb.  SegWit2X will double transaction capacity to about ~8mb.
Percentage of Blocks signaling SegWit Support

SegWit Drama

Whether one sides with B2X or not, it is difficult to argue against SegWit’s benefits.  SegWit effectively increases the capacity of each transaction from 1mb to roughly 4mb of data.  It also fixes a transaction malleability issue where hackers could potentially manipulate signature data to defraud users.  This upgrade seemingly improves Bitcoin’s ecosystem, so why was SegWit’s activation held up for months?  And why, even after SegWit gained approval from the community, do the companies behind the New York Agreement still want B2X?

Truth is, Bitmain was not as against SegWit as much as they were against a soft fork.  SegWit’s implementation as a soft fork posed as a strong threat to Bitmain’s revenue.  Bitmain discovered a loophole in the bitcoin mining protocol that gave them an advantage over their competitors.  This technology, ASICBoost, allows ASIC mining hardware to increase its mining efficiency by 20%.  Exploitation of this loophole using ASICBoost is estimated to generate as much as $100 million USD per year.  However, ASICBoost is incompatible with most soft fork upgrades and would be rendered useless by SegWit’s soft fork, hitting Bitmain’s top line.  Bitmain stalled SegWit to pressure Core for more block size, which can only happen as a hard fork.  A hard fork would keep ASICBoost intact and the perfect excuse is to argue for bigger blocks.

Bitmain released a statement to this allegation.  In short, they admit their machinery contains the ASICBoost design.  They blatantly admit that they “can legally use it in their mining farms in China to profit from it and sell the cloud mining contracts to the public” but claim that they do not “for the greater good of Bitcoin”.  Bitmain essentially denies using ASICBoost, yet defends its legality and design.  I’m not buying it.  It is clear to me that Bitmain wants to: 1) hard fork to keep ASICBoost and 2) get a bigger block size while they are at it.

To Be Continued

The Hong Kong Agreement’s fallout re-energized the divide between two scaling ideologies.  Social media and Bitcoin forums became a nasty battleground where productive scaling conversations about Bitcoin often turned into insults and shouting matches.  B2X hides itself behind a contentious scaling debate, pretending to be the champion for Big Blockers.  In the next article, we will look B2X’s arguments and uncover motivations they don’t want one to be aware of.

Click here for part 2 of this article