Anyone holding Bitcoins will probably have noticed what shenanigans the market has been u̶p̶ ̶t̶o̶ down to lately. The market’s tanking, and it’s tanking hard. Ask anybody why it’s happening and they’ll quickly tell you it’s in anticipation of Segwit2x.
A segue into Segwit2x
What’s Segwit2x and why do some in the Bitcoin community want it implemented? As Bitcoin’s adoption and price skyrocketed over the last few years, the network has experienced growing pains caused by a significant increase in transactions.
Bitcoin was hard-coded such that every Bitcoin block should take 10 minutes on average to be mined and added to the blockchain. If there was no congestion in the network and every transaction was guaranteed to be included in the next block, each transaction will take at most 10 minutes to be confirmed once. If there was some congestion, outstanding transactions could be pushed to blocks further out and thus delayed by increments of 10 minutes. The main problem with Bitcoin right now is that there’s so much congestion that some transactions were taking hours on end to be confirmed once.
Before moving forward, it’s important to understand what causes network congestion. Congestion results when the demand for transactions exceeds the network’s maximum throughput. We can calculate maximum throughput by calculating the maximum number of transactions that can fit into one block and then dividing by the average block time (10 minutes). Each Bitcoin block has a
1MB size cap. Each transaction averages
500B and thus one block can hold up to 2000 transactions. Therefore, the Bitcoin network’s maximum throughput is 3 transactions per second. Terrible for something touted as a revolutionary new global currency and it’s no wonder blocks were taking so long to be confirmed!
Segwit2x is the solution to this abysmal transaction throughput. The first thing Segwit2x does is introduce the Segregated Witness technology to Bitcoin. Segregated Witness essentially takes out Witness signature data from a transaction, so that transactions are smaller in size and more transactions can fit into a block. Witness signature data still exists on the blockchain, just not in a block.
Segregated Witness can be performed with a soft fork: the new software can be released to the Bitcoin network without requiring every single Bitcoin node to update at the same time (this is considered impossible anyways, which is why hard forks are so undesirable). It’s interesting to note that Litecoin has implemented Segregated Witness back in May and it’s been running fine on the network ever since. For Bitcoin, Segregated Witness will increase the maximum transactions per
1MB block from 2000 to 4000, essentially doubling transaction throughput.
Along with Segregated Witness, Segwit2x will also increase the maximum block size from
2MB, hence the “2x” in its name. Doubling the block size cap will allow one block to fit twice as many transactions as before and with Segregated Witness, a Segwit2x block will be able to fit up to 8000 transactions, a 4x improvement from the current situation. The only problem is, Segwit2x requires a hard fork. The change must be deployed to every single Bitcoin node at that same time in order to avoid a blockchain split. As I’ve mentioned, this is impossible and it’s guaranteed that after Segwit2x, there will be two Bitcoin blockchains in the wild, one old and one with Segwit2x deployed. The stability and survival of Bitcoin as a cryptocurrency relies on the majority of Bitcoin miners adopting Segwit2x and eschewing the legacy blockchain.
The price to pay for a 4x transaction throughput increase is a risky hard fork and it seems that the majority of the community supports it.
Segwit2x is probably not the end of the world
Looking at the markets right now, it’s very likely people are selling in fear of what Segwit2x might do to their portfolios. Afterall, if two Bitcoin blockchains emerge and there’s no clear winner, the ensuing confusion and panic could force Bitcoin off its throne as the premier cryptocurrency. Who knows how far Bitcoin’s price will tumble if that happens. shudder
But this is just a possibility and I believe the chances of chaos is very very low. Here’s why.
1. The majority of Bitcoin’s mining power is lining up behind Segwit2x
The success of Bitcoin results in the success of Bitcoin miners. These miners have invested in Bitcoin mining rigs and probably also own Bitcoin. If Bitcoin fails, they’d have to reconfigure their rigs for another cryptocurrency and their Bitcoins lose value. If Bitcoin succeeds, their rigs continue chugging along and their Bitcoins maintain/gain value.
2. Segregated Witness is a tried and true technology
If Segregated Witness was a new and untried technology, I’d be more wary of Segwit2x just because of potential undetected flaws in the tech. However, the technology is definitely not new nor untested. Segregated Witness was implemented by Litecoin and has been running on Litecoin’s network for a couple months now with no issues.
Segregated Witness works and it’ll be a dramatic improvement for Bitcoin.
3. Ethereum survived the DAO hardfork
When Ethereum launched a hard fork in defiance of hackers siphoning millions of dollars from the DAO through a software bug, Ethereum’s blockchain split and the original chain became it’s own cryptocurrency (aka Ethereum Classic). As of right now, Ethereum Classic is the 5th largest cryptocurrency by market cap ($1.319 billion).
Right after Ethereum’s hard fork, an Ether was worth $10 USD. Today, an Ether is worth $150 USD. Ethereum not only survived the hard fork, it proceeded to thrive in the months to come. If Ethereum survived a hard fork, Bitcoin can too, even if a legacy Bitcoin blockchain chain continued to exist.
4. Segwit2x greatly improves Bitcoin
Going back to Ethereum’s hardfork, we see that the circumstances surrounding Segwit2x favours Bitcoin’s survival much more than the circumstances surrounding Ethereum’s hardfork.
Ethereum was hard forked to save a poorly coded smart contract program, while Bitcoin is being hard forked to significantly improve the platform. There were ethical questions surrounding the Ethereum dev team’s decision to unilaterally intervene, whereas everyone agrees Bitcoin’s current transaction throughput sucks and needs drastic improvement.
It’s much easier to get behind Bitcoin’s hard fork than Ethereum’s, yet Ethereum not only survived, but thrived post-hard-fork.
5. Cryptocurrency vloggers agree
I’ve also been watching a few cryptocurrency vloggers (Boxmining, TheChartGuys, CryptoBud, etc.) to gauge their opinions on Segwit2x. Several of them believe the FUD (Fear, Uncertainty, and Doubt) surrounding the event is overblown and some have even compared August 1st to Y2K. Remember how Y2K turned out to be such a big nothing burger? Segwit2x will probably turn out the same.
Not the end of the world
In conclusion, I don’t think Segwit2x is as bad as some in the community makes it out to be. All this selling is probably overcompensating for the risks involved and this might just be one big bear trap. Perhaps it’s even time to get greedy and go on a shopping spree?