Segwit2x: A beginner’s guide to the bitcoin fork

Posted: 2 November 2017 2:17 pm

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What's going on?

Segwit2x Fork Cancelled

The organisers of the Segwit2x (B2X) hard fork announced that they were putting the plans on hold due to a lack of consensus among the community.

"Unfortunately, it is clear that we have not built sufficient consensus for a clean block size upgrade at this time. Continuing on the current path could divide the community and be a setback to Bitcoin’s growth. This was never the goal of Segwit2x. Until then, we are suspending our plans for the upcoming 2MB upgrade." wrote one of the organisers.

The upcoming fork may have been driving prices upwards as investors looked towards an opportunity to get a mirror of their current holdings on the new B2X blockchain, so the upcoming fork may have pushed prices upwards.

However, the cancellation has also driven prices up. It seems that many investors are seeing this kind of self-correction as a sign of long-term health for bitcoin.

Historical Rate chart of BTC and AUD

Updated: 25 Jul 2021 23:35:14 UTC

The bitcoin Segwit2x (B2X) hard fork is set to come at block 494,784 and is predicted to happen on 16 November. It's part of a prior agreement to increase block size from 1MB to 2MB, with the effect of improving bitcoin transaction speed, reducing transfer costs and making bitcoin quicker and easier to mine.

Bitcoin has experienced hard forks before, into Bitcoin Cash and Bitcoin Gold for example, but the Segwit2x fork is probably more contentious and unpredictable than others.

One of the easier and more useful analogies might be to think of forks as the evolution of a cryptocurrency.

A hard fork is when a new species of coin with different DNA is born and goes off on its own evolutionary path. This evolutionary path is its new blockchain and transaction history. In this case, the original species is original bitcoin (BTC), and the species that evolved from it is bitcoin with the Segwit2x change (B2X).

In the case of a hard fork, you now have two similar but different species of cryptocurrency where there used to be only one. What happens next is anyone's guess. Both might just continue on their own ways, or one (or both) might end up going extinct.

With the Segwit2x hard fork, there's no clear agreement on whether bitcoin even should be evolving like this. A contentious fork like this is more likely to end up with two different species of coin competing for limited resources, which might be bad news for both of them.

What to consider when there's a fork

Like other forks, the B2X hard fork means current bitcoin key holders on the "old" BTC prong of the fork will have a mirror image on the "new" B2X prong of the fork.

So if you have 5 bitcoin (BTC), then after the fork, you'll have 5 BTC as well as 5 B2X.

Around a fork, investors, miners and other stakeholders may need to decide how to allocate resources. For investors, the decision is probably how to distribute funds between the forks for the highest returns. For a miner, this would be how to divide hashing power between forks.

Buyers might:

  • Take a side and support one new species against the other - If you're confident that one of the forks will drive the other to extinction, then you might support that one entirely. This might be trading all your coins on one side of the fork for coins on the other side.
  • Split their efforts between both in order to hedge their bets - If you're not sure how things will turn out then, you may want to divide your investment between both.

For bitcoin network participants, this question takes the form of whether to install and use the modified B2X software, stick with the legacy BTC software or use both.

But this B2X fork could be considered a tricky one for several reasons.

What's the problem with the B2X fork?

The main problem is that there's no apparent consensus on whether the fork is a good idea, so it's difficult to anticipate how many miners will be running the B2X software and how many will be sticking with the old BTC system.

A few months ago, it looked like a safer assumption that B2X might be taking over as the main version of bitcoin.

According to Medium, as of 25 May 2017, a critical mass of the bitcoin ecosystem had signed on to support the B2X changes, including 83.28% of hashing power, millions of users and 58 companies around the world.

Generally, the majority rules and no one wants to be left on the wrong side of the fence, so this kind of support would have suggested that B2X was almost a sure thing.

But more recently, some companies have withdrawn their initial support of B2X, and significantly, some core developers of the initial bitcoin have strongly condemned Segwit2x.

This divide suggests that it's going to be an especially contentious fork, and that the value of BTC and B2X may be even more prone to abrupt shifts than usual.

The forecast

It's not possible to tell with any certainty what the outcome will be, and it's possible to find experts on both sides who appear confident that one will come out ahead.

Outcomes include:

  • BTC rules change: If everyone switches to B2X, then the BTC rules change. Larger block size makes bitcoin transactions cheaper and quicker, but also speeds up mining and detracts from rarity which may impact value. B2X likely takes the BTC "brand name" which helps it retain existing BTC value despite the changing rules.
  • BTC remains unchanged: B2X fizzles out with a lack of support and becomes practically worthless.
  • Two bitcoins are created: Both sides get enough support to run, and they become competing currencies.

On paper, B2X has enough support from miners to switch the majority of the network over to the B2X chain. If the bulk switch over immediately, then the remainder might also follow shortly afterwards for fear of being left on unprofitable software.

However, even if 80% of the network switches over, the remaining 20% might well be enough to keep the BTC blockchain going. Also, many miners will possibly be working both blockchains rather than committing to one.

It's not possible to speculate on where people will shift, but the third outcome is probably the most likely in the short term.

In the longer run, you might also ask yourself what the purpose of bitcoin is and where its future lies.

The B2X changes are designed to improve bitcoin transaction capabilities and make it more of an actual usable currency by making it easier to mine. B2X proponents argue that this might hurt the value of bitcoin in the short term, but that it's essential in the long run. Some experts have said that the main reason bitcoin is so resilient is because buyers think it's being seriously undervalued in the long run and will someday become the next main global currency. This might be dependent on bitcoin eventually solving problems with transaction times and costs, and becoming more usable as a currency.

B2X opponents, many of whom have large sums of money invested in BTC, argue that Segwit2x isn't reliable, that it puts the value of BTC at risk and that it's generally a bad idea to rock the boat.

It might also be worth remembering that the eventual "winner" isn't necessarily going to be the side with the most compelling arguments or the better system. It's simply going to be the one that ends up getting the most support one way or another.

More functionality at the cost of short-term value might help BTC climb to higher values in the long run, but in the shorter term, there are probably plenty of stakeholders that are happy to think of BTC as an investment bubble to be abandoned before it bursts.

Historical Rate chart of BTC and AUD

Updated: 25 Jul 2021 23:35:14 UTC
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