Bitcoin as we know it might never be the same again from August 1 as the possibilities of fork become more pronounced than ever before. The hottest news in the cryptocurrency industry right now is that the Bitcoin blockchain will be split into two. A group in the Bitcoin community has announced a plan to split off from the Bitcoin network to create a new version of the cryptocurrency called Bitcoin Cash.
The splitting group made up of investors, developers, miners and Bitcoin users submit that Bitcoin cash is a continuation of the Bitcoin project as peer-to-peer digital cash in line with the original vision of Satoshi Nakamato. This piece provides insight into why Bitcoin is being faced with the possibilities of a split as well as the scenarios that could play out around the split.
Bitcoin is far from perfect
Bitcoin is a smart store of value and a means of exchange that offers a superior value proposition to fiat currencies. Bitcoin is scarce, durable, portable, divisible, storable, fungible and difficult to counterfeit – features that fiat currencies can’t easily claim. Yet, despite the obvious pros of Bitcoin, it mostly serves as an investment and store of value in today’s economy instead of being a means of exchange.
The main problem delaying the mass adoption of Bitcoin is two-pronged. To start with, the Bitcoin blockchain network is currently too slow to be viable to power the bulk of economic transactions. The Bitcoin blockchain processes about six transactions per second; in contrast, VISA alone processes more than 1,600 transactions per second on its network.
The slowness of the Bitcoin network is the reason behind the second problem ailing Bitcoin – Bitcoin usage attracts expensive transaction costs. Each Bitcoin transaction includes a transaction fee – the transaction fee is the payment that encourages miners to include a transaction in the block ledger for the transaction to be processed. Since Bitcoin is decentralized, users have the liberty to determine how much they want to pay in transaction fees.
However, since miners are human—they tend to process the transactions will high fees first while transaction with low fees might be left unattended for hours and sometimes, days before they are recorded in the block.
Making Bitcoin perfect is causing massive divisions – Here’s why Bitcoin is about to be split
One of the proposed solutions for speeding up the processing times of Bitcoin transactions and reducing the transaction costs is called the SegWit solution that removes the part of the transaction that is not critical to the block in order to create room in the block for more transactions.
Another solution that was proposed to solve the problems ailing Bitcoin is SegWit 2X, which is known as MASF (Miner Activated Soft Fork) and BIP 91 in some quarters. SegWit 2X simply separates the Witness from the Block (same as in SegWIt) but it goes ahead to expand the size of the block from 1MB to 2MB. SegWit 2X should ideally increase transaction times and reduce transaction costs. However, SegWit2X could potentially push small miners out of the market and put the Bitcoin ecosystem under the control of a few miners.
The fact that there are two schools of thought on how the Bitcoin platform can be further improved to drive mass adoption has already caused massive division in the Bitcoin community. If the split goes into effect, there will be two version so Bitcoin – one version will see people use the traditional block in line Satoshi’s plans while the other version will have a blockchain built on an updated platform.
Bitcoin users should in theory not be worried about the split because you should be able to spend the coins you had before the split on both blocks. However, after the split, the Bitcoin on the two blocks might experience different variations in value, usage, adoption, and quantity
Here are four possible scenarios surrounding the split:
Possibility 1 – the split will go on
The first possibility is that the Bitcoin network is now guaranteed to split given the arrival of Bitcoin Cash in the market. Bitcoin Cash debuted with an official announcement on a Bitcoin talk forum from a group (not the UASF group) that wants to split off because SegWit is about to be adopted in the Bitcoin network. Bitcoin cash is radically different in the set of rules it wants to run on its network and it is unlikely that the people behind Bitcoin cash will back down. To start with, Bitcoin Cash is designed to benefit users more than miners; hence the value proposition of Bitcoin Cash suggests that it will get a warm welcome in the market. Bitcoin Cash network is launching with an 8MB block size to have a higher transaction capacity than Bitcoin SegWit/Bitcoin Current.
Bitcoin Cash already boasts the support of ViaBTC (one of the high profile miners). ViaBTC has posted a cryptic tweet hinting that they’ll stop mining regular Bitcoin on August 1 and transfer their mining power to mining Bitcoin Cash. It is important to note that ViaBTC currently accounts for 5.2% of the total mining power on the Bitcoin network.
It is also quite possible that the people behind Bitcoin Cash already have set up high tech mining systems under the radar through which they’ll get their network up and running. In any case, there’s a strong possibility that the split will happen on August 1 in line with Bitcoin Cash threats. If you are currently holding Bitcoins you will be entitled to free Bitcoin Cash tokens in case you are using one of the supported wallets or exchanges.
Possibility 2 – we will avoid the blockchain split
Even though Bitcoin Cash is gearing up to start up as a different version of Bitcoin, there’s a slight possibility that the split won’t go off. For one, the Bitcoin community could find a way to reach a compromise on the core problems causing division in the Bitcoin platform. However, the more factual reason a split might be averted (at least for now) is that most miners are yet to signal bit 1 for SegWit. In fact, experts believe that the proportion of miners signaling bit 1 is below 50% contrary to hints on BIP 91 activations.
In essence, the people coalition behind Bitcoin Cash might decide to stop or postpone the forking if they can’t guarantee the fact that BIP 91 will be enforced on economic relevant nodes – by economic relevant nodes I mean nodes managed by Bitcoin users who accept Bitcoin as a form of payment. Right now, the only factual thing that we can lay hold about the split is a statement of intent and I wouldn’t be surprised if new information triggers a need to rethink the decision to fork the blockchain.
Possibility 3 – the split will happen but one of the versions will fizzle out
Another possible change that the Bitcoin platform can see is that the split will happen as predicted but of the Bitcoin versions will fizzle out and loss steam. Either of Bitcoin Cash or ‘Bitcoin SegWit’ could crash soon after the split on August 1 if too few people use the cryprocurrency, if merchants don’t support the cryptocurrency, and it wallets don’t support the cryptocurrency.
For one, the 5.2% mining power that ViaBTC is promising to direct towards mining Bitcoin Cash steal leaves about 94.8% of the current mining power in the hands of Bitcoin SegWit miners. Hence, unless the people behind Bitcoin Cash have already (or plan to) invested in mining equipment, Bitcoin Cash might run out of the mining power it needs to reach a critical mass.
Possibility 4 – a two-part split twice this year
Another undeniable possibility is that we could see the split being postponed until sometime later this year. Irrespective of what the warring factions in the Bitcoin ecosystem believe, a split into two (or more) versions of Bitcoin is bad news for the cryptocurrency.
To start with, many people have invested heavily in the Bitcoin brand and it would hard to sort out of the mess arising from a split. More so, it might not be easy to work out cross-compatibility in the early days of the split and the price of Bitcoin will tank massively if users panic to trigger a sell-off. Hence, it is quite possible that the voice of reason will prevail and that the warring factions will find middle ground on their points of differences.
Nonetheless, there always seem to a sort of power struggle going on in the Bitcoin platform because the miners are on one side of the divide and the Satoshians are on other side of the divide. In essence, postponing the August split is akin to postponing the proverbial evil day because the fundamentals differences will remain. Hence, it is quite possible that we will avert a Bitcoin split on August 1, but you shouldn’t be surprised if we start talking about another potential split in the next couple of months.
Irrespective of whether a Bitcoin split happens or not, Bitcoin users will do well to take proactive steps to protect their Bitcoin holdings to avoid being caught in the crossfire. You may want to make sure that you have transferred all the Bitcoin you own to your private wallet by August 1 before the split goes into effect. In fact, you should ensure that you have withdrawn your Bitcoin from all exchanges and third-party sites into private wallet that you control the key to.
It’s in your best interest to withdraw your Bitcoin into a hardware wallet but you may want to find an online wallet and keep your recovery phrase secure. You should also avoid sending or receiving any Bitcoin transactions from August 1 until the volatility in the cryptocurrency market boils over and we know where Bitcoin is heading as a currency.
This post is part of our contributor series. The views expressed are the author's own and not necessarily shared by TNW.