THE PROBLEM: Bitcoin is full. The blocks in the blockchain are limited to 1 megabyte, and they’ve been at capacity since mid-2015. Transactions intermittently have large fees and long delays. Nobody has been able to agree how to fix this, and everyone involved despises each other. (See Attack of the 50 Foot Blockchain, chapter 7.)
THE SOLUTION: a Judgement of Solomon, wherein an exasperated Solomon says “All right, we’ll just cut the baby in two then,” and the women think that’s a great idea and start fighting bitterly over whether to slice the kid horizontally or vertically.
THE UPSHOT: if you had Bitcoin (BTC) before August 1st in your own hand, you have them now, and you have them on the new Bitcoin Cash (BCH) chain too. Free money! If you had your BTC on an exchange, some exchanges credit you with BCH and some don’t, and it’s a bit of a mess. Also, the tax man may want a word.
THE FORK PROPOSALS:
SegWit2x — also known as the New York Agreement. This puts SegWit (Segregated Witness) into place on the main Bitcoin chain, to solve the transaction malleability bug and increase capacity a bit. The “2x” means they plan to take Bitcoin to 2 megabyte blocks in November. This is backed by a supermajority of the Bitcoin mining hashpower.
UAHF (User Activated Hard Fork) — this was originally BitcoinABC and is now Bitcoin Cash (BCH) — just go to 8 megabyte blocks, no SegWit. This is explicitly creating a fork of the Bitcoin blockchain: copy the whole blockchain and start adding new blocks to it per the new parameters. So everyone who had BTC before will have BCH now! The value proposition is faster transactions with much lower fees. The hook is FREE MONEY for Bitcoin holders.
UASF (User Activated Soft Fork) — or BIP 148 — where people who want to keep small blocks (1 megabyte) put in SegWit. This is not the miners, but the non-mining nodes in the wider Bitcoin network, particularly those run by the Bitcoin core developers. The politics here is that they thought they could swing this without the miners onside — though nobody else thought this. They called victory with the adoption of the SegWit part of SegWit2x, though they’re still not happy about the 2x part.
Bitcoin Unlimited — a plan to just go to 2MB blocks, expanding further as needed. These guys back Bitcoin Cash now.
BUT WHY ON EARTH?
There are technical objections both to SegWit (security, complexity) and to larger blocks (increased centralisation, makes the blockchain even more unwieldy). But of course, the dispute isn’t really technical — it’s all the politics of who gets to make money. Everyone involved hates everyone else and characterises their opponents as working in bad faith and being opposed to “Satoshi’s vision.” They figure if they shout abuse at each other they’ll get rich faster, or something.
WHERE WE ARE A MONTH LATER:
SegWit2x was locked in by late July, with SegWit to activate a month later and 2x in November. Bitcoin Cash and UASF decided to act on August 1st. (No, I don’t know why they both chose August 1st.)
SegWit has been adopted on the main Bitcoin chain, finally activating on August 24th … and, after years of discussion and advocacy, approximately nobody is using it. As I write this, it’s running around 1% of transactions. Software and hardware support is only just now coming into place, despite advocates having had a couple of years to prepare and a pile of companies claiming they were ready.
Bitcoin Cash had a slow start as they had very little mining capacity but hadn’t adjusted the mining difficulty from the main chain — though their difficulty readjusts much more quickly and they did eventually get some mining power on side. BCH has spotty support as yet from merchants, exchanges and payment processors — notably, Coinbase isn’t supporting it until January — and none from the darknet markets, the people who really wanted a Bitcoin with fast and cheap transactions. Its use case at present is speculation. The initiative refuses to implement SegWit, so suffered a transaction malleability attack.
Bitcoin and Bitcoin Cash use the same hash and almost the same software, so some mining capacity switches between the two, depending which is more profitable at the time. (You can see relative profitability on the aptly-named fork.lol.) This has made the time between blocks on both chains swing up and down wildly, which hasn’t helped the perennial transaction clog on the main chain.
The UASF supporters — including many of the Bitcoin core developers — still don’t want 2x to happen, and consider they can force it not to happen by ignoring it, even if the mining capacity wants it. This would make SegWit2x into a third separate version of Bitcoin. One miner has backed off from the plan, though 85% of the mining power still supports SegWit2x. I predict the miners will win the battle for hearts, minds and what wider Bitcoin ecosystem there is.
Both core and 2x are resisting adding protection against replay attacks —where you replay transactions on one chain against the other chain, so you can take coins on the other chain without them having been intentionally sent to you — because this would involve a backward-incompatible protocol and hence software change, and neither wants to be thought of as “the fork.” So they’re playing “chicken.” This is the same pigheadedness that led to Ethereum replay attacks when Ethereum Classic split from the Ethereum Foundation after The DAO debacle.
WHAT SHOULD I DO?
Not gamble on cryptos. If you already did, and you have both BTC and BCH now, and don’t want to sell out straight away before the bubble pops, you may as well keep doing whatever you were doing. Keep in mind that crypto trading is zero-sum: every dollar you gain, someone else lost, and vice versa.
Bitcoin Cash is still being actively subsidised by its advocates, who want it to become the Bitcoin and like to call BTC the “legacy chain,” but I really don’t think it’s going to unseat the existing Bitcoin. Functionally, it’s an altcoin with backers; as a speculative asset, it has even less foundation than Bitcoin.
You will need to get your accounts up to date. What’s your liability if someone decides they’re going to fork Bitcoin? Is it a windfall? Is it a property division? Is it enough like a stock split? You’ll be delighted to hear that the US tax implications are entirely unclear (archive) so far. Don’t forget that the IRS is actively looking into undeclared cryptocurrency gains, so you’ll want to be as upfront with your local tax authorities as you can, and be ready to refile when they work out how to deal with this.
Cryptos hardly ever die completely, so I can see BCH and any future forks lingering quite a while. Particularly with all the free coins each fork would get, assuming an exchange carries the coin in question and there’s enough interest for meaningful trade. Remember, Bitcoin is strictly limited to 21 million coins! Unless someone feels like forking it.
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