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BITCOIN AUGUST PREPARATIONS

Bitcoin Bubble Talk - Learn more at BitcoinPam.com

The bitcoin August 2017 scaling issues are something I’ve been asked about a lot lately.  While I am by no means an expert on the scaling issue or the proposed solutions – I have done a lot of research on the subject and have enough of an understanding to know that certain precautions can be taken to secure my bitcoin holdings (that are outside the TCC).  This post is not for those “experienced bitcoiners, miners, etc.” – it is for those of us new to cryptocurrency that may have bitcoin in online exchange wallets.

BITCOIN AUGUST CONCERNS

There may be some turbulence for the Bitcoin network beginning August 1, 2017.  Personally, being that I live and breathe the technical world, to me it represents “growing pains” of a new, emerging technology and is not “scary”, nor does it detract from my fascination of cryptocurrency.  That said, there are steps I have taken to ensure that all I have to do is wait out the “growth” and react according to the ultimate outcome – without losing any bitcoin.  If you’re unsure why you should take steps to ensure security of your bitcoin, you might visit Bitcoin FAQs for a quick review in addition to what I cover in this post.

I am only going to cover all this in brief terms – as there are many scenarios, opinions, and thoughts on the subject and a full education is not my goal.  My goal is simply to prepare for any outcome.  I am not a “player” whose actions will make much of a difference in this drama – so my focus is simply to secure the bitcoin I own.

Bitcoin Improvement Proposal (BIP) 148 is a User Activated Soft Fork (UASF) that requires that miners signal for Segregated Witness (SegWit). SegWit readiness is signalled by miners by setting the version number of blocks mined. Signalling this bit does not mean miners support SegWit, but is a signal for readiness that miners are ready to enforce the rules. Miners are still allowed to mine blocks that do not support SegWit and are only required to not mine non-standard blocks that spend SegWit transactions along with not building on top of blocks that do this.

Beginning 1 August 2017, nodes that enforce BIP 148 will reject any block from miners that do not signal SegWit readiness, along with any block that is built on top of a block that does not signal support.

You might read this post from Rusty Russell, an extremely respected open-source Linux kernel developer that has been working on the Lighting Network.

A hard fork is a permanent divergence in the the block chain, which commonly occurs when non-upgraded nodes can’t validate blocks created by upgraded nodes that follow newer consensus rules.  A soft fork is a temporary divergence in the block chain caused by non-upgraded nodes not following new consensus rules.

This is a fairly technical thing to explain, so I am going to leave it to Andreas Antonopoulos to explain far better than I can.

It seems that most community members are ambivalent towards BIP 148.  This video discusses BIP 148 and both parties are ambivalent towards it, but also feel bitcoiners should prepare for it.  Here is an interesting analysis by Jimmy Song that you might want to read.

If miners activate SegWit prior to 1 August 2017 then BIP 148 will not be enforced. All users of Bitcoin will remain on the same chain no matter what client they use.  In other words, the majority of hash power goes along with Bip148, segregated witness, and it all activates smoothly and preforms with no worries.

If miners do not activate SegWit then there may be a chain split. A chain split will mean that some users will see a different set of transactions than others.  So, if the majority of hash power does not go along, it could create a chain split. If at that point you held your own private keys, you will end up with the new Bip 148 and old legacy coins. Now it is possible for the 148 chain to become used more and longer than the old legacy chain, causing it to then intertwine with the 148 chain and all previous activity and history would be morphed into the Bip148 new chain, wiping out all legacy history as if it never existed. At that point you have a good chance of losing your bitcoin from that previous blockchain UNLESS you hold your own private key that will do its own validating on networks to keep it secure.

If the majority of miners enforce BIP 148 – then these chain splits will be temporary and eventually all clients will see the same chain and SegWit will activate for all SegWit compatible clients (0.13.1+ for Bitcoin Core). If the majority of miners do not enforce BIP 148, users that enforce BIP 148 will diverge from users that do not enforce it.  If the majority of miners do start enforcing BIP 148 at a later date then the legacy chain (without BIP 148 enforcement) may be reorganized once the BIP 148 chain has more work.  The users who are running BIP 148 would be undisturbed, but users running legacy clients may see a large amount of history re-written and could lose funds.

If bitcoin splits – and the two coins remain for a certain period of time or forever – it could create the problem of something called a replay attack.  This is when one would own BIP 148 and legacy coins, make a transaction thinking your only sending BIP 148, but you also send one of your legacy coins at the same moment, when you only intended to send the BIP 148 as payment.

So pay close attention. The advice I have read is: do not make any trades, whether it be buying or selling, until the dust settles and you can fairly judge the outcome.

This is all fairly technical and convoluted – but here’s the shortest version I could deliver based on what I understand…and only 4 of the possible scenarios – there are others.  For clarity – let’s call the two sides “Users” (UASF BIP148) and “Miners” (Legacy) – not 100% indicative, but more convenient for most of us!

Scenario #1: Miners Concede

Easiest scenario to understand. The Miners, not wanting to risk a soft fork, decide to signal for Segwit and manage to lock in Segwit before August 1. Creates a situation where BIP148 won’t do anything and will avoid the soft fork altogether. Segwit will be in Bitcoin, so this scenario can be considered at least a partial win for the Users, even if some larger block size comes along with it.

Scenario #2: Users have Minimal Hash Rate

If Users have something like 0–13% of the July 31 network hash rate on August 1, the consequence of having such a low hash rate is that blocks will come very slowly (one per 80 minutes+) causing two big problems.  1) a tremendous backlog of transactions on the Users’ fork; and 2) doubt whether SegWit will activate on the Users’ fork, because it requires 95% of the blocks to signal in a 2 week network difficulty adjustment period before November 15.

Scenario #3: Miners Do Nothing

If Users have 25-75% of the network hash power, the Miners may not react in any manner. This is more complicated…to Miners, UASF BIP148 looks very much like an attack, or coercion to signal for SegWit (even if they want to, they don’t like being told what to do).

If the Users’ fork has 51% or more, there will be only one branch and that branch will only accept blocks signaling Segwit. There may be a lot of orphaned blocks and perhaps reorgs that go 3–4 blocks at times. This will make it much easier to double-spend, so exchanges and merchants will likely not take transactions with less than 6–8 confirmations, but otherwise, things will go on mostly as normal.

If the Users’ fork has somewhere below 50%, then there will be two branches, a User’s fork and a Miners’ fork. If at some point, the Users’ fork gains more hashing power and has a longer chain than the Miners’ fork, this is where the fact that UASF is a soft fork comes into play. The Miners’ fork is then wiped out. That is, all the blocks on the Miners’ fork are replaced with the Users’ fork.  No amount of confirmations, then, on the Miners’ fork can really be trusted and this will cause a good deal of disruption. Of course, exchanges and merchants can still accept coins from the Miners’ fork, but any coins accepted or distributed on the Miners’ fork in this scenario are subject to simply disappearing and constitutes a large risk.  This wipeout risk will add tremendous incentive for the Miners’ fork to eliminate this risk, especially as the Users’ fork catches up to the Miners’ fork. But in this scenario, we assume the Miners do nothing, and the risk never goes away, perhaps due to infighting or slow development of a solution.

Scenario #4: Miners Permanently Fork

Tremendous demand for an exchange to list coins from both the Users’ fork coin and Miners’ fork coin will exist. After all, UASF advocates will want to sell their Miners’ fork coin and buy the Users’ fork coin. For an exchange to be able to offer this, there are two primary transactions on the blockchain that they have to be able to do on both chains in order to service customers: Deposits and Withdrawals.

Normally, exchanges credit deposits after 3 or so confirmations. When there’s wipeout risk, however, no number of confirmations will suffice. If the Users’ fork can overtake the Miners’ fork after 100 blocks, some deposits with 100 confirmations would be invalidated! An exchange would be taking on risk to accept deposits on the Miners’ fork. This risk gets greater as the Users’ fork catches up to the Miners’ fork.

In addition, exchanges normally pay out withdrawals without much thought to replay attacks. Without replay protection, when an exchange pays out 5 BTC to the Users’ fork, they may unknowingly also pay out 5 BTC to the same address on the Miners’ fork – and vice versa.  Coinbase lost a lot of money on replay attacks when Ethereum split – and used corporate money to make clients “whole”.  To do that with Bitcoin would cost millions!

Therefore, exchanges will demand both wipeout protection and replay protection in order to list both coins – but in order to offer such protection, the fork between the coins has to become permanent. As Bitcoin is currently formatted, there is no way to offer both without also eliminating the possibility of emerging with a single chain. However, people will demand the listing of coins from both forks and this is why many feel it’s likely that the Miners will hard fork.

If you have bitcoin holdings, the most important thing you can do is create and store your own private keys.  Once you’ve done that – avoid conducting bitcoin transactions (sending or receiving coins) until it’s all over.  Your bitcoin will be safe.  There are scenarios where your transaction will get wiped out no matter which fork you choose – so, don’t transact.

If you store your Bitcoin in an online exchange – such as Coinbase, Bitstamp, Bittrex or Poloniex for example – you DO NOT HOLD YOUR OWN PRIVATE KEYS, the exchange does.  Private keys are generated alongside the public key when you set up a wallet for the first time.  But these private keys are not given to you when you setup a wallet on an exchange – the exchange holds them.

Private keys are 51 characters in length and made up of random assortment of upper and lower case letters along with numbers. What this means is that anyone attempting to break into a wallet by guessing your private key would spend roughly 204 tresvigintillion years trying to crack it. (A tresvigintillion is 10 to the power 72.)  Bitcoin’s clever technology and the mathematics behind it makes it extremely secure for all users if they take the proper steps to secure their own holdings.

If an exchange, or other online wallet, has custody of the private keys – then it is entirely up to them whether you lose them or not; or which block chain those bitcoins can be transacted on in the case of a split. While most major exchanges will do their best to ensure you keep your bitcoin, and can transact them on both chains, there is no guarantee of this. If you have a significant amount of money in an exchange (which is very unwise to begin with), you should move them to a system where you control the private keys, such as a wallet on your computer (with appropriate backup and security precautions); or a hardware wallet device (much  safer). This advice is true at all times, regardless of the upcoming bitcoin August situation.

I feel it is very important to put your plans and security in place because – who else is responsible for one’s money except one’s self?  If you remember the case with Ethereum splitting up into Ethereum and Ethereum Classic – Coinbase did not hedge themselves or plan accordingly, and distributed the coins incorrectly. Instead of Coinbase going through a whole big fiasco – they went into their own corporate coffers for the sum of around $28,000 to make their Coinbase clients whole. Imagine the scale on the current bitcoin networks if this were to happen?  You’re talking millions and exchanges would be bankrupt.  Thus no “making clients whole” would be the outcome.

Bitcoin very much requires that each individual be accountable for the security of their own holdings.  Those that do not – will lose their bitcoin, as has been the case time and time again in the past.  Those that do – have never lost their bitcoin.  It is that simple – take accountability, or pay the price.

While there are some wallets and exchanges that support BIP 148, there are others that do not.  You can research your particular wallet or exchange and make your own decisions on where/how to store your bitcoin based on what has been covered in this post.

As a Hodler (Long Term Investor)

If a chain split occurs then long term investors will have equal amounts of coins on both sides of the chain.  If a chain split is resolved then they will have their original balance on the unified chain and need to take no actions.

As A Bitcoin Trader

As a trader you will need to find an exchange that supports, both the legacy chain and the BIP 148 chain. Traders may have an opportunity to trade coins from one side to another. If exchanges support both chains, then they could sell one and buy the other.

If sufficient demand exists on the BIP 148 chain, it may encourage miners to mine on that chain, which could eliminate any split.

Traders should exercise caution when trading on the legacy chain, as it may be reorganized without warning. Traders should also exercise caution on the BIP 148 chain, because if interest in it is insufficient, it may not hold long term value.

At the time of this post, I do not have knowledge of the Trade Coin Club’s position regarding BIP 148, the legacy chain, or both.  I will update this post as I obtain this information.

The safest plan for storing coins on August 1, 2017 is to gain control of your coins, and evaluate your options after a potential chain split. If BIP 148 is successful, then little to no action is needed from most users. However, around August 1, 2017 users should be cautious, especially when receiving coins.

Personally – for my bitcoin (not invested in the Trade Coin Club), I chose to download the “offline” wallet Exodus for my MAC (Windows 64-bit and Linux releases also available) – into which all has been transferred.  If you are computer-savvy, you might want to read this Exodus review by 99Bitcoins.com to see if it might be an option for you.  Please know that I do not have a huge amount of bitcoin – if I did, it would be put into a hard wallet.

Other options: a hard wallet (highly suggested) or a paper wallet.

NOTE – To have the highest level of security possible, an offline wallet would be installed on a computer that has never – and will never – connect to the internet. This minimizes the odds that any sort of malware could be installed on your system and gain access to your private keys.  I am sharing steps I have taken, but you should keep in mind that… 1) I am on a MAC; and 2) I am a webmaster experienced in keeping a computer secure.  As always, please exercise caution and use suggested or any other security method – at your own risk!

One thing I’ve learned – after reading for hours, both sides of this drama – is that it is impossible to analyze every scenario.  So, let’s look at the strengths of both sides and what matters most in this upcoming conflict as outline by Jimmy Song.

  1. Mining Hash Power – hash power determines which side can become aggressive if it chooses to.
  2. Cooperation and Coordination – whichever side agrees among themselves vs. infighting will be more successful.
  3. Quality and Speed for Development/Deployment – this is code, this is digital.  As situations change, the side that can be quick to develop and deploy will have the advantage.
  4. User Sentiment – not the biggest influencer of the four, but having users support will matter.  Users provide the liquidity for one coin or the other!

All that said…you will find much from both sides of this conflict to support their “side” – I like Andreas Antonopoulos’ explanations, and I’ll secure what bitcoin I own, sit back and watch this drama unfold – then react accordingly.

If you are new to bitcoin and have only a small amount in a reputable exchange or wallet, if you don’t understand what’s going on (and don’t want to learn), just avoid sending or receiving bitcoins after 7/31/2017 until it is all over.  That could be anywhere from hours to weeks, but most likely 1-2 days based on what I’ve learned.

Some feel that bitcoin August BIP148 will be a non-event for most users, and I did read this… “if enough exchanges support it, miners will activate SegWit and the value of your holdings goes up.  If not, all exchanges will force a BIP149 in January anyway” – but who knows!  That’s part of the excitement, I suppose 🙂

Chances are, your bitcoin will be safe.  However, if you don’t do anything to move your bitcoin to a wallet where you control the private keys, you may not be able to quickly react to any opportunities that may arise from this whole thing.

I hope this post is helpful.  It has taken me several weeks to research and digest an overwhelming amount of available information on the subject, and I will continue to watch, read and update BitcoinPam.com followers with anything relevant learned, to the best of my ability.  If I have made any errors, please let me know by using the contact form – so they can be corrected 🙂

By | 2017-07-07T07:27:54+00:00 June 18th, 2017|

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