BITCOIN AUGUST PREPARATIONS

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.