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Why the crypto uncertainty?

To get the skinny on all this crypto uncertainty, take a look at the Aug Preparations post from a couple of weeks ago.  Currently, it is reported the market believes that Bitcoin Core (BTC) has about a 70% chance of success in the event of a chain split.  Does that mean arguments made by the other side have no merit – and that they should all just “fork off” (pun intended)?

I am for the activation of SegWit and hopeful it will be activated, signaled, or whatever has to happen – prior to Aug 1, making that particular deadline a non-issue.  But that said, I also hope that this scaling issue is resolved satisfactorily and the business of bitcoin (and all things crypto) can move forward.  The current scaling deadlock seems less about an optimal scaling architecture, and more a matter of control and economic interests.  Apparently, there is enough money involved for some to push for control.  (Go figure.)

Discussions on how to scale Bitcoin are complicated, but let’s try a quick recap anyway – which I’ve pieced together by researching those who know way more than me about this issue and the underlying concerns…

UASF (User Activated Soft Fork) is interesting in that it does not require a hard fork, but rather the majority consensus is captured and decided by the Bitcoin Exchanges and not by the Bitcoin miners.  Miners would have no choice but to support the chain that the economic majority wants, at least if they want to be able to continue to sell the bitcoins that they win from mining.  It appears the “fork” debate causing this crypto uncertainty has 3 solutions from 3 Bitcoin groups:

1) Core developers (SegWit);

2) Miners/Startup-Community (BU); and

3) Bitcoin Economy/Users (UASF).

Ideally consensus would come from the latter, the UASF solution.

The impending activation of BIP 148 (UASF), due to take effect on August 1, would ensure that SegWit, an optimization feature that increases block capacity, gets activated without strings attached.

Meanwhile, there is a “SegWit2x” team working on a plan to activate SegWit in July in return for an agreement to also hard fork and double the block size limit later this year.  SegWit2x is basically the uber-large miners seeming to say, “this will only fly if we get what we want, and now”.  If the greater community decides this is inappropriate of the miners, it can soft fork and add SegWit directly to bitcoin via a soft fork process – thus checking the power miners have – both now and in the future.

The Core team takes a meritocratic (based on ability) approach when it comes to new development with long-term interests of bitcoin in mind.  The Startup Community is more likely impatient investors whose partners expect liquidity from their investments in a relatively short amount of time.  Then there are the Users, who want to see more features and lower fees now from the platforms they use.

SegWit2x will finally get SegWit implemented, but assumes that months from now the community will hard fork away from Core’s current consensus rules without issues. Difficult to see that happening – so it seems more like a short-term resolution that serves to give miners too much influence and sets a precedent that is not good.  Those in-the-know feel that “one miner in particular has blocked SegWit for the sole purpose of showcasing their power within the ecosystem and strengthening their competitive positioning”. 

Core is evidently working on significantly tightening privacy and increasing scalability in ways that will grow bitcoin without hard forking. Their ways are safe, but maybe don’t happen fast enough.  Miners feel that absolute block size increases aren’t high enough on the Core’s to-do list, and want bigger blocks now to help with network congestion – yet many will mine empty blocks.  It seems no other major business, and a small fraction of the bitcoin user base, share the conviction that SegWit should be blocked without a corresponding block size increase – today, or else!

The primary function of Core is to write code that preserves the bitcoin system for the long-term.
The primary function of the Startup Community is to build apps that make bitcoin more usable

While both positions have their place in the bitcoin ecosystem – in my opinion, rushing into anything that might sacrifice the long-term interests of a peer-to-peer cash system that prevents censorship can’t be a good idea.

How to help?

If you want to see BIP148 (SegWit ) activated, and put an end to this current crypto uncertainty, you can:

  1. Contact your exchange(s) and ask them to upgrade to BIP148. If you want to strengthen your request, you can inform them that you will take your business elsewhere if they don’t.
  2. Switch to an exchange that supports BIP148 to buy any bitcoins after July — and be sure you don’t leave bitcoins on exchanges that might fail to upgrade in time.
  3. Make sure the merchants and individuals you do business with know about BIP148, and encourage them to publicly support it.
  4. Offer to patronize merchants, or do more business with them, if they support BIP148.
  5. Understand that many businesses don’t actually accept bitcoins directly, but rather simply get fiat currency using a payment processor that accepts bitcoins. In those cases, you may need to focus on the payment processor rather than the business directly.

How to protect your bitcoin?

Before August 1

It is highly probable that bitcoin’s exchange rate(s) will drop sharply during this Aug crypto uncertainty, so make sure that you are not holding more value in bitcoin than what you are willing to lose – UNLESS you’re in this for the long haul.

If you are in this long-term, and choose to hold your bitcoins – the single most important thing to do is make sure you control your own private keys!  If you are storing your bitcoins on an exchange, in a custodial wallet (like Coinbase), or on any other service that holds your private keys for you – it is possible you might not receive coins on both ends of the chain in the event of a fork.  If these services are not prepared, there could be scenarios where you receive none of your bitcoins at all.  So it is important to create your own wallet (click here for more info).

The safest are full node wallets that verify all protocol rules, but if you’re not transacting with bitcoin (which you should not do during this period of crypto uncertainty), and just want to keep your bitcoin as a long-term investment then use a paper wallet, hardware wallet, or desktop wallet.  That said, a desktop wallet is only as secure as your computer is – and since most are not that secure, they are not a good for large amounts.  A mobile wallet is probably even less secure, for obvious reasons.

Make backups of your keys!  And store those backups in a safe place.

On and Shortly After August 1

If a majority of hash power signals support for SegWit through BIP148 on or before August 1st, the protocol upgrade will activate smoothly. If that happens, your bitcoin will be fine, even if you didn’t prepare at all.

When the blockchain branches into two, there will be two digital assets immediately after the hard fork. Bitcoin holders who possess their private keys will have access to assets on both chains after the split event occurs.  If you hold money on a bitcoin exchange, then it will be up to the exchange’s discretion on how they choose to disperse both token assets to customers.  This type of chain-split could resolve in several ways, but suffice it to say that the crypto uncertainty will exist for hours, maybe days, and perhaps even longer.  For this reason, buying or accepting bitcoin after the split – especially right afterwards – is very risky.  Your bitcoins could quite literally disappear during a transaction.

After August Chain-Split

If the 148 BTC chain gets more accumulated proof of work, it should be the only chain to survive, and the split would be over. All 148 BTC would then simply be bitcoins (BTC) again.  But if it doesn’t happen quickly – a chain-split could linger, and the two chains could coexist.  You will have coins on both sides, an amount equal to what you started with on each of the two sides.  It will be very tricky and risky to spend coins on one chain without inadvertently spending the equivalent on the other – far too stressful for me!  My bitcoins will be sitting on the bench during this game!

Some exchanges will employ coin-splitting services on the backend to handle things, and if the split continues – wallets for both coins would start appearing before long.  Just don’t accept any transactions before all of this is made clear.

Crypto Uncertainty Recap

1. Control your private keys if you hold your bitcoin.

2. Avoid any transactions on and shortly after August 1st. (How long after depends on what happens.)

3. If there are still two chains when the dust settles, split your coins into different wallets – because you’ll now have both.

Coinbase’s Position

As of 18 hours ago…