In this article, our research team put together facts we think our readers need to know about the upcoming Bitcoin upgrade. Although our publications are usually focused on Ethereum, we believe this is an important event that will impact all cryptocurrencies and we expect some volatility during the upcoming weeks, specifically for Bitcoin.
1. The date and the event
August 1st, 2017
Bitcoin undergoes a Fork to improve scaling
2. What’s a fork?
In the Blockchain technology, every time you need to change the rules of the network a fork must take place. Until today, it’s still the only way to change the protocol. Depending on the required update and if a consensus is reached in the community, a soft or a hard fork might take place.
3. What’s the difference between a soft fork and a hard fork?
A Soft Fork is a backward-compatible change to the software protocol, used for instance to add new transaction types and only requiring the miners and users to understand the new transaction type.
A hard fork is a permanent divergence from the previous version of the blockchain, and nodes running previous versions will no longer be accepted by the newest version.
This article does a great job providing a non-technical explanation for specific terminology for words like nodes, ledger, blocks, mining, wallet, private key. It also gives some more info about the soft fork and hard fork.
4. The problem Bitcoin is facing
- The issue that led to the need for a fork
When using Blockchain, transactions are represented by Blocks. As more and more Bitcoin transactions are happening (Buying, selling) the weight of these transactions is causing processing delays in the verification and validation of transactions. Therefore, the network is getting slower and slower and the processing fees keep increasing.
- The challenges of reaching a consensus
To approve a fork, the Bitcoin community needs to reach an agreement. The community nowadays includes Bitcoin’s developers, Businesses (Exchanges and start-ups) and Miners. In short, we have different players, different agendas, capabilities and ideologies. Therefore, reaching an agreement on the next step for Bitcoin is no easy task.
The following wikipage provides updates on the status of the consensus among the Bitcoin community,
5. The proposed solutions
Solution #1 –Segwit (BIP 141), activation method BIP 9
- Needs 95% of blocks produced to signal SegWit before November 2017 to activate
- Segregated Witness is a soft fork that would increase Bitcoin’s blocks ability to hold data and solve some longstanding protocol issues.
- To accelerate the process of verification, SegWit (Segregate witness) proposes a solution that separates the digital signature from the transaction Data and transferring it into a separate “structure”. This solution also reduces security flaws by eliminating any possibility of tampering with the senders’ IDs.
Solution #2 -UASF (User activated Soft Fork) (BIP 148)
- Needs 80% only of blocks produced to signal for activation
- UASF stands for User Activated Soft Fork, it’s a solution designed by one of the Bitcoin developers to transfer the decision-making power to the community versus the Miners (The opposite of a Miner Activated Soft Forks “MASF”). At the time of writing, we have two specific UASF proposals: BIP 148 and BIP 149 and both are aimed to reduce Miners’ control of the Bitcoin upgrade in order to accelerate the concensus process.
For BIP 148, the activation method is BIP91. BIP91 also triggers BIP 9 that activates SegWit for 100% of that chain provided that the chain is a majority (80% or more). The Signaling for BIP148 starts as of August 1st, 2017 and marks the start of a 14 weeks to Segwit’s activation. Once SegWit is activated, it will reject all non-segWit Blocks.
- BIP149 activated on BIP 8
BIP149 is the Plan B if BIP148 fails to activate in mid-November. It is a last resort put together by the developer responsible for BIP 148 to avoid a hard fork and gives even less decision-power to the miners.
Solution #3 – MASF (Miner activated Soft Fork) SegWit2x Activation method BIP91
- SegWit2x is also known as the New York Agreement and seems to have gained solid support in the community. SegWit2x proposes a solution that will increase Bitcoin’s block size from 2 to 4mb once activated. To have more information on how it will work, it is worth it to read the SegWit2x official proposal page.
- BIP91 is a very likely going to be the solution used to upgrade Bitcoin as major miners announced as of the 18th of July that they are supporting it and started signaling even before the official date of the 21st of July.
- SegWit2x is focused on the continuity of Bitcoin and avoiding the Hard fork risk. Just like BIP148, it only needs 80% for activation and is miners activated. Once the activation is done, it will reject non-SegWit blocks. The deadline for BIP91 is July 29th.
6. What’s Next?
These are some possible and theoretical scenarios for informational purposes only. Other scenarios might occur since this is a first and no one knows what might happen during the deployment.
- If 95% of the Bitcoin community adopts and signals SegWit (BIP 141) => SegWit activates on Bitcoin, no network split.
- If 80% of the Bitcoin community adopts and signals SegWit through the UASF (BIP 148) By August 1st => SegWit is activated on Bitcoin, no network split. The Network follows the BIP148 chain and the Legacy Bitcoin will be discarded. No Split or alternative measures required and the SegWit update will activate as planned.
- If less than 80% of the Bitcoin community adopts and signals SegWit through the UASF (BIP 148) By August 1st => Bitcoin’s network splits into 2 parallel chains: The BIP148 and the Legacy Bitcoin chain. The BIP148 chain will signal BIP9 and triger SegWit therefore updating 100% of this split chain to SegWit and not recognizing Legacy Bitcoin.
- If 80% of the Bitcoin community adopts and signals SegWit2X through the MASF (BIP 91) => SegWit is activated on Bitcoin, no network split. We will know if this scenario is happening soon as the window for the activation is short and happens between July the 21st and July the 29th.
- If less than 80% of the Bitcoin community adopts and signals SegWit2X and BIP148 doesn’t follow => SegWit2X is activated and Bitcoin might split into 2 parallel chains running different sized Blocks. SegWit2X comes with last resort options to avoid the Hard forking but it is a possibility.
As of the date of writing this article, major Bitcoin miners have already announced their support for SegWit2X and started signaling BIP91. This announcement signaled that it is now very unlikely for Bitcoin to Split into 2 chains.
Btcforkmonitor is currently monitoring for a potential network fork and will issue a warning if they detect that the chain broke. Interestingly, up until yesterday the status was green (meaning, no chain split detected). Just today, there was a warning about a chain split but it has been solved in the meantime. No surprise the price of Bitcoin went sharply lower today.
7. What you need to consider
- Stay informed, our article gives you a good foundation to start your research.
- Remember the important dates, this article has a good overview of important dates.
- If you are holding any Bitcoin, make sure you are aware of any specific instructions from your Bitcoin wallet. Some exchanges may be closed on the 1st of August and possibly other dates.
- Back up your Bitcoin Keys
- “You Alone are responsible for the safety of your Bitcoins” as Bitcoin mentioned on their Potential Network disruption alert. Make sure you go through the alert and do your due diligence.
This is a major change and a first for Bitcoin so volatility is expected and technical problems might arise. The good news is that we are seeing the majority of the Bitcoin community opting for SegWit2X so that’s definitely a good sign.
This upgrade will not only impact the Bitcoin future and value but will definitely have an impact on the future value of Ethereum. As InvestingHaven‘s research team has said many times before, there is always a bullish and a bearish side to the story. The Bullish story for Bitcoin is this upgrade will increase its scalability and security so once the dust settles, Bitcoin will continue on its uptrend. The Bearish story for Bitcoin could be a chain split making investors opt for Ethereum .The change in Bitcoin’s Block size is another factor that could turn out to be either Great for Bitcoin or make users or even miners choose Ethereum as a more interesting option.
Our commitment to our readers is that we will be watching the developments of this upgrade and sharing updates and our findings regularly.
This communication is for informational purposes only. It is not intended as investment advice or to be interpreted as such, or an offer or solicitation for the purchase or sale of any financial instrument. No market data or other information is warranted or guaranteed by Investinghaven as to its completeness, accuracy, or fitness for a particular purpose, express or implied, and such market data and information are subject to change without notice. Investinghaven may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented herein. Those communications reflect the assumptions, views, and analytical methods of the persons that prepared them.