SegWit2x – Bitcoin’s Most Contentious Fork and Why It’s a Big Deal

SegWit2x is 10 days away, and is coming amidst must controversy and drama. Here's what you need to know about Bitcoin's upcoming fork and why it's a big deal.

If you’ve been following Bitcoin for a while, you’ve probably heard of ‘forks’ – these are splits in the blockchain, resulting in new currencies, such as Bitcoin Cash, and the more recent Bitcoin Gold. For the regular Joe, forks and splits are not a big deal, and can even be profitable, as was the case when Bitcoin Cash split from Bitcoin; in addition to keeping their original coins (BTC), holders also got the same amount of coins on the new chain (BCH).

Now, there’s a new fork looming on the horizon – SegWit2x – expected on November 16, 2017, following block 494,784. The SegWit2x fork is not as ‘friendly’ as the previous ones, and there is a lot to be concerned about. If you’re a little confused at this point, that’s to be expected; this post will help you understand the new upcoming fork and why it is such a polarizing development that is leading to fiery debates in the cryptospace.

Why fork? What’s the problem with Bitcoin?

Bitcoin is powered by a distributed database, a blockchain – this stores all transactions in ‘blocks’, which are mined every ten minutes (approximately) by miners. Currently, each block on the Bitcoin chain can hold up to 1MB of transactions; this was sufficient in the early days, but tends to get clogged up fairly quickly now that Bitcoin is growing in popularity.

As the number of transactions rises, blocks get filled up faster, but since a new block can only be generated every 10 minutes, this means a lot of transactions remain pending. Additionally, since the miners who generate these blocks do it for the fees they earn, they generally favor transactions with higher fees. This, in turn, leads to users being forced to increase fees in order to ‘skip the line’ and get their transactions processed first.

Overall, this scenario presents a major scaling issue, as Bitcoin proponents seek to obtain mainstream adoption. If a Bitcoin transaction takes hours and fees are ridiculously high (currently, the average BTC transaction fee is over $6; in January this year it was $0.4), it cannot compete against traditional payment methods which take seconds to process and cost much less.

A number of solutions have been proposed for this scaling problem, two of which are currently at the forefront – SegWit and larger blocks.

SegWit, the easier solution, focuses on packaging transactions into the current blocks more efficiently. The solution separates transaction data from signature data, and manages to include four times as many transactions into a 1MB block, alleviating the congestion issue for now.

However, there is a group of people, including various companies and miners, who believe SegWit isn’t enough. In May 2017, this group proposed an upgrade to Bitcoin’s block size, suggesting that it be increased to 2MB, thus enabling it to store more transactions. The problem with this upgrade is that it would constitute a software update which would not be backwards compatible, and if not adopted universally, would lead to a hard fork, resulting in two chains – one with the old, legacy or original Bitcoin (whatever you want to call it) and one with the new split.

Since the Bitcoin community is split over this scaling solution, a fork becomes likely, giving rise to a great deal of contention as people from both sides of the fence claim that they represent the real Bitcoin.

What’s the fighting about and who is involved?

Bitcoin’s core developers and a large part of the community – let’s call them group one – is against SegWit2x, i.e. the hard fork which proposes doubling the block size. On the other hand, the Digital Currency Group, whose New York Agreement is backed by 58 companies (including names like Coinbase, ShapeShift, BitPay, and Xapo) from 22 countries and over 80% of Bitcoin’s hashing power, represents group two.

The main point of contention between both these groups is the hard fork, with group one being content with SegWit (which is not a hard fork) and group two pushing for the 2MB upgrade (which would result in a split). For group one, Bitcoin is mainly a store of value, but group two sees it as a means of payment.

Both sides claim to support the original Bitcoin, and both have their own arguments. Group two is pushing for the block size upgrade because it would allow more transactions to be processed in the same amount of time, reducing congestion and fees. Group one is against the upgrade because it would essentially discourage independent nodes (as it becomes expensive to run a full node with the blockchain size increasing) and lead to centralization, as only major players can then afford to stay in the game (the very parties who signed the New York Agreement).

Additionally, group one, which comprises the community at large, considers group two to be attacking Bitcoin with a hasty upgrade which is supported by a minority and has been rejected by both users and developers.

When analyzed at the macro level, it becomes clear that the larger issue here is political, and pertains to the democratization of Bitcoin and its trademark characteristics – decentralization and trust.

Group two, however, argues that without the 2MB upgrade, Bitcoin will lose ground to other currencies which are far more scalable, and may even become a relic if timely action is not taken. For them, the upgrade is not a split; rather, it is a vital part of Bitcoin’s natural evolution.

What’s going to happen on November 16?

What will November 16 bring? This is the $122-billion-dollar question right now. What’s most alarming is that the SegWit2x supporters are planning what seems to be a hostile takeover of Bitcoin.

The upgrade, as they want it, would involve the majority of hashing power moving to the 2x chain, leaving the 1x chain with severe challenges as new blocks take hours, transactions get delayed and mining becomes dysfunctional.

Moreover, in a controversial move, SegWit2x developers are not activating replay protection, which would prevent attacks where transactions on one chain can be replicated on another without authorization. The 2x supporters say there is no need for replay protection because, according to them, the 1x chain is not going to survive, post-split (or it will become an alt coin as per Bobby Lee of BTCC).

The 2x proponents call their fork (B2X for now) the real Bitcoin, and it may well be that supporting exchanges and wallets end up listing the fork as BTC and the original chain as B1X (or something else). This would lead to chaos and confusion, as users struggle to ascertain whether ‘BTC’, on their exchanges and wallets, denotes the original coin, or the fork.

For simplicity’s sake, here are the three main outcomes that are possible on November 16:

  1. Majority miners upgrade and move to larger blocks without any issues (B2X becomes BTC)
  2. Only a few miners upgrade, creating two chains – B1X and B2X (or whatever they may be called)
  3. Majority miners stay on the current software and no change takes place

To be on the safe side, it is advisable that you move your Bitcoins to wallets where you hold the private keys, and avoid making any transactions on or after November 16, until there is more clarity about the fork and which exchanges and wallets support each chain.