Bitcoin stands at a crossroads. The survival of the cryptocurrency network all but depends on whether or not the majority of mining pools agree on which road to increased scalability is the one to take. Tomorrow is when it all goes down…
The cryptocurrency to start it all; Bitcoin, has limited scalability by design, as we have reported before. Currently, the network can handle roughly 7 transactions a second which compares poorly with for example VISA which handles 2,000 transactions per second on average. The thing about Bitcoin is how a transaction reaches settlement. For that to happen, a transaction much propagate through the network’s nodes and each one has to verify that transaction. If a node happens to be a mining pool, it can choose to incorporate the transaction into a block of transactions on the network’s ledger, also known as a blockchain. It’s not until now the transaction in reality has gone through, and this may in turn take up to seven hours.
In order to increase transaction rates, several approaches have been put forth, none of which represents a definite solution to the scalability problem as the solutions themselves often come bundled with their own problems. One such proposal is the introduction of Segregated Witness to the Bitcoin network. What this piece of code does is essentially doing away with signatures in the creation of transactions, instead attaching a bit of data on top of the transactions as a kind of add-on. This means that when miners create a block, there is less data to mine, thus making more effective use of the blocksize limit, which currently sits at 1MB.
SegWit can make room for other protocol layers as well, such as fault proofs, and it also provides backwards compatibility with nodes that don’t run SegWit. However, nodes that do run SegWit have an advantage since it’s “easier” to mine a SegWit block than a normal one, creating an unbalance in the network. Therefore, an increase in blocksize is simultaneously proposed to increase the amount of data and thereby the time it takes to create a block, all the while increasing the transaction rate, as more transactions can fit into a larger blocksize.
The first steps of integrating SegWit have already been taken place. On July 21st, Bitcoin Improvement Proposal 91 was implemented by 97% of the global mining power, apparent by their signaling of the so-called bit 4. This mediating layer is supposed to allow nodes to implement SegWit, however only if mining pools also signal bit 1. Far from all nodes are doing that as of yet, but it doesn’t mean SegWit will not be implemented eventually. However, tomorrow is when the proposed lock-in of SegWit is meant to take place, followed by a grace period of three months whereupon the blocksize limit is supposed to increase to 2MB, also known as SegWit2x.
There are purists that say that SegWit is modifying the blockchain in ways it was not intended. However, contesting the increase of scalability of Bitcoin is threating the survival of the network itself. It has to increase throughput, or see itself replaced by alternatives. Of course, the majority of mining pools should see SegWit as a blessing, making it easier to mine, and therefore easier to get the reward of 25 BTC per block (about USD $67,500). Though, the increase in blocksize will mean that in time, the reverse is true; taking longer time and more processing power to create a block. However, more transactions will be incorporated in the same block, thereby increasing throughput.
Though SegWit does away with signatures, thus taking less time to verify a transaction, the doubling of the blocksize means it takes longer to propagate between nodes. How this will affect the cryptocurrency network remains to be seen. SegWit2x is therefore considered an intermediate solution to the scaling problem, buying time until better proposals arise. Among the various problems with SegWit, one is related to light nodes. Since these types of nodes only check for valid transaction IDs, trusting that mining pools play fair, the blocks created using SegWit will be accepted by light nodes, even if the input signatures are missing. This makes it easier for a malicious mining pool to cheat light nodes in paying out mining rewards for what are in reality empty blocks…
Since the network (still) is not run by any centralized institution, the decision to implement SegWit and/or 2MB block size is up to the individual nodes themselves. This may in the worst case scenario create a split in the network where some mining pools acknowledge one part, but not the other one of the SegWit2x implementation. This could catalyze a catastrophic event where there will be two different forks of Bitcoin; alternatively, only one survivor that after a while renders the coins existing in the losing fork to become invalid and lost to the ether. In predictions not as gloomy, the network may instead only see an increased centralization as the resources required to keep a validator node or mining pool running increases.
The future is enshrouded in clouds of doubt as to what will actually happen to the world’s largest cryptocurrency. Major coin-exchanges such as Bitstamp, Kraken, Poloniex and Coincheck have signaled they will stop the trading and transactions of Bitcoin on July 31st to protect their customers’ assets in the event of a hard fork. Many more that have invested in Bitcoins are being watchful as to the fallout of tomorrow’s lock-in of SegWit and the outcomes of the following weeks.
So what do you guys think? Have you invested in Bitcoin and hope the community makes a rational move, or do you plan on jumping on alt-coins? Let us know in the comments below!