Reason Why Segwit2x Would Fail
Everyone is waiting for the outcome of hard fork of the bitcoin software: Segwit2x which would take place in two weeks’ time.
This is because it could result to the largest and most contentious chain split that would ever occur to bitcoin as well as crypto-currencies. This kind of event would have a negative effect on the ecosystem, however analysis has shown that this has resulted to a great fear and such split can be avoided so that it would serve as an important test that will support the perception of bitcoin as a secure store of value.
Some factors have contributed to the escalation of this situation and it has resulted to an uncertainty. Other forks which aim to increase the block size have come and gone with little effect under the name of Bitcoin XT, Bitcoin Classic and Bitcoin, Unlimited. However there is difference between 2x and all these previous attempts in two major ways.
One of the difference is the major support 2x fork has which is as a result of “New York Agreement” between major stakeholders in the industry as well as miners, wallets, exchanges and payment processors.
Initially, the agreement was between 58 companies which are located in 22 countries which include many of the largest in the ecosystem, and 83.28% of miner hashing power. This is very significant for any hard fork to increase its block size very well.
And since it was announced the agreement has not gotten a favorable number of that support, most of the original signatories have not changed their stand.
The second which is also a crucial difference is the NYA’s break from the traditional conventions with respect to the protocol of bitcoin. The content as well as the protocol in the community is as a result of this.
This is different from the previous attempt to change the bitcoin protocol because Segwit2x was introduces through the New York Agreement, and not as an improvement to Bitcoin Proposal.
This is very important because bitcoin and all blockchains strictly involved in the consensus-based system. So as to implement a backward incompatible change such as an increase in block size, all peer-to-peer networks of bitcoin nodes must update their software so as to avoid splitting the blockchain as well as the ecosystem.
Because of this it is essential for those advocating for hard forks to take one of these two options. Firstly, they can create widespread consensus in the ecosystem about the need for a backwards-incompatible change in order to prevent a confusing chain split. Or, if they are unable to create such consensus, replay protection can be enacted, just like bitcoin cash did so as to split clearly into a minority chain which would cause minimal disruption to the ecosystem.
This trend was broken when Segwit2x decline to enact the replay protection, they also fail to seek and also build the support of the majority for the adoption of the software.
This is explained by the language of the NYA announcement which shows a deeply flawed premise: that the consensus for such change has already been obtained since, “The group of companies which signed represent a crucial mass of the bitcoin ecosystem.”
Far from consensus
Most of the large companies which supported Segwit2x may seem to represent a clear consensus among the majority in the ecosystem; new development has shown that this is the case.
The doubling of the block size which Segwit 2x wanted to implement has been rejected by most of the open-source development community for technical reasons and because of this, it is not being merged into the Bitcoin Core which is the most widely used and supported bitcoin client. Most of the original signers of the agreement have formally dropped their support. The notable ones are the mining pools Slush and F2Pool, and the two of them account for about 13% of hash power as at the time of this publication. Exchangers have also given recognition to “legacy” bitcoin, and that Segwit2x coin would be treated as separate units of value after the hard fork. This does not correlate with the original intention and goal of Segwit2x which was to replace the current bitcoin protocol as well as the corresponding unit of value.
From my own point of view, these developments is enough to ensure 2x has little chance of overtaking and replacing the legacy chain for any given time and this is the reason why.
Irrespective of the original intention, if the segwit2x fork takes place, it would result to a ruined debacle for bitcoin. With the strong contention which exists between the users, nodes and developers, it is certain that two chains will co-exist and maintain monetary value.
Although this is not the normal case but isn’t a cause for alarm. Without replay protection and with two chains maintaining independent monetary value, many users on the network will lose their fund due to accidental replay spending, replay attacks, sudden as well as widespread incompatibility between various software and services. The uncertainty is how severe and continuous such state of affairs proves to be and the level of reputational damage bitcoin would incur as a result.
There is no need to say such a debacle would be detrimental to the ecosystem as well as its stakeholders, and it’s likely to exceed what the Segwit2x signers envisioned. However, the NYA is not only not binding, but its associated “support” as well as “signaling” can be equated to little more than flag waving.
Whether the supporters would want to accept the economic consequences of following the split with the clear division regarding the fork is a separate question.
Most of these companies are profit oriented and would stay in the ecosystem no matter what, and there is doubt that the repercussions of a deeply contentious fork without replay protection is lost on most of them. Risking this for an increase in block size makes it an undesirable deal. In this case, circumstances have changed because the participating companies have agreed to what they see as a safe and straightforward commitment.
This is why it is possible for the Segwit2x agreement to continue to lose more support before the activation date. Perhaps the only reason why this has not been happening is because there are little incentives for these companies if they are the first to back out of the agreement while there is enough time before they are required to act on it.
Because of this, if Segwit2x is launched, there is likelihood that it will debut with much less than currently advertised support. This is why signers are faced with the actual risk as well as cost of following through with the clear division in the ecosystem.
The market will decide
If Segwit2x emerge in a way other than being accepted by users as well as the market as the “new” and superior bitcoin which is the original intention, it will show in its market price. The best indication of such price are coin split future markets on many exchangers like Bitfinex, which has valued a future Segwit2x coin at about 15% of bitcoin value.
Regardless of initial miner signaling, there would be a battle for hash power which would quickly play between the two chains which can only be determined by the profitability. Due to the fact that miners have large sunk as well as ongoing costs, it is a must for hash power to follow the chain which is very profitable to mine.
But how can we have the assurance that this case will continue and that the market will also continue to value the legacy chain rather than Segwit2x, especially if hash power of bitcoin renders transaction times very slow. What if, to make the case worse, all the companies included went through the agreement without considering the risk to the ecosystem and their own reputations, and are also willing to incur some financial loss by doing so?
The analysis of the dynamics at play reveal that the NYA was flawed right from the start because of the misunderstanding in the nature of the network and by ignoring what makes a bitcoin valuable.
Because of this, Segwit2x won’t have the chance to overtake bitcoin in the market successfully irrespective of the amount of corporate backing.