A number of Bitcoin companies and miners have agreed to run code that will implement a hard-forking increase to the non-witness data in blocks roughly three months after the activation of Segregated Witness (SegWit). According to some of its proponents, the proposal, known as SegWit2x, is said to be the only viable solution to the Bitcoin scaling debate.
However, agreeing to initiate a hard fork without knowing how speculators will react to such a change comes with risks. If there is not full support for the hard fork from bitcoin holders, the end result could be a split of Bitcoin into two separate cryptocurrency networks, which could cause extreme brand confusion among the general public (depending on the severity of the split).
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In addition to the potential risks of a permanent split of the community, SegWit2x also ignores tools that could be used to get the intended benefits of this particular hard-forking increase to capacity without the possibility of a network split.
Perhaps most troubling, SegWit2x ignores the reasons as to why Bitcoin is useful in the first place.
Speculators Call the Shots
While the original Medium post regarding the New York Agreement claimed the signatories accounted for $5.1 billion worth of monthly on-chain transaction volume (more than half of the entire network for April), the general view of SegWit2x from bitcoin holders is unclear at this time. Companies representing large amounts of bitcoin holdings (Digital Currency Group, Coinbase, Xapo, etc.) have signed onto the agreement as well, but we have yet to see speculators have the chance to set a price for the hard-forked chain.
As of now, the hard-fork portion of SegWit2x appears to be contentious, which means exchanges are likely to list both the original chain and the chain with a hard-forking increase to the block size limit. Companies that take custody of their users’ bitcoins will need to allow their users to withdraw both coins.
Although more than 80 percent of the network hashrate has agreed to run the SegWit2x code, it’s possible that speculators will prefer the non-hard fork chain. It’s also possible that a futures market could illustrate this point before the hard fork takes place.
Of course, miners could decide to mine at a loss and not listen to the market, which would theoretically go against the incentives of the Bitcoin system. If miners abandon the chain preferred by users, it’s possible that a proof-of-work change will be needed, as faith in the current miners may be lost.
Such a scenario could be disastrous for Bitcoin, which means miners (and everyone else in the ecosystem) should be incentivized to avoid it. But we’ll have to see what happens.
If These Companies Control Bitcoin, Then a Public Blockchain is Not Needed
The point of Bitcoin is that it allows everyone to have full control over their money without the need for a trusted third party. There is no third party in Bitcoin because no one controls the consensus rules. If someone is in control of Bitcoin’s consensus rules, then they’ve effectively become the third party that the system was designed to avoid in the first place.
With the New York Agreement, the signatories are basically saying they control the rules of Bitcoin (or at least the fork of Bitcoin that they’ve all agreed to run). If that’s the case, then the need for a public blockchain is less clear. Users would effectively be trusting these institutions with the rules of the system and ordering of transactions because they could decide to completely change the rules via a hard fork at any point in time. If the system is no longer trustless, Sybil attacks on the state of the blockchain can be thwarted by having trusted entities sign blocks rather than miners.
With that in mind, it may make more sense to launch a federated sidechain pegged to Bitcoin’s main chain instead of trying to turn the main chain into a trusted system. This would allow the main chain to retain Bitcoin’s core value proposition of permissionless money while the sidechain can process the microtransactions these companies desire.
The signatories of the New York Agreement could become the functionaries of the sidechain, where they’d control the consensus rules and sign blocks. This sort of setup makes much more sense if users are supposed to trust these entities anyway. A much more efficient transaction network can be created when proof-of-work and decentralization are thrown out the window.
In fact, this is exactly what Blockstream’s Liquid sidechain is supposed to achieve early next year. Ironically, some of the signers of the New York Agreement are supposed to be participants in Blockstream’s upcoming federated sidechain.
If there are no goals for SegWit2x other than increasing capacity on the Bitcoin network, then a federated sidechain is a much better alternative. There’s no risk of a chain split, capacity can be increased exponentially higher than the twofold increase offered by the hard-fork portion of SegWit2x, and other features, such as Confidential Transactions and faster block times, can also be implemented.
Put in this perspective, SegWit2x is completely nonsensical. I’m not sure what the New York Agreement will lead to over the next few months, but it appears to be unnecessarily risky.
This article is a guest post by Kyle Torpey. It does not necessarily reflect the views of BTC Media or Bitcoin Magazine.