There has been a lot of noise lately in the media and on all social media about the possible Bitcoin hard fork, some say it will be a soft fork, others are calling for no fork whatsoever…but what the heck is this all about and why all the panic?
The problem Bitcoin faces right now is one of scale-ability. The current block size is limited to 1MB – a cautionary measure implemented early on in the Bitcoin development after the blockchain suffered numerous hacking attacks. This was supposed to be a temporary limit on the block size but it was never lifted and we now face a big backlog on transactions, some days amounting to 100 000+ pending transactions for hours on end. Which in effect brings the fees up with many companies allowing their customers to pay higher fees and speed up their transactions processing. Currently, the daily revenue of fees on Bitcoin transactions is $350 000. Each day….
At the same time there are new coins, most of which are soft forks on Bitcoin in a way and offer improvements like instant-pay [by DASH] or higher privacy [Zcash, PIVX] or superior blockchain [Ethereum].
Many argue that if Bitcoin is to stay the dominant crypto currency, it has to be able to evolve and rise to the challenges of the times. The debate about the possible forking is not new, but it was reignited in December last year  when the news about Bitcoin Unlimited began circulating.
What exactly is a Fork?
Forking is used as a term to describe a split in the system. In simple terms, we see a proposal of a diversion from the current software that will enable size blocks to . There are two ways to do this.
“Hard Fork”is a permanent change in the block chain, where only the new software is accepted in the network. It means that every node – miners, merchants and users – has to upgrade to be able to validate the new blocks. Old nodes will not be able to validate new blocks. This will cause a split in the blockchain [version A and version B].
“Soft fork” does not cause a split in two blockchains because it is backwards-compatible and self-correcting in that only a majority of miners need to update to the new consensus rules. Old nodes will then see the new blocks as valid.
SegWit [ Segregated Witness] is one solution proposed for upgrading the block size to 2MB without the need to split the blockchain and it’s effectively a soft fork. This is not met with agreement by all miners unfortunately as some are in support of a bigger scale-ability of the blocks.
In the occurrence of a “Hard Fork” the result will be two development groups which is a split into:
- Bitcoin Core [the current network]
- Bitcoin Unlimited [the new version of the network with up-scaled block size].
BTC Vs BTU
Bitcoin Core [BTC] is the current version of Bitcoin that we know and use. It supports 1MB blocks and has the ability to support SegWit but does not agree with proposed upgrades by BTU
Bitcoin Unlimited [BTU] is a group of miners who propose a change in the software that allows for greater size of the blocks to be determined by market demand [and accepted by consensus of the miners]. The change is, however, incompatible with the current Bitcoin software and would therefore create a “new coin,” while carrying over the entire transaction history of the currency. BTU was developed by software engineer Andrew Stone and is supported by a minority but headed strongly by one of the biggest Bitcoin PR faces – Roger Ver, CEO of Bitcoin.com
Under normal circumstances, a change of rules would only occur if the whole network would agree on the new rules. Only one coin would emerge, causing no problem. However, as this split is caused by the very disagreement on the rules, initiated by Bitcoin Unlimited, it is very unlikely that Bitcoin Core would give in and would move to Unlimited.
If more than 51% of the nodes agree on the changes proposed by BTU, a hard fork will be possible and there would be two coins, each adhering to their own rules and the public opinion is that BTU forming as an Alt Coin. Many Alt Coins are just different versions of Bitcoin. My research shows that BTU is not very well-received in the Bitcoin community and most people would prefer that a split did not happen.
How would this affect us?
At times of uncertainty we usually see a price-dip and this is already quite noticeable this week. Bitcoin is currently standing at $950-970 per coin, down from $1200 in February. In the short term this is expected and it could be a trend that will last for a few more weeks. As soon as we see the end of this debate or at least some stability in the market, we will expect a recovery and some readjustment back to the higher numbers. Many speculators will take advantage of this lower price and the media hype that surrounds this topic only feeds the panic that causes a big dump at the exchanges which will make those buyers very happy. Some are diversifying their holdings with Alt Coins, others prefer to convert to USD for a short time and buy Bitcoin at a lower rate.
If you are not an active trader but holding Bitcoin for longer term, I would advise to just do nothing. Hold it but make sure you are using a cold storage. [like Ledger or Trezor] so you are the owner of your private keys. This way you can benefit from the choice of what version you will use in the future while some vendors and wallet providers might only choose to work with one of the two versions. Trezor and Ledger both give this response to the question about the splitting of the blockchain:
This might not be the case if you are holding your coins in an online wallet. Most cloud storage wallets might not offer a choice to customers, so we see warnings issued by Coinbase, Circle and other providers to their customers.