What’s happening on or before August 1 that you must know about?

Currently, Bitcoin can handle about five transactions per second. That was fine in Bitcoin’s infancy. However, if you compare it to Visa’s average of 2,000 transactions per second, you can see Bitcoin’s capacity is not enough for the future and it’s causing Bitcoin transactions to take a long time.

Over a year ago, a plan was developed to increase speed and volume of transactions. It is called SegWit and stands for segregated witness. This boost in speed is necessary because Bitcoin is being used for more and more transactions every day.

Bitcoin incorporates information on each transaction plus an encrypted code to verify these transactions in a block of data. Each block is then tied to the previous block by another encrypted code. This chain of data blocks is called the blockchain.

To prevent hackers (evil programmers) sneaking their own instructions into software code to cause harm, blocks were severely limited in size.

Adopting Segregated Witness would increase block size allowing more transactions per second. It also fixes a bug to allow additional software that permits even faster transaction handling. Segregated Witness requires 95% agreement for its adoption. As of 20 June 2017, there was less than 35% agreement on it.

Why not adopt Segregated Witness? Although Segregated Witness increases block size by as much as four times (and therefore the number of transactions processed per second), it still leaves block size limited and thus is a limited solution for a short term, whether that short term is four years or ten.

Another plan, Bitcoin Unlimited, proposes that block size should not be restricted at all. Thus, solving the problem for all time. Bitcoin Unlimited has 40% agreement on it.

Why not adopt Bitcoin Unlimited? To match Visa’s transaction capacity, Bitcoin would have to increase (scale up) block size by 400 times! To handle such huge blocks would require computing capacity only huge corporations could afford. This would put control of Bitcoin in the hands of a few corporations, which is exactly the opposite of what Bitcoin was created to be—decentralized and not under the control of a small number of corporations, banks or governments. In addition, Bitcoin Unlimited has crashed due to bugs at least twice in the last three months.

Making either change requires rewriting the software that runs on the Bitcoin network. Any time programmers disagree on software upgrades and produce two different versions, it is called a fork—just like a road splitting in two directions. Changes that permit running either the old or new versions of the software are called soft forks. This is like a software upgrade for an app on your smartphone. You can choose to upgrade or not. The app will still run.

Software changes that only permit running the new software are called hard forks. This is like an app that won’t run any more until you upgrade it.

SegWit is a soft fork meaning after SegWit there will still be only one Bitcoin regardless of which software processes it. Bitcoin Unlimited is a hard fork meaning if that change is adopted, the new software will only handle the “new” Bitcoin. So, there will be two coins: the old Bitcoin (BTC, also known as XBT) still running on the old software and the new one, Bitcoin Unlimited (BTU) running only on the new software.

The debate over which plan to adopt has been going on for over a year. Because the adoption requires an overwhelming majority (95%), you can see a quick resolution does not appear likely. Splitting the current demand for Bitcoin into two smaller parts has the danger that the reduced demand for each part will make each coin less valuable because reduced demand usually reduces prices. Knowing this, holders of Bitcoin are nervous.

The disagreement over how to increase Bitcoin’s speed is further complicated by the fact that there are two separate groups that make up Bitcoin. The first group are miners. They run computers that create new Bitcoins and record and confirm transactions. The second group are the wallets and exchanges that create the transactions to be recorded when Bitcoin is bought or sold.

Both are essential. Miners require users to sell their new Bitcoins and users require miners to record and confirm their transactions.

It is 95% of the miners that have to agree to adopt a plan. However, users are the ones suffering from long waits for transactions to complete due to the slow network. Also, the long waits have allowed miners to raise their fees for recording and confirming transactions.

With the debate showing no sign of arriving at an agreement, users have decided to force the issue by activating their own soft fork (called a User Activated Soft Fork or UASF). They proposed this in Bitcoin Improvement Proposal (BIP) 148.

On August 1, exchanges and wallets will begin running versions of the software that require each Bitcoin block produced by miners to signal they will adopt SegWit. The signal is simply a 0 or 1 in a specific place in the block of data. If the new blocks as of August 1 do not contain this signal, the users’ software will no longer process that block and no new Bitcoins will be sold! Therefore, the miners will not get paid.

The reason signaling is important is that once the signals reach 95%, the Bitcoin network will automatically adopt SegWit for the whole network.

Next: What does the August 1 change mean to you?

Leave a Reply