Well that was fast — the 2x hard fork has been abandoned a day after I wrote this. Probably still a good memento to keep here.
I am writing this post as I currently feel that the potential economic consequences of a contentious 2x Hardfork in Bitcoin are being underappreciated by the cryptosphere and they deserve to be heard.
It is a difficult topic for me to write about as I lack the technical expertise to fully grasp all the aspects of the fork and need to therefore rely on other people that I trust for these aspects. I have collected a small amount of links at the end of the article that I think describe the technical side adequately. I apologize beforehand for any misunderstanding related to these technical aspects and any mistakes that might arise from it. However, I believe I am immersed well enough in the field to shed some light on consequences that anyone interested in the cryptospace should want to avoid, but that currently get overlooked as they are “merely” economical.
Very briefly to start
You can read about what a hardfork (HF) is and what the possible scenarios are in the articles below. However, these items should be known for the rest of the article:
- A hardfork splits a current blockchain into two new chains with different properties. Initially (usually) everyone has the same amount of coins on one chain as on the other
- Replay protection is a built-in mechanism that prevents one transaction on a Bitcoin chain to be “replayed” on another Bitcoin (BTC) chain, leading to a potential loss of coins
- Hashrate, while broader in meaning, is equivalent to speed of transactions on a chain’s network (bearing in mind difficulty of calculation on that chain) as well as signals “power” of miners regarding determination of which chain is the correct one in the blockchain validation procedure
- There have been numerous HFs of Bitcoin in the past and as long as consensus is formed around them OR there is proper replay protection enabled this is not necessarily an issue per se
- The current two major forks (Bitcoin Cash and Bitcoin 2x, referred to as BCH and 2X below) are both stemming from the same debate around blocksize as well as Segwit (segregated witness) activation
- BCH split off from Bitcoin about two months ago and has full replay protection built in. The chain is currently being mined c. 75% by only one anonymous miner/mining ring (who essentially controls the blockchain)
- 2X is based on an agreement of mining pools and exchanges (not users) called the “New York Agreement” (NYA), aims to double current block size and is looking to split off from BTC mid-November and importantly has decided (so far) not to implement replay protection. Furthermore, despite more and more signatories dropping their support as it is clear that the user community is tilted heavily against 2X, an estimated 75% of total BTC hashrate are still supporting 2X. It has been termed “a corporate takeover” of Bitcoin by some, as the fork is technically unnecessary at this point (current BTC blocks are not near their limit) and it failed to build consensus, notably also breaking with Bitcoin core developers
- At this point in time, based on futures on Bitfinex as well as actual trading, BCH is worth about 8% of BTC and 2X is worth about 15% of BTC in USD
The unintended consequences of a contentious hard fork
The scenario that I am basing my “warning” on is one in which BTC, BCH and 2X all vie for position as the “true and only valid” Bitcoin chain. Assumptions are that miners (see a very interesting letter from a miner below; potentially of course a fake) and developers on all three chains launch attacks on the other chains in order to take home the perceived price, namely slipping into the mantle of BTC and assuming its position. Thereby obviously 6–10x their own chain in value. They would end up with a chain that they can control better (as they got rid of Bitcoin core in the process and own the mining power; at least at the start) and would have effectively centralized Bitcoin.
I believe the potential economic consequences of such a scenario would be devastating to the entire cryptosphere and potentially even to the blockchain as a technology. These are some of the possible consequences:
a) If the BTC chain were to suffer from a 51% attack (namely a mining ring determining on their own which version of its blockchain is valid; not theoretically impossible anymore if 75% of current hashpower leave BTC) that transfers wealth into the pockets of whoever led the attack, the Bitcoin brand and quite possibly blockchain technology would be dead for purposes of mass market adoption. It would make Jamie Dimon look right in his claim that Bitcoin is just a ponzi scheme and take away the main “selling point” of Bitcoin and the blockchain itself, namely immutable, trustless transactions based on an open ledger. If this were to become true it does not matter who can claim to be “the real Bitcoin” as the entire technology will take a huge hit in relevancy and all Bitcoin chains along with anything that is not backed up by equity or other assets and denominated mostly in Bitcoin would easily lose 90% of its value.
b) Assuming a 51% attack is out of the question, given the potential loss of hashrate from BTC to 2X and a slow mechanism to adjust difficulty downwards on the BTC chain it is quite possible that the current Bitcoin chain (the one trading at 7000 USD) would suffer from extremely slow transactions. It could take several hours to complete any kind of transaction on that chain for several months. No doubt this is one of the goals of the 2X proponents. They are however completely wrong if they assume that this would simply make their chain the current “real Bitcoin” and that they could reap any kind of profits. Several exchanges have already confirmed that the original BTC ticker and brand name will belong to the chain of Bitcoin core. This might not matter much to technical blockchain enthusiasts, but the general public does not currently grasp the details of such a split and its new chain, so that branding essentially determines price and mass market success. If Bitcoin itself starts being extremely slow to transact, its value will fall and I am betting that the knock on effect on other cryptoassets is starkly negative and will actually impact the forked chains just as much. More so as institutional money is currently quite possibly the only thing that can really push Bitcoin from here and in order for that to invest you need certainty as to what Bitcoin is. It can’t be Bitcoin today and Bitcoin Cash tomorrow.
c) Other coordinated mining attacks to the legacy BTC chain, along with missing replay protection leading to chaos ensuing and people who recently joined crypto being unable to send their coins anywhere, some losing them, some simply frustrated and heading for the exits. This is actually, at least in my mind, the current base case scenario. I believe the consequences of this would be the same as under b) and the damage to Bitcoin regarding mass market adoption could well be permanent or at least set it back by a few years. Again, I would be extremely doubtful an emerging Bitcoin fork (in this case BCH, as 2X would suffer the same replay issues) could actually reap the benefits in this case.
In all the cases above, mass market adoption of cryptoassets would be materially affected. ETFs will not be allowed to launch and Futures will likely cease trading. After all, if you cannot be sure that the product you are investing in is actually going to be Bitcoin and you run the risk of the custodian of your assets (good luck to those) losing your money or not switching to the successful chain (if there is one), who would truly invest significant sums. If any of the above scenarios were to truly play out without actors starting to become reasonable at some point (something I doubt as the supporters of all three chains to me, a technical bystander, seem deeply entrenched and almost hateful of each other) the economic benefits will hardly have been worth it for the victor. Furthermore, these actors would likely enable something (assuming the 51% attack does not happen, which would likely harm blockchain as a whole) they truly despise, namely mass adoption of state-sponsored, centralized cryptocurrencies that people will perceive as safer than the chaos generated by the open source version.
As I stated at the start — my technical understanding may not be advanced enough and I may have gotten several points wrong. However, I do believe these scenarios currently are at least realistic and it would seem that there is a lot more to gain from NYA signatories to scrap or at the very least postpone their HF plans to properly build consensus.
Finally, my usual disclaimer: this is not investment advice, it is merely my personal opinion and not my professional advice, any assets can go to zero.