the good, the bad and the ugly

“All those who gain power are afraid to lose it”. That’s a direct quote from Star Wars’ Emperor Palpatine. Why am I borrowing it? That’s a really good question for a really good tale. 

--this article is not meant to be taken as financial advisement. It’s purely my personal views and opinions on cryptocurrency and cryptoeconomics. Please check sources at the end and, as always, feel free to leave a comment. Even if it is to trash this whole idea. But if it is, you’re probably wrong and I hate you--

A couple of months ago, in a galaxy not so far, far away, there was an event that came to be known, in the crypto world, as the New York agreement. During the discussion that led to the agreement, the bitcoin (BTC) community discussed what could be done to solve the blockchain’s major scalability issues, namely the small block size of 1mb. And folks, this is where things get really interesting. A part of the community agreed that, later that year, an upgrade (or “hardfork”) of the blockchain network would occur, and segregated witness would be implemented. Don’t get me wrong, the blockchain already has segregated witness implemented (via a soft-fork), although it’s still not being used. But a part of the bitcoin community, who did not agree with segwit2x, decided to take a different approach by simply increasing the blocksize to 8mb. And that’s how Bitcoin Cash (BCH) came to existence in late July 2017. 

Now, this all might sound unfamiliar, and you might not know what (1) segregated witness, (2) segwit2x or a (3) hardfork is. Alright, so let’s take a quick step back and understand what is what. The (1)st and the (2)nd are basically the same thing. Segwit2x is segregated witness technology (or code, for all that matters). And segregated witness is nothing more than removing the witness hashes from the signature and add it at the end of the merkle tree structure, which in a way would increase blocksize available space (to around 1.8mb I think). Plus, it would mean few people would actually need to access the full blockchain at all times.  

“But that leaves room for exploitation, as you could do off-line transactions and double spend for example.”

Is the usual argument against segwit, which does make sense, although safety measures have been incorporated making this solution quite backwards compatible. Segwit2x was the actual agreement, in my view, as it defined that besides segregated witness being incorporated, the block size would increase to 2mb (in May 2018), as I’ve explained. 

“How does this relate to all the turbulence and price shifts over the past week?”

I’m getting there, just be patient. Segwit2x was supposed to happen at the end of November, but the core development team decided that they did not have enough support from the bitcoin community, so they simply shut the project down. Not bitcoin obviously, as bitcoin cannot be stopped. But segwit2x could and was. This raised questions. Questions that led to interesting findings. This, in turn, led to even crazier maybe-conclusions. 

Not long after the New York agreement, a post emerged online, @pastebin.com, stating the New York agreement was nothing more than a scam and segwit2x would never happen. It also stated interesting facts, as they turned out to be, such as the creation of a new bitcoin coin, called bitcoin cash, which goal was to replace the actual bitcoin. I know, this all sounds crazy. I also think this is nuts. But then I remember reading about bitcoin cash when it was released, in the summer and thinking: “why would the community be divided into two groups if the goal is the same?”. If you actually think about it, segwit2x was implementing segregated witness, but would also increase the block size. Well, that last purpose was already accomplished by bitcoin cash. It has a block size of 8mb. This means way faster transaction times. No more 10 minutes of waiting for your transaction to actually be posted onto the blockchain. Plus, fees are cheaper in bitcoin cash! Isn’t that awesome?!

No. Or maybe not. At this point I think we must, again, take another step back and ask ourselves: what is bitcoin’s purpose? Is it to be used as normal fiat currency? Or is it to be used as an investment asset, much like gold? (I know, I know. I always use the same bitcoin-gold comparison). I see no reason for an asset which purpose was to be used as currency, to have such a limited supply like bitcoin does (21 Million). But hey, that’s just me. And I’m definitely not Satoshi, so I do not know the answer.  

“Why would we continue to use bitcoin then, instead of bitcoin cash?”

Yes, that’s the million dollar question. Personally, I believe bitcoin cash to not be as secure as bitcoin. Plus it has less support from the community. But the price has been spiking, being already the 3rd largest market cap (November 2017), right after ethereum. Going back to the weird post I mentioned above, it stated that segwit2x was never meant to happen. And that bitcoin cash was going to overtake bitcoin. But how? Well, a group of people who have enough hashing power to upset the network could simply shift from mining bitcoin to mining bitcoin cash. And by selling accumulated bitcoin at a cheaper price than the market (dumping) and buying bitcoin cash at a higher price. Does this sound shady? I completely agree. Did it actually happen? 

Le coup d’état 

Over the last couple of days the South Korean markets (see below) were the main responsible for the bitcoin cash price going up. There was no apparent reason for the shift, rather than the cancelation of segwit2x in the previous week. 

I see two different possibilities: (a) a group of miners with significant hashing power decided they wanted to get higher fees for validating blocks and shifted to a different bitcoin or (b) a group of miners still wants to use bitcoin, but also wants higher fees paid for validating transactions. If you’re still not convinced, that’s fine. Just look at this comparison below, between BTC and BCH during the 10th November until the 14th. It seem funds were literally flowing from bitcoin to bitcoin cash. 

The beauty of cryptocurrency is that all data and transactions and movements can be traced to specific wallets and places. Yes, it’s still anonymous, but you can track who is doing what. You simply do not know who the “who” is. In any case, we know the majority of bitcoin dumps for bitcoin cash came from South Korea. And we also know most mining rigs had to be moved from China to South Korea and Japan. Let’s use logic and try to answer our previous (a) , (b) dilemma. If miners really wanted to go into bitcoin cash and forget bitcoin, then they simply would move. But moving is not something that you can do by clicking a button (or is it?). See, the first thing that we need to understand: (1) is there a cost for moving to a different network? The answer is yes: the cost will be how much of bitcoin you lose for starting validating transactions in the bitcoin cash network. Also, we must take into account (2) which coin is more valuable? Because higher valuation means, higher profits. So even though you might get more BCH for each block you validate, does it really worth more than what you were getting in BTC? Let’s see if the blockchain can help us answering that.

First we start by looking into the mempool count, which is “The number of transactions waiting to be confirmed”. As you can see below, the transaction count has spiked, which shows us there were higher amounts of transactions waiting to be approved, more than normal, during the period that matches the above graphs. Could this dump of bitcoin mean there are fewer miners available to validate transactions? 

Yes, it could indeed. What if we see the average for the last 30 days?

Is it only my impression, or does it seem like the number of transactions waiting to be approved are increasing exponentially, although the transaction count is getting lower? 

Let’s move forward and take a look at another quite interesting blockchain graph. If we look below, we can see what’s happening to the transaction fees paid by users who send bitcoin. Isn’t it curious that the first spike occurred right after segwit soft-fork was implemented and segwit2x agreed upon?

If higher transaction fees are paid, it can be due to a handful of reasons like (a) the algorithm adjusting the difficulty level of the hash has increased, so more power is required to solve the hash, thus making miners increase their fees, or (b) miners shifting away from bitcoin, leaving less miners to solve the computational problems, which would lead to higher fees too. But higher fees attract more miners. And more miners reduce the overall gains. So this will always be shifting. But what’s interesting is the difference between the lowest and highest points. They’re getting further and further away from each other, right? But shouldn’t the overall gains remain more or less the same? As it tends to zero?  

Ups! It seems the opposite is going on. Look above, at the last 7 days average movement of miners’ revenue. It seems to be increasing, especially since… the New York agreement! What does all this tell us? A lot and nothing I guess. We can make loads of assumptions. But assumptions can be wrong. I believe that bitcoin is still profitable and, in fact, is getting more and more profitable as time goes by. But in order for that to happen, the adjustment algorithm must play its part. And what better help than an improved bitcoin version, attracting miners and splitting the community? Any proof-of-work system works by action and reaction:

1.      Miners start mining and get loads of rewards for validating blocks (high fees)

2.      The more miners come, the less everyone gets. Also the probability of solving a block and getting the reward lowers for each participant.

3.      The adjustment algorithm kicks in and adjusts the difficulty level for solving the block hash, so that each block is created every 10 minutes (more or less).

4.      With more miners the difficulty is higher, with less miners the difficulty is lower;

5.      The more bitcoin are available, the lower the reward for solving a block is.

If all these points are true, and we’re facing a traditional supply-demand perfect market, how come the average miners’ revenue is going up so much, when it should remain more or less the same, eventually tending to zero?

This is why, in my personal opinion, what is now being viewed as a kind of “hostile takeover attempt” by BCH, is nothing more than a mechanism for miners to increase their bitcoin profits. At the end Bitcoin will still be bitcoin, and bitcoin cash will be bitcoin cash. One won’t replace the other.

On a personal note, if you want a faster bitcoin, use lightning network technology. Increasing the blocksize means increasing the size of the overall blockchain. That’s not the purpose if everyone is supposed to be able to access it, at any time. Otherwise I will need loads of space to store the blockchain. Besides, other coins like litecoin or ethereum already try to address the block size issue, and are consideberaly safer than bitcoin cash.

Is bitcoin cash really a way to fix bitcoin issues, or is it simply a vessel to increase miners’ revenue? What people call speculation, I look at as free-market forces: any cryptocurrency uses economic incentives for the network to work. If economic incentives are higher on bitcoin cash, why the hell would miners stay in bitcoin?!

To conclude, I would like to leave you with the following thoughts: can different incentive systems, like proof-of-work and proof-of-stake, be implemented in the future or is the blockchain already hostage to the bitcoin miners? If such a powerful force can shift market prices as we saw last week and collude with each other, how will the blockchain enforce new upgrades that benefit the bitcoin community as a whole, rather than just a small group of people like, "oh jeez, i don't know Rick".. the miners?

Basic ref:

@pastebin.com/n0aGBMQr

@investopedia.com/terms/h/hard-fork.asp

@investopedia.com/terms/s/segwit-segregated-witness.asp

@en.wikipedia.org/wiki/Bitcoin_scalability_problem

@en.wikipedia.org/wiki/SegWit2x

@blockchain.info/en/charts

@coinmarketcap.com/currencies/bitcoin-cash/

@coinmarketcap.com/currencies/bitcoin /

@hacked.com/

(data dash) @youtube.com/channel/UCCatR7nWbYrkVXdxXb4cGXw

(ivan on tech) @youtube.com/channel/UCrYmtJBtLdtm2ov84ulV-yg

(boxmining) @youtube.com/channel/UCxODjeUwZHk3p-7TU-IsDOA