Hold on to your hats as bit­coin’s civil war threat­ens to get real

Irish Independent - Business Week - - BUSINESSWEEK TECHNOLOGY -

IT’S time for bit­coin traders to bat­ten down the hatches. The no­to­ri­ously volatile cryp­tocur­rency, whose 150pc surge this year has cap­ti­vated everyone from Wall Street bankers to Chi­nese grand­moth­ers, could be headed for one of its most tur­bu­lent stretches yet.

Blame the bit­coin civil war. Af­ter two years of largely be­hind-the-scenes bick­er­ing, ri­val fac­tions of com­puter whizzes who play key roles in bit­coin’s up­keep are poised to adopt two com­pet­ing soft­ware updates at the end of the month. That has raised the pos­si­bil­ity that bit­coin will split in two, an un­prece­dented event that would send shock­waves through the $ 41bn (€37bn) mar­ket.

While both sides have big in­cen­tives to reach a con­sen­sus, bit­coin’s lack of a cen­tral au­thor­ity has made com­pro­mise dif­fi­cult. Even pro­fes­sional traders who have fol­lowed the dis­pute’s twists and turns aren’t sure how it will all pan out. Their ad­vice: brace for volatil­ity and be ready to act fast once a clear out­come emerges.

“It’s a high-stakes game of chicken,” said Arthur Hayes, a for­mer mar­ket maker at Cit­i­group, who now runs BitMEX, a bit­coin de­riv­a­tives venue in Hong Kong. “If you’re a trader, there is a lot of un­cer­tainty as to what hap­pens. Once there is a de­fin­i­tive sig­nal about what will be done, the price could move very quickly.”

Be­hind the conf lict is an ide­o­log­i­cal split about bit­coin’s right­ful iden­tity. The com­mu­nity has bit­terly ar­gued over whether the cryp­tocur­rency should evolve to ap­peal to main­stream cor­po­ra­tions and be­come more at­trac­tive to tra­di­tional cap­i­tal or for­tify its po­si­tion as a lib­er­tar­ian bea­con; whether it should act more as an as­set, like gold, or as a pay­ment sys­tem.

The seeds of the de­bate were planted years ago. To pro­tect from cy­ber at­tacks, bit­coin, by de­sign, caps the amount of in­for­ma­tion on its net­work, called the blockchain. That puts a ceil­ing on how many trans­ac­tions it can process – the so- called block size limit – just as the cur­rency’s grow­ing pop­u­lar­ity is boost­ing ac­tiv­ity.

As a re­sult, trans­ac­tion times and pro­cess­ing fees have soared to record lev­els this year, cur­tail­ing bit­coin’s abil­ity to process pay­ments with the same ef­fi­ciency as ser­vices like Visa.

To ad­dress this problem, two main schools of thought emerged. On one side are min­ers, who de­ploy costly com­put­ers to ver­ify trans­ac­tions and act as the back­bone of the blockchain. They’re propos­ing a straight­for­ward in­crease to the block size limit.

On the other is Core, a group of devel­op­ers in­stru­men­tal in up­hold­ing bit­coin’s bug-proof soft­ware. They in­sist that to ease blockchain’s traf­fic jam, some of its data must be man­aged out­side the main net­work.

They claim that not only would it re­duce con­ges­tion, but also al­low other projects, in­clud­ing smart con­tracts, to be built on top of bit­coin.

But mov­ing data off the blockchain ef­fec­tively di­min­ishes the inf lu­ence of min­ers, the ma­jor­ity of whom are based in China and who have in­vested mil­lions on gi­ant server farms.

Not sur­pris­ingly, Core’s pro­posal, called SegWit, has gar­nered re­sis­tance from min­ers, the most vo­cal be­ing Wu Ji­han, co-founder of the world’s largest min­ing or­ga­ni­za­tion Ant­pool.

“SegWit is it­self a great tech­nol­ogy, but the rea­son it hasn’t taken off is be­cause its in­ter­est doesn’t align with min­ers,” Wu said.

Still, af­ter pre­vi­ous counter-pro­pos­als cham­pi­oned by Wu fell through, min­ers last month agreed to com­pro­mise and sup­port SegWit, in ex­change for in­creas­ing the block size.

Wu says the plan will al­le­vi­ate short-to-medi­umterm con­ges­tion and give Core enough time to f lesh out a long-term so­lu­tion. That pro­posal is what is known as SegWit2x, which im­ple­ments SegWit and dou­bles the block size limit.

“You can think of the SegWit2x pro­posal as an olive branch,” said Wu.

Sup­port for SegWit2x has reached lev­els un­seen for pre­vi­ous so­lu­tions. About 85pc of min­ers have sig­nalled that they are will­ing to run the soft­ware once it is re­leased on July 21 and some of bit­coin’s largest com­pa­nies have also jumped on board.

The un­prece­dented level of en­dorse­ment is partly prompted by anx­i­ety that bit­coin may lose its dom­i­nant sta­tus to ethereum, a newer cryp­tocur­rency whose pop­u­lar­ity has soared thanks to its abil­ity to run smart con­tracts and its more cor­po­rate-friendly ap­proach.

Still, hard­lin­ers say that af­ter more than two years of bit­ter ar­gu­ments, a split would let peo­ple part ways to ex­plore dif­fer­ent vi­sions, even if prices crash.

Bit­coin dropped for a fourth day on Tuesday, de­clin­ing 1.9pc to its low­est level since June 15.

The cryp­tocur­rency is down 22pc from a record high in early June.

Some of Core sup­port­ers are push­ing a sep­a­rate agenda called UASF (user­ac­ti­vated soft fork).

Start­ing from Au­gust 1, it will re­ject trans­ac­tions not com­pli­ant with SegWit.

If a ma­jor­ity of min­ers do not adopt SegWit by then, two ver­sions of bit­coin would come into ex­is­tence, trig­ger­ing a cur­rency split.

“It’s mod­er­ates ver­sus ex­trem­ists,” said At­lantabased Stephen Pair, CEO of BitPay, which is one of the world’s largest bit­coin wal­lets.

“It de­pends on how much a per­son values the ma­jor­ity of peo­ple stay­ing on one chain at least for a lit­tle while longer, ver­sus split­ting and al­low­ing each pur­su­ing their own vi­sion for scal­ing.”

Many Core devel­op­ers con­tinue to re­ject SegWit2x be­cause they see its development and im­ple­men­ta­tion as be­ing too rushed, which they ar­gue could un­der­mine the soft­ware un­der­pin­ning bit­coin.

“To sug­gest that a hard fork hap­pen sig­nif­i­cantly faster than even the most mi­nor of changes in re­cent his­tory is ir­re­spon­si­ble and dan­ger­ous,” said Matt Co­rallo, a Core con­trib­u­tor and for­mer co-founder of Block­stream, which is among the com­pa­nies that stand to ben­e­fit from SegWit. (Bloomberg)

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