The past two weeks have been some of the most intense in bitcoin’s history as Bitcoin Core and Bitcoin Unlimited went head to head in what appears to be the last metaphorical battle.
Bugs in Bitcoin Unlimited were irresponsibly revealed and exploited. It was then found the bug was partly due to Bitcoin Core’s use of asserts in production, an unusual practice. Some exchanges then made a fork statement which apparently bound them to Bitcoin Core. It quickly backfired as the market sent the price down by $300 due to what some saw as a statement which places the entire currency into question.
Other exchanges quickly came out to say they will follow the longest chain, but another bug was exploited which again triggered asserts, sending nodes down, to only quickly recover.
During this period, Bitcoin Unlimited (BU) has retained around 40% hashrate share with bitcoiners now waiting for the decision of F2Pool, one of the bigger miners with some 11% network share. There are indications they may be switching, at which point Bitcoin Unlimited would have more than 50%. Once that is reached, we may see a psychological shift in attitudes as a fork moves towards becoming inevitable.
Technically, once more than 50% is reached, BU can fork at that point, but they most probably won’t because miners want to assure there will be no chain split. As such, they are likely to wait for 80% or maybe even 90% of the hashrate before they fork.
BW and Bixin (formerly known as HaoBTC) would give the network around 60%, perhaps 65%. Bitfury may be slightly swaying. If BU reaches 65%, they too may switch, giving the network 75%-80%.
Once 75%-80% is reached, miners will probably want to wait another month or two to give others a chance to upgrade. At that point, it is likely most, if not all, miners will switch, thus they’ll probably wait to reach 95%-100% network share. Once they do, they can then create a 2MB block.
Would There Be a Chain Split?
Once a 2MB block is created, the network can, technically, split into two chains. One chain can continue operating under Bitcoin Core (BC) nodes, while the main chain operates under Bitcoin Unlimited nodes.
Practically, this is very unlikely for many reasons. Firstly, if BU nears 70%, Bitfury, which has only 10% network share, would most probably switch. It is highly likely other miners would too. The Bitcoin Core chain would have an insignificant amount of hashpower which means their transactions would take days to confirm with ordinary transaction times not returning for months.
To make a chain split practical, BC may change proof of work. This, in effect, prevents current hashrate from mining BC coins, but only in theory. Bitcoin miners tend to provide hashrate to other coins too, thus have plenty of GPUs which would allow them to mine BC coins if they wished.
Matters may get far more complicated. Firstly, we have to consider whether the threat to change proof of work (PoW) is a bluff. That is because undertaking such action automatically places the Bitcoin Core coin (BCC) at a disadvantage. The coin is simply not secure, nor, many would argue, is it conceptually bitcoin because the change of proof of work where miners do not objectively act maliciously fully undermines the entire purpose of proof of work.
By changing proof of work, BCC would be conceding and would become a minority coin. They would further lose Bitfury and BTCC, isolating them considerably. Furthermore, they would probably lose support among at least some of their base who may see a PoW fork as going too far.
As such, it makes more logical sense to see a PoW fork threat as a bluff, but BC has two considerable advantages. Firstly, bitcoin.org, bitcointalk and r/bitcoin strongly support BC. If there is a split, these three media outlets would probably call BCC as bitcoin, regardless of its hashrate or price.
This would only serve to cause confusion. Moreover, if the market values BCC considerably lower, say $50, due to its low security as well as high fees plus transaction delays, while the Bitcoin Unlimited coin is valued at $800-$900, it would be a significant humiliation to Bitcoin Core which may find itself with a barely used chain.
Once a fork seems inevitable, they may therefore choose to bite their time instead of betting it all on red. A further consideration for Bitcoin Core is a miner’s statement that they will make an inoperational minority chain. The reason is probably to avoid confusion.
A more effective advantage Bitcoin Core may have is the potential to find bugs in Bitcoin Unlimited. This may serve to change attitudes towards the client and, if successful, may avoid a chain split, so retaining Bitcoin Core and its 1MB.
However, Bitcoin Unlimited has been attracting many developers and will probably tighten up its review procedures, therefore it is not clear whether BC can exploit any other bug besides the asserts it has already exploited.
A chain split, therefore, appears unlikely. It is more probable some Bitcoin Core developers may move to litecoin or another altcoin which may integrate segregated witnesses (segwit), but nothing can be said with confidence as a decision in such a decentralized way has never been made before.
What Happens if There is a Chain Split?
If a chain-split does occur, there would be two networks with their own chains, nodes, miners, and coins, no different than an altcoin, but with one significant differentiator. A bitcoin chain split would give the same amount of bitcoins to current holders on both chains.
Currently, just over 16 million bitcoins have been mined. In the event of a chain split, there would be 16 million BCC and 16 million BTU. Once both coins are listed on exchanges, there would probably be a great trading frenzy as speculators and ideologically motivated holders place their bets.
During this period, volatility is expected to be greater than ever. Whoever is not a professional trader will probably want to stay out and wait for the waters to calm. Common wisdom says diversification is very useful and highly advised for investors. Eth would probably be a good hedge.
After about one or two weeks, perhaps a month, either BCC or BTU will probably be judged by the market as having greater value. Whichever coin so does would probably be called bitcoin. The fixed amount of 21 million bitcoins, therefore, would probably remain as it is highly likely only one coin will have significant value.
As this event in such a decentralized way has not happened before, the above is necessarily speculative. It may well be the case that both coins are valued near the same, but that appears unlikely.
Non-scientific, but perhaps indicative, polls consistently tend to give bigger blocks around 80% approval over the past two years. As such, the coin value, after the trading frenzy, would probably initially settle on an 80/20 split, with the 20% coin gradually losing share.
The Ethereum Example
Ethereum is the only significant example of what may occur if both coins are listed. The combined value of both coins was initially greater than before the split as the trading opportunity attracted value from other coins. After one week of trading frenzy, eth settled at around 80% of the value with ETC settling at around 20%.
ETC then gradually began to lose share, first to 10% and now to a very insignificant amount, but there are considerable differences between eth and btc. Ethereum developers unanimously stood behind eth, even those who disagreed with the fork decision. All eth projects stood with eth, none moving to ETC.
In Bitcoin, developers are split with some, like Gavin Andresen and Jeff Garzik, supporting bigger blocks and BU, while others support BC. Most businesses tend to like bigger blocks, but they have not made any statement regarding BU. Some businesses will probably support BC.
Moreover, ethereum’s communication channels stood in a united front behind eth. In bitcoin, they are currently split and if there are two coins they would probably remain so split. The eth example, therefore, does not easily apply, but it does show that a split can be beneficial in the longer term despite potential confusion as eth has increased to around $50 after reaching a bottom of $5.
What Are the Chances of a Fork?
This is a difficult question to answer because it is necessarily speculative. Currently, I would say the chances remain slim for one main reason. A new pool has suddenly gained considerable share of the network, rising to 8% in just one week.
Little is known about 1Hash, including where their hash came from in such a quick time, but they are like F2Pool. That is, they have no hashrate of their own, simply facilitating the combination of hashrate owned by other small miners.
It is not yet fully confirmed, but there are indications they may be against BU. In a very short interview with Hacked, 1Hash’s owner said “we support the dilatation, but do not support the split.”
I asked if the pool will signal for segwit or BU, but received no further response. If they are indeed against Bitcoin Unlimited, then the client’s hashrate might stall around 60-65% with a fork appearing unlikely before winter or maybe next year.
Capacity, however, is currently a very big problem as fees have been increasing. With segwit seemingly rejected, some of the miners that currently signal segwit might switch. With BU having 60-65%, it would be far too tempting for them not to. As such, there may be a fork as soon as this summer.
It is highly unlikely a fork would occur during this spring, if one happens at all. I’d give it a 30% chance for summer and 50% chance for autumn/winter. That is based on current information, matters do move fast in this space and the behavior of eth would be of particular relevance.
The currency has plans for unlimited scalability, therefore it has attracted the attention of many big block supporters. Its market cap is now around 1/3 of bitcoin’s, with its transaction volumes nearing half of bitcoin’s.
If eth continues to advance, there would be immense pressure on miners to fork so as to increase capacity because they would see value leaving the network. Many have already left and not returned. They used to be strong cheerleaders of bitcoin, now they cheerlead Ethereum.
In my personal view, a fork by summer might halt what is now more than a drip drip, but autumn or winter might be too late depending on how things develop in eth land.
Images from Shutterstock.
Fidelity Investments is Mining Cryptocurrency
Fidelity Investments is a multi-billion dollar brokerage that just so happens to be mining cryptocurrency. In fact, it has been at it for three years, using its own computers to harvest bitcoin and Ethereum.
CEO Abby Johnson recently told Fortune that its U.S.-based mining operation is “making a lot of money.” This comes despite running a relatively modest operation.
Hadley Stern, Senior VP of Fidelity Labs, described his company’s venture as an “experiment.”
The real reason we began mining, and still do, is to learn how the network works, how consensus works, how difficulty levels work,” he said in reference to the mining process.
The key to profitability has been the dramatic rise in cryptocurrency over the past year. Bitcoin and Ethereum are the world’s No. 1 and 2 cryptocurrencies by market capitalization, and no-one else comes close.
Well Ahead of the Pack
The fact that Fidelity has been at this for three years speaks volumes about the company. Other, much bigger players are still dipping their toes in the market, but are unsure about how to proceed. Goldman Sachs is reportedly on the fence about starting a cryptocurrency trading operation, while J.P. Morgan has already begun handling customer orders for bitcoin-based instruments.
Fidelity is doing a lot more than just mining tokens. Earlier this year, it reached an agreement with Coinbase to let customers view cryptocurrency prices alongside other assets on their Fidelity homepage.
Coinbase is the world’s most funded cryptocurrency exchange with more than 7.4 million users.
The cryptocurrency market ended the week on a firm note, with bitcoin (BTC/USD) reaching a session high of $4,425.00. At press time, the index was up 1.6% at $4,368.
Ether is also trading higher against the dollar, with the ETH/USD rallying more than 3% to $305.
Ripple (XRP) lost momentum on Friday, but still managed a weekly gain of 21%.
Chinese Government Eyeing Fresh Bitcoin Legislation?
The Chinese government could roll out fresh cryptocurrency regulation in the coming months permitting licensed brokers to operate, based on recent information from Xinhua.
The state-owned news publication recently revealed that the government is mostly concerned with stamping out illegal activity involving bitcoin and other cryptos. Government authorities could be planning to regulate the market by creating a licensing program with strict Know Your Customer (KYC) and Anti-Money Laundering (AML) systems.
The Case for AML
The need for KYC/AML protocols has long been raised by cryptocurrency proponents, especially in reference to initial coin offerings (ICOs). In response, the blockchain community has come together to create the Simple Agreement for Future Tokens (SAFT). The SAFT is both an instrument and open-source framework for token sales that vets accredited investors.
SAFT activity is quickly gaining traction, with the likes of Gizer recently issuing a presale of its ICO through SAFTLaunch.
SAFT was officially created by Protocol Labs in close collaboration with AngelList and Cooley.
China’s Stance Looms Large for Cryptocurrency Market
Although digital assets have recovered from the China-induced flash crash of September, favorable regulations on the mainland could mean big business for bitcoin exchanges. Prior to the ban on ICOs and bitcoin brokers, Chinese investors were responsible for a quarter of all BTC trades.
According to Xinhua, China is likely to pursue a licensing program similar to Japan, a country that recently approved 11 cryptocurrency exchanges. CnLedger, a leading source of cryptocurrency news in China, recently had this to say:
“Xinhua News, official press agency of CN: Virtual currencies have become the top choices of underground economies. We shall adopt ‘0-tolerance policies’ towards crimes hidden underneath and take measures such as record-keeping, licensing, AML processes, real-name, limiting large transactions.”
Is China’s cryptocurrency ban temporary? It certainly looks that way. Regulators must already know that the ban hasn’t stopped mainland investors from buying cryptocurrencies next door in Hong Kong or Singapore. A saner approach to an all-out blanket ban is a tighter regulatory framework that will stamp out money laundering and other underground activities.
«Featured image from Shutterstock.»
Tim Draper Has Made Over $110 Million Since 2014 With his Bitcoin Investment
Tim Draper, the billionaire technology investor and prominent venture capitalist who has invested in some of the most successful technology startups in the likes of Coinbase, Patreon, SpaceX, Tesla, Box, FourSquare, has profited over $110 million from his investment in bitcoin less than three years ago.
In 2014, Draper participated in the auction of 144,336 bitcoins by the US government and the US Justice Department, which were seized during the investigation into Silk Road, a dark web marketplace. Draper was granted the permission to purchase a batch of 30,000 at around $600 from the US government.
Upon securing 30,000 bitcoins, Draper told Fox Business:
“[I’m] very excited about bitcoin and what it can do for the world. Bitcoin is as big a transformation to the finance and commerce industry as the internet was for information and communications. If bitcoin were here in 2008, it would be a stability source for our world economy. Everybody should go out there and buy a bitcoin. Every investor who’s a fiduciary should at least be partially involved in bitcoin because it’s a hedge against all the other currencies. There’s a whole ecosystem being built that’s going to make commerce much easier with much less friction and safer.”
Today, Draper’s 30,000 bitcoins are worth $129.9 million. Considering that Draper had spent $19 million purchasing the batch of 30,000 bitcoins in 2014, Draper has recorded a profit of over $110 million in less than three years.
While Draper held onto his investment in bitcoin, the US Justice Department was quick all of the 144,336 bitcoins seized during the Silk Road operation. According to various sources, the US government sold the majority of its 144,336 bitcoins at a price of $336, at $48 million. If the US government had sold its bitcoins in 2017, it would have generated an additional profit of around $573 million, as 144,336 bitcoins at today’s bitcoin price of $4,330 are worth $624.9 million.
Since 2014, in addition to purchasing tens of thousands of bitcoins, Draper has funded some of the most successful bitcoin companies in the cryptocurrency market including Coinbase and Korbit. Earlier this year, Coinbase secured a $100 million investment at a $1.6 billion valuation, while Korbit was acquired by the parent company of a $10 billion gaming company in Nexon at a $140 million valuation.
Furthermore, Draper has not sold his stake in Coinbase and earlier this year, Brian Armstrong, the CEO of Coinbase, revealed that Coinbase is still at an early stage in terms of developing and scaling. Armstrong noted that it will evolve into the safest and most trusted exchange in the global market.
“Digital currencies are having their ‘Netscape’ moment. The pace of innovation has been accelerating and we are now seeing exciting projects and companies being built on top of digital currencies. We’re beginning to transition into phase three of our secret master plan. Our goal is to be the safest, most trusted and compliant, and easiest to use. Not the first to market with new assets. Especially at scale, it takes time to ensure any new asset we add is well tested and secure,” said Armstrong.
Coinbase is also one of the two exchanges in the US market apart from Gemini that is targeting institutional and retail investors by providing sufficient liquidity. As Coinbase and its flagship cryptocurrency trading platform GDAX continue evolve, Draper will position himself at the forefront of cryptocurrency innovation and disruption.
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