Monday, October 30, 2017

Battle Royale Segwit1X And Segwit2X

The strangest aspect of the upcoming fork is that Segwit2X is priced at 0.15 BTC on the futures market, despite there being an expected 90% of mining support for it. This is an unusual situation and is totally at odds with known facts and logic. Logically the chain with the greater hashing power should command the higher price.

When Bitcoin Cash hard fork on 1 August, Bitcoin Cash was expected to have the lesser hashing power, and the futures was priced accordingly.  In this situation, it is as though the current 90% hashrate signalling for Segwit2X is not real.

Adding to this anomaly is that many Segwit1X supporters have already resigned themselves to the fact that the fork will proceed as scheduled. They concede that a hardcore of Segwit2X supporters controlling more than 50% of the hashrate, have already "burned their bridges" with Core developers.

The most profitable chain is a function of the Price, Block Speed, and Transaction Fees and miners will choose to mine the most profitable chain. As we examine these three variables below we can see that Segwit2X comes out on top in all three criteria. Something is not right.

Transaction Fees.

Fees on Segwit1X are on average 1 BTC per block, which means that Segwit2X should yield about 1 BTC more per block, as transaction fees on Segwit2X will be twice as profitable, because blocks are twice as large.

Block Speed.

Both Segwit2X and Segwit1X will start with the same difficulty. As Segwit2X is expected to have 90% of the hashrate at the start, BT2 can have a price 10 times less than BT1 and still be more profitable to mine.


Segwit1X supporters push the narrative that the current BTC price will be the price of BT1 immediately after the fork, and thus will be more profitable to mine.

The first flaw in this argument is that BT1 price will be at best 0.85 BTC and not 1 BTC after the fork. This makes it only about 5 times the price of BT2 not 10X.

The second is to assume that the futures price equates to the price after the fork. The futures could be manipulated.  Given that the price of BT1 or BT2 is unknown, price discovery will be decided by miners and the users after the fork. The chain with the majority hashrate will become the longest chain, with the most work done, command the higher price and become the "real bitcoin".

The third fallacy is to think that because the majority of users believe that BT1 is bitcoin, they will be willing to pay $6000+ for BT1. Highly unlikely if it is their own hard earned money. They will only be willing to pay that much money for the "real bitcoin". Sentiments go out the window when it is their own money is at stake.

If an exchange makes a proclamation that BT1 is BTC and the BT1 chain dies, they will incur financial and administrative costs in making their customers whole again. No exchange can afford to take such unnecessary risks for no reward. Any exchange that claims one or the other token is BTC is only stating an opinion.  The only rational course of action is to let the market decide.

Other Factors

1) Mining pools will have to let their customers decide on which chain to mine. Not to have both option will mean that they will lose some of their customers. It is silly to take a stand and incur unnecessary risk when they don't have to.

2) A businessman prides himself on keeping his word. It must mean something. It will be a terrible blow to miners reputations if they signaled 90% Segwit2X support and end up contributing much less. We can all understand if they change their mind after finding out that Segwit2X is less profitable, but to start off doing the opposite of what they promised is deceitful.

3) Other signatories to the NYA agreement also face the same issues as miners, if they do not follow through on their word. The bigger their business the more their decision will impact on their reputation and business.

4) Segwit2X is the second part of the NYA agreement. The first part was the activation of Segwit which would have never occurred without the agreement as it never had more that 40% miners support for over a year. It is inconceivable that they not follow through with this second phase of the agreement.

5) Is Segwit2X a takeover of Bitcoin by big business? Bitcoin as they say is anti-fragile. It is designed with three groups exercising checks and balances on each other.

a) Miners verify transactions and is paid by the protocol. They are not beholden to anyone for their income.

b) Developers maintain the protocol through compatible clients, competing for users.

c) Users build, support the infrastructure and give value to Bitcoin.

Bitcoin's weakness has always been that there was basically only 1 client - Core, in use. For the first time we have a second client - Btc1, competing against core with a 2MB block size difference. This competition and choice is the Bitcoin protocol working as it was designed. Through this trifecta of checks and balances consensus is reached. Segwit2X is not a takeover. It is simply an upgrade.

In conclusion, we assume that if Segwit1X has less mining support they must hardfork to another proof of work. We should not discount the fact that they could simply also adopt 2MB blocks, remain a competing client and most probably assume the role of being the main client yet again. In other words, adopt the Segwit2X hard fork.

Wednesday, October 18, 2017

Countdown To The Real Bitcoin

From the beginning we were one community pushing the Bitcoin message to anyone who would listen. Enduring the continuous flow of bad news, disappointments and barrages of ridicule from mainstream experts continually predicting Bitcoin demise. Then came 3 years of bitter infighting ridiculously over a  block size increase, which essentially is a battle for the "spirit and soul" of Bitcoin. 

After the Bitcoin Cash hard fork on 1 August and with another upcoming hard fork, Segwit2X, we are in the midst of the most exciting and interesting period in Bitcoin history, and with interesting times, opportunities abound. Fortunes will be made and lost. With that in mind let us drill down for a closer look.

Blockchains containing the genesis block.

There have been many alt coins cloned and inspired, from Bitcoin in the past, but Bitcoin Cash, Segwit2X and Segwit1X are the blockchains that contain the genesis block and share the same hashing algorithm. It is for this reason that any of these three can claim to be "The Real Bitcoin". This outcome will be determined by widespread use and adoption, and the metric to track this is transaction volume, because in the long run, transaction fees will replace block rewards.

Bitcoin Gold does not belong to this class, as it does not have a clear raison d'etre and does not share the same hashing algorithm. It will struggle to get adoption even as it tries to use the huge Bitcoin user base for token distribution. This project will be stillborn, destined to be a footnote in Bitcoin history. If anything it will highlight how difficult the process is to successfully launch a new coin.

Wealth transfer.

The upcoming Segwit2X hardfork will be one of the greatest "shake out" and crypto wealth transfer in Bitcoin history. Entrench stakeholders will, pick a wrong side, make a wrong decision, and win or lose a fortune. The crypto wealth landscape will again change and there will be three distinct phases.

The first phase was the Bitcoin Cash hard fork. The decision was easy then. All you needed to do was hold and you would have increased your total wealth, as BTC and BCH together had a valuation higher than before the fork.

This upcoming Segwit2X hardfork will be the second phase. Many will sell Segwit1/2X out of pure sentiment, ideology, and misleading or incomplete information. However this time if Segwit2X survives, Segwit1X will succumb to the chain death spiral and vise versa. Pick the wrong fork and you will lose all your money. If Segwit1X survives by hardforking to a different proof of work, it is no longer Bitcoin.

Do nothing and you will be safe for a little while, until phase three which is the struggle between Bitcoin Cash and Segwit. This will come down to adoption and useability which will be reflected in transaction volume.

Bitcoin Cash and Segwit2X.

Ultimately Segwit is the difference between the two chains as Segwit1/2X can also increase blocksize. What then determines adoption and useability?

Bitcoin introduces the notion of triple entry accounting. The payer, the payee and the blockchain. Any two of these records can validate a transaction. We are looking to a time, beginning perhaps five years hence, when all commercial transactions are conducted and recorded in bitcoin instead of fiat. The key word here is "commercial". Yes. it is businesses that will account for the overwhelming majority of all bitcoin transactions. Legitimate businesses need transparency and be as open or as private as the Bitcoin protocol allow. Legitimate businesses will need to have the functionality to track and trace all their "open and public" transactions.

Segwit and small blocks introduces legal and transaction cost (high fees) issues which will preclude its' use as a transactional currency for businesses. The lightning network is not suitable for recording business transactions as those transactions are off-chain and not traceable.

Bitcoin Cash on the other hand retains the original design of Bitcoin and with Gigabyte blocks, can scale on-chain with low transaction fees. A business transaction will comprise of 

1. a signature of the transaction
2. a hash of the source document 
3. a value of the transaction

With this data structure as the building block, a new accounting system will evolve that can be as open as required or as private as needed and anywhere in-between. 

Bitcoin will truly revolutionize business accounting as it introduces new concepts of open audit and real time accounting. Coupled with decentralised autonomous corporations and atomic swaps, new forms of economic entities will emerge.

The upcoming hardfork. 

If there was consensus Segwit2X will just assume the BTC name after the fork and the process will be smooth and seamless. We assumed that all interested users will upgrade to the latest version of the software. Let us examine the process in the absence of consensus.


1.0 Miners choose to mine Segwit1X or Segwit2X. 

1.1 Are 100% of miners mining Segwit2X. If Yes, Goto 3.0

2.0 Compete for hashpower. 

2.1 Does Segwit2X have 100% hashing power. If Yes Goto 3.0
2.2 Does Segwit1X have 100% hashing power. If Yes Goto 4.0
2.3 Goto 2.0

3.0 Segwit2X is the real bitcoin. End

4.0 Segwit1X is the real bitcoin. End

Losing chain will undergo chain death spiral and cease to exist.


Each BTC = BT1 (Segwit1X) + BT2 (Segwit2x) and will be traded as such. It is neither BT1 or BT2. New trading pairs of BTC/BT1 and BTC/BT2 will be introduced. This situation will continue until the winner of the hashrate war resolves the issue.

Update: Bitfinex and Coinbase will trade BX1 as BTC until situation is resolved. Miners will mine the most profitable coin. Will be interesting to see which is more profitable. 

If the price on Bitfinex is right, then Segwit1X will be the expected winner. However if Segwit2X does gets the majority of hashing power the situation will get interesting.  Miners with 85% hashrate are signalling Segwit2X but they have not confirmed their intentions.

Before Segwit activation in August, Segwit1X could never get more than 40% miners support. This may mean that there is at least 60% hardcore Segwit2x miners support. 

Competition for hashing power

Miners compete based on sentiment, ideology and profit. Profit calculus is now based on the price of BT1 or BT2 and the price of BT1 and BT2 will be related to hashing power rather than sentiment or ideology. The BTC traded on exchanges is BT1+BT2 and is neutral.

Nodes are not part of this equation. This is how Bitcoin was designed. The protocol pays the miners (and only the miners) for securing the network. The miners should only be loyal to their paymaster which is the Bitcoin protocol, and no one else. Anyone can participate in this process. Anyone can be a miner.


Currently hashrate signalling favours Segwit2X. If so the price of BT2 will be higher than BT1 possibly in the ratio of their hashing power. However the price of BT2 futures is 1/5 of BT1. There is a disconnect between signalling intentions and expected outcomes. Either the futures market is not representative of all participants or the signalling is false.

The standard argument is that hashrate follows price. In this case the price of  BTC = BT1 + BT2. Segwit1X supporters were advocating that the price of BTC is the price of Segwit1X because it was that before the fork. This argument is not supported by the exchanges. Most have and will choose to remain neutral and let the market decide.

If Segwit1X fails, Litecoin will benefit as some Core developers will move to work with segwit on Litecoin. If Segwit2X succeeds unless the Core developers responsible for Segwit supports it, it will be a less than optimal blockchain divorced from its' original developers. 

In the long run Bitcoin must be able to handle trillions of transactions a day. All the transactions in the world currently using fiat. Segwit and small blocks preclude this from happening and while lightning may be useful for streaming micro payments it is not suitable for recording transactions.

Please note :-  These are my views and are not investment advise. Analysis are usually based on incomplete information. Trading and investment in Bitcoin is risky. Even if the analysis is correct the execution can be faulty. Use Caution.

Signatories to the NYA agreement.


ANX (Hong Kong)
Bitex (Argentina)
bitFlyer (Japan)
Bitso (Mexico)
BTCC (China) (China)
Coinbase (United States) (Phillipines)
CryptoFacilities (UK)
Korbit (South Korea)
Safello (Sweden)
SFOX (United States)
ShapeShift (Switzerland)


1Hash (China) (St. Kitts & Nevis)
Bitfury (United States)
Bitmain (China) (China)
Genesis Mining (Hong Kong)
ViaBTC (China)


Abra (United States) (St. Kitts & Nevis)
BitPay (United States)
BitPesa (Kenya) (UK) (China)
Circle (United States)
Coinbase (United States) (Phillipines)
GoCoin (Isle of Man)
Jaxx (Canada)
Luno (Singapore)
Ripio (Argentina)
Unocoin (India)
Xapo (United States)

OTHER /Chandler Guo (China)
BitClub Network (Hong Kong)
Bloq (United States)
Civic (United States)
Decentral (Canada)
Digital Currency Group (United States)
Filament (United States)
Genesis Global Trading (United States)
Grayscale Investments (United States)
MONI (Finland)
OB1 (United States)
Netki (United States)
Purse (United States)
Veem (United States)

Tuesday, October 3, 2017

Charlie Lee on how Coinbase and other exchanges will handle the Segwit2X hardfork - Debunked.

I’ve been asked multiple times how I think Coinbase (and other exchanges) will handle the Segwit2x hardfork in November. For background, although I’m no longer working at Coinbase, I was previously Director of Engineer at Coinbase and led the GDAX team, and I still give Coinbase advice. This is how I think this 2x hardfork will play out…
With the ETC and BCH hardforks, it was clear that those 2 coins will be the minority fork, so it was safe to use a wait-and-see approach. So Coinbase didn’t support those forks initially. And only if there was traction on those forks, would Coinbase spend the time and resources to support those forks and let people access their coins on the minority chain. That is what Coinbase did with both ETC and BCH hard forks.
For the 2x hardfork, things are a bit more tricky. 2x is supposed to be an upgrade to the Bitcoin protocol. What that means is that ideally everyone should upgrade to the 2x code before the hardfork and the hardfork will just happen and everyone would just switch to the new chain and no one would be on the old chain. 

Exactly how it should happen. All signatories to the NYA agreement that is, the miners, exchanges, wallet providers and users would have upgraded to btc1, within the 3 months notice given. Anyone still on the old chain after the fork will be on their own. They are forced to upgrade to be compatible. That is how Bitcoin is designed to work.

This only works if everyone did this. Because this is a hardfork, if not everyone upgrades, then there will be 2 chains. The supporters of 2x and the NYA agreement believe that if all the mining hashrate switches over to the 2x chain, the original chain will be dead and no one would use it. But how is that different than fiat currency, where miners decide (by fiat) that your old bills are no longer valid? 

I think he has lost the plot here. The reference to fiat is irrelevant and makes no sense. 

Thankfully, Bitcoin doesn’t work this way. It’s the people who use the coin that gives it value, and miners will mine the coin that makes them the most money. And right now, pretty much all the Bitcoin Core developers and a large part of the community including a lot of prominent figures in this space have come out against this hardfork. 

No. Bitcoin is designed to work that way, and No it is mainly the core developers and alot less of the prominent figures that are against the hard fork. More interested parties than not signed the NYA agreement. 

Because this 2x hardfork is so contentious, Coinbase cannot handle it the same way they handled the ETC and BCH hardfork. In other words, they can’t just choose one fork and ignore the other fork. Choosing to support only one fork (whichever that is) would cause a lot of confusion for users and open them up to lawsuits. So Coinbase is forced to support both forks at the time of the hardfork and need to let the market decide which is the real Bitcoin. 

No. They already have experience on how to handle a hard fork and they will be repeating it. There are no laws that can compel anybody to support a version of software that they have upgraded and superseded. You certainly can't sue Microsoft for not supporting Windows XT or 7 and besides Bitcoin is open source.

Now the question is which fork will retain the “BTC” and “Bitcoin” moniker and which will be listed as something separate. Although Coinbase signed the NYA agreement, I do not believe that this agreement binds them in any way with respect to how to name the separate forks. For practical reasons, the BTC symbol belongs to the incumbent, which is the original chain. This is because there will be no disruption to people who are running Bitcoin Core software and depositing/withdrawing BTC to/from Coinbase and GDAX. And only if you trade the coin on the 2x fork, would you need to download and run the BTC1 Segwit2x client.

No. Everything just carries on. There is no disruption. The user should not notice any difference. They will keep sending Btc and receive Btc. Nothing changes. There is nothing for users to do except to keep using Btc the way they have always done.

If the market really supports this Segwit2x upgrade, that coin will trade at a higher price. And then we will all agree which is Bitcoin and which is a minority fork. There will be no contention at that point.

Total rubbish. There is no rule to say that a coin that trade at a higher price should be Bitcoin. There was speculation that the coin with the longest chain should be Bitcoin and as we have seen that this is not true. We now think that the coin with the most work done is Bitcoin, but even this may not be the case. The truth is that Bitcoin is the coin that everybody agrees is Bitcoin. It just resolves itself.  Nothing else matter. It is the same with accepting Bitcoin as money. There is no need to prove before use. It just happens.

This is the advice I have given to Coinbase and I expect Coinbase and other exchanges to handle this Segwit2x hardfork in this way.

I thought advisors give their advise under confidentiality agreements, unless it is unsolicited advise.

This is what will happen.

On the day of the fork at block 494784 these are the possible scenarios.

1) All the signatories to the NYA agreement have upgraded to btc1 and Segwit2X becomes BTC.

2) The signatories to the NYA agreement do not upgrade, in which case Segwit1X remains BTC.

3) Some of the signatories upgrade, and this is the most likely scenario. We won't know which is the preferred coin until after the first block is mined and confirmed. We will then see the Chain Death Spiral come into play. None of these two chains have Emergency Difficulty Adjustment protection and so one will come to a grinding halt.

If it is Segwit1X it will most likely be forked off with a different proof of work and replay protection. It will have to undergo the same process that Bitcoin Cash went through. Segwit1X coin will have to be submitted to exchanges to determine its' value. Coin splitting will come after. Not before it has proven itself to be a viable and valuable coin.

If it is Segwit2X, then it will most probably be abandoned.

Exchanges may stop all deposits and withdrawal until this is resolved. Thereafter it is business as usual.

4) While all this is happening Bitcoin Cash is still in the mix complicating matters. It could conceivably be the most profitable coin to mine and starve both chain off mining hashrate. A protracted and drawn out tussle between Segwit1X and Segwit2X may lead to greater use of Bitcoin Cash for bitcoin transactions. More likely than not this will be resolved very quickly.

5) What of Bitcoin Gold? Nothing. It will have to go through the same process. Submit their token to exchanges to determine value.

6) Recently the price of bitcoin have risen sharply and altcoins have taken a beating. This is due to people selling altcoins and buying into bitcoin hoping to own 2 coins after the split. Many believe that the two bitcoins will have a higher valuation than before the split.

They will be disappointed. After the hard fork, the only difference between the 2 coins is 1MB and 2MB. If 1MB wins nothing changes and there won't be a second coin. If 2MB wins 1MB must fork off with a different proof of work, and the only reason to support such a chain is to support the developers. It is unclear if the Core developers will even be interested to work on this chain. Others may come forward to volunteer their efforts but it is unlikely to make any headway without a clear point of difference and a roadmap.

7) If 2MB wins and the whole Core team rage quit, will Segwit be relevant? Who will continue development? If segwit becomes irrelevant  what becomes of Segwit2X? Of course the best outcome is for the Core team to swallow their pride and move to 2MB. However this won't happen because it was never about bitcoin or the community. It was about control of the community through Bitcoin.