The effects of the Segwit2x cancellation

Bitcoin was dealt a massive blow yesterday with the cancellation of Segwit2x, and I thought that today might be a good day to share a few ideas.

First, a few days ago I mentioned that the prediction markets for "Segwit2x futures" were rigged to show a lower probability of the chain becoming dominant than actually existed, and that the Core was using the prices as propaganda. If you weren't aware of the issue, it was that the paper Segwit2x coins being traded in these markets would only have value if both the fork occurred and it became the dominant chain. In the real world, of course, holders of bitcoins would also get "Segwit2x value" if the fork didn't occur, because they would still own their original bitcoins.

It seems clear now that the reason the value of those futures markets was so low was because investors placed a high probability on the fork not occurring at all. Myself, I didn't see an outcome where the Core survived if the fork was executed as planned. Most of the mining pools that supported Segwit2x were not profit-switching, and changing software is not easy, so the smaller blocks combined with the lesser hashrate would have made the Segwit2x chain 6 times more capable than the Core chain, causing panic.

The other reason those futures prices were so low was because if the fork did occur, the Core was likely to have been willing to go all-out in an effort to stop it, perhaps by paying huge transaction fees on the 2x chain, or by conducting DDoS attacks, along with their usual unethical tactics like trolling and censoring forums. I think that an immediate post-fork value of bitcoin around $1000-$2000, as many of the markets said, probably was accurate. So what happened here? Money won out, as always. Instead of sticking to their principles, the Segwit2x proponents correctly recognized that while they would win, it would require months or a year of low prices to do so, costing them their personal wealth. I doubt there's any more to it than that. They even admitted they wanted to "protect the industry" from damage caused by the fork - in other words, keep prices high so they can profit.

Now it's worth examining what we're left with. As I stated last month, a rejection of Segwit2x would indicate a permanent end to the blocksize debate for bitcoin, with blocks remaining at 1MB in perpetuity. After two years of continually rejected ideas, there are no believable plans on the table for any solution to the problem. The Core will remain in charge indefinitely, and their behavior will attract like-minded individuals while scaring off honest developers. Another huge winner is Michael Marquadt, who successfully cemented his domination of reddit, bitcointalk.org, bitcoin.org, Coindesk, and a number of other media sites. I see the communities that were initially set up to provide uncensored discussion, like the "btc" subreddit and bitcoin.com, moving away from bitcoin discussion altogether. We can already see that happening by how most posts now discuss bitcoin cash and other coins. Marquadt was handed an unequivocal victory yesterday, and Bitcoin's agenda is now moderated almost solely by a man who has been allowed to get away with a lack of accounting for millions of dollars in "forum donations" that were never spent upgrading his forums.

Despite how catastrophic this outcome is for bitcoin (and the comical outcome of a global financial tool being able to be used as a "settlement chain" with just 4 transactions per second is unquestionably absurd,) I think that overall, it is the best outcome for cryptocurrency as a whole. Segwit2x would have resulted in an environment where the blocksize debate would continue essentially forever, with the Core reneging on their promises to leave Bitcoin and moving the goalposts forward to oppose the next fork. This outcome has removed almost all the uncertainty. The Core will remain in control of Bitcoin and can do what they want with it, and most new users will be introduced to cryptocurrency by using more affordable networks like Litecoin, Bitcoin Cash, or Ethereum. Anticipation of this external growth is likely why prices of these coins have started to rise.

The other key benefit of this outcome is very important: developers of software now know that they need to plan for these other coins being their primary method of payment. The OpenBazaar developers, for example, can now see that Bitcoin is never going to become widely used to purchase goods online. They need to support some other coin or provide an auto-changing wallet. Amazon and Wal-Mart, if they have plans to accept cryptocurrency, can now roll out acceptance of Bitcoin Cash or Litecoin and position one of those coins as the way to get everyday spenders involved in cryptocurrency. If you didn't believe me last month, this outcome has sent a very loud and clear signal: this is going to be a multi-coin world, and if you think people are going to pay $50 transaction fees to buy your goods, your business is going to fail.

Moving forward, there are a few issues to watch.

Will bitcoin continue to be purchased by investors as a store of value? I'd say "yes," because many of the people buying it heard about its prior potential from the news and will invest on name alone. Bitcoin will have value to some people as it becomes more and more centralized due to the Core's actions, as people tend to trust large institutions. They most likely have never heard of Litecoin. That trend will probably abate in the long-term as altcoins become necessary to actually spend cryptocurrency, and therefore, become more valuable and the increases make the news.

Will the Core developers maintain relevance? I'd also say "yes," but only technically. Their political plan for Bitcoin is deeply flawed; for example, they never considered that even if the Lightning Network works perfectly, and somehow there is still enough blockchain space for the settlement transactions, nobody is going to run the nodes because they are clearly defined as "money transmitters" who receive money from one person and send it to a different person. To obtain a license costs millions of dollars. This cost will be impossible to make back by solely running a Lightning node. Remember, the Core ideology is to prevent centralization, but the actions they are taking will cause the exact opposite result: that the only way to profitably run a node is to be an exchange like Coinbase that already has these licenses for a different purpose. This will result in the destruction of their political power.

But despite all the useless stuff they write, and their inability to see the consequences of what they are doing, the Core does produce some interesting and innovative things. As altcoins slowly become the focus, I can see the Core developers slowly losing their current political power, but still being the leaders technically. Their code is extremely easy to copy across many other coins. Bitcoin Cash, for example, will continue to maintain itself as a usable offering despite its (for now) having fewer active developers by simply copying almost everything the Core does. And while the Core stupidly cripples the Bitcoin network, other coins like Litecoin can copy the same Lightning Network they want to develop anyway in addition to being more capable at the protocol level.

Finally, will Litecoin be able to expand its blocksize? On this one, I'm not as confident, but we can do something about it. By virtue of its inclusion on Coinbase, Litecoin is currently the most useful cryptocurrency for transferring value. We send over 1000 transactions per day for an average of 13 cents and will be converting our dollar payouts to be issued through litecoins soon. Litecoin doesn't suffer the difficulty adjustment problems that Bitcoin Cash has, it's API-compatible with the Core bitcoin, it supports SegWit so that those who want to develop for it can use Litecoin as well, its fees are reasonable, and its transaction times are fast enough without producing orphans. But there are two issues that could drag it down: the Core could decide that, having won the Bitcoin debate, it's now time to try to destroy the Litecoin community; and that Charlie Lee spent months as a vocal proponent of the "No2x" side.

I expect Lee to follow through on his commitment to raise the Litecoin blocksize when blocks are half full. Should he not do so, then it should be made clear that we can control 20% of the votes. Unlike the Segwit2x signatories, we will not sit by and allow Lee to renege on his promise. Litecoin has a golden opportunity to succeed where Bitcoin failed, and its community must not allow the Core's tactics to limit its potential as well.

In conclusion, the outcome of the blocksize debate has made the industry stronger overall. For the first time, there is finally certainty in how businesses can proceed with their plans. Unless you've actually dealt with the ridiculous number of new customers that have been flooding into the space recently (and the Core has not), you simply can't understand how there is no time to wait for more capacity. While Bitcoin is no longer the leader, the certainty provided by yesterday's events is going to shift and accelerate the already insane pace at which money is moving into other cryptocurrency networks, businesses, and infrastructure.