Rearranging the deck chairs

It's been a long time since I've been able to contribute a post here. Now that the system is relatively stable, I thought that it was worth a few paragraphs to point out the idiocy of what's going on with bitcoin. The bottom line is that right now, there are at least four different forks fighting a losing battle over a cryptocurrency that is overvalued and obsolete. I'll review a little bit about all the sides in this latest debate, starting from the incompetent and ending with the vile. I don't think anyone has actually taken the opportunity to step back and point out exactly how ludicrous the current situation is, so let's do that here.

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Bitcoin Cash

First, there is Bitcoin Cash, which is the best of the ideas, but that isn't saying much. Bitcoin Cash is a great system in theory, but the creators were horrible at execution. First, fttrader, who is probably the first person to push for a unilateral large block fork of bitcoin, refused to operate under his real name, which significantly hindered the perception and support of his project. Then, despite Michael Marquadt's censorship of /r/bitcoin making it readily apparent that no consensus would ever be reached, he and others waited two years to execute the fork, at which time it was too late to gain majority support.

Then, when it was time to actually deploy, its creators added last-minute mandatory replay protection and an emergency difficulty adjustment, which destroyed compatibility with existing implementations. Plus, they called the chain "Bitcoin Cash," instead of insisting on Bitcoin. Those actions eliminated the possibility of an actual battle to determine which direction bitcoin would take, leading to the current situation where miners play games with the emergency difficulty adjustment. While the same cannot be said of the Bitcoin Core, the people behind Bitcoin Cash seem generally "good;" they just made ineffective choices.

Finally, Bitcoin Cash has its blocks hard-limited to 8MB, so even if it were to become the dominant coin, the blocksize issue will need to be revisited someday and will encounter the same problems. Therefore, Bitcoin Cash is flailing because it was implemented poorly. It's not having trouble because the idea has no support, which is what the Bitcoin Core would have everyone believe.


Bitcoin Gold

Next up is Bitcoin Gold, a nebulous fork of Bitcoin that is supposed to change its proof-of-work algorithm to the same algorithm used by Zcash.

The project's goal is to use GPUs that are currently mining Ethereum on the grounds that ETH will move to proof-of-stake in 2018; however, the current plan of the Ethereum Foundation is that only 1% or less of ETH will be staked in the near term because the Foundation's activities were delayed by attacks in 2016. A fork of ETH will occur next week to increase the time until proof-of-stake activates. Not only is Gold's premise of redistributing hashrate incorrect, a significant negative impact of Bitcoin Gold is that if it achieves any traction, it will further inflate world GPU prices to create a coin that provides no additional features to Bitcoin. The developers acknowledge as much in news articles where they state they wish to "follow the Core."

Bitcoin Gold, like Bitcoin Cash, was also conceived by an anonymous developer, H4x3rotab. H4x3rotab acknowledges that Bitcoin Gold will be premined, with up to 1% of its supply being created by mining that may already be underway. Upon reading that, I tried to figure out what this money is being used for, and was unable to find an answer.

The developers boldly claim that they want Bitcoin Gold to serve as a "backup" in case the other forks of Bitcoin fail during the upcoming November crisis. Surely everyone will be more than willing to switch to this "backup" that also happens to include 1% extra money as a fee for those "backup" services. Because of this 1% and the developer's anonymity, Bitcoin Gold will be a great source of extra cash for people who can get it to exchanges in time to sell.

Note that since the developers readily acknowledge that no wallet is likely to be available at launch on October 25, the people who can sell will be those who are writing a private wallet now. This sounds like a moneymaking opportunity for industrious developers - write a wallet and sell it to people who own large numbers of bitcoins before the fork in exchange for a cut of the sale. Surely there is zero chance that the anonymous developers haven't already written a wallet for themselves.


Segwit2x

The greatest part of the November chain split is that either Segwit2x or Bitcoin Core has to lose. Everyone knows about the abhorrent behavior and incompetent management practiced by the Bitcoin Core developers. I, for one, wouldn't be sorry to see them follow through on their promises to leave in a fit of rage.

But the Segwit2x signatories are hardly angels. Segwit2x was conceived behind closed doors by rich businessmen without consultation of everyday users and merchants. It suddenly appeared out of nowhere in a surprise announcement. Instead of arriving at a solution that satisfied both sides (like a "Segwit Unlimited" plan where each side got what they wanted), the people in the room arrived at a flawed solution that satisfies nobody and somehow assumed that they would be welcomed with worldwide applause upon opening the doors. Now, everyone is shocked (!) that nobody actually supports Segwit2x - which would have been readily apparent if real users had been invited to an open meeting.

Plus, did anyone really believe that the Bitcoin Core developers and their supporters have any decency or honor whatsoever? These are the same people who make personal attacks on twitter, censor forums, and manipulate discussion to make it appear as if users hold the opposite beliefs they actually do. They removed Gavin Andersen, one of Bitcoin's earliest and most competent developers, Marquadt still has not been brought to account for millions of dollars of "forum donations" that have disappeared, they modify websites with false attacks on merchants, they move the goalposts constantly with their inconsistent worldview, and they unethically disconnect non-Core nodes from their clients.

The Core developers are liars, and it's time that people consider them as such. The Segwit2x people structured the deal so that the Core could renege after they got what they wanted (Segwit activation), and therefore Segwit2x was scammed.

Finally, a blocksize of 2MB is woefully inadequate for widespread usage. Assuming that Segwit2x does succeed, does everyone immediately go back to spending millions of dollars on continual arguments and another round of upgrades?


Bitcoin Core

Finally, we come to the Bitcoin Core chain, which the Core developers ludicrously promise will have 1MB blocksizes large enough for eternity. They view the Lightning Network as the future of and a savior for Bitcoin. According to their long-term plan, transactions are to be "settled" on the blockchain, with most transfers taking place off-chain. A critique of the Lightning Network is beyond the scope of this post, and there are certainly advantages and disadvantages to it, but what casual readers need to know is that there is simply no way that the settlements can take place in 1MB blocks if a significant number of providers uses the Lightning Network.

Consider the simple case that huge corporations want to use the Lightning Network, and somehow all on-chain communication could be optimized to one small transaction per node per block. That isn't true, but even in this case, there isn't enough space for more than 3000 businesses to use the Lightning Network!

Then, there's Segwit. The Core claimed that Segwit activation would somehow make a significant difference in the capacity problems Bitcoin faces. As I pointed out, and repeated in March 2016, and repeated over and over since, actual uptake of Segwit would likely result in a capacity increase of 1.1x. It seems that the actual usage is even worse than I predicted, somewhere around 1.01x, at two months after release. Part of the reason is likely because Segwit is so complex that the Core doesn't even provide support for it in their own Core client's wallet!

In the end, the Core developers forced more than five thousand lines of complexity, which almost nobody understands, nor are even they using, into the Bitcoin Core codebase to achieve a 1% capacity increase. Despite this catastrophic failure to achieve the results they promised, there are people who are still convinced that Gregory Maxwell and Peter Todd are competent developers. Some still believe that the Core is actually providing value, rather than taking it away.

The Core developers continue to add useless or even dangerous features into the Core software. Their technical debt then spreads to other coins like Litecoin, to the point where the latest version now contains opt-in replace-by-fee (RBF), a "hack" designed to get around actually solving the blocksize limit problem that makes it easier to revert unconfirmed transactions. Fortunately, we will continue to ignore RBF for our blocks.

Some will correctly argue that the Core developers are not "Bitcoin," and that Bitcoin involves many other people like merchants and users and miners. The problem is that once Segwit2x forks, the "Bitcoin Core" fork will be the "Core." The Core has made it very clear that they will not continue to develop for Segwit2x, and that they consider it an "altcoin." The Segwit2x signatories, who did not invite the Core to their meeting, made it clear that they have lost confidence in the Core. If the Core fork becomes the most valuable fork after November, that means that the Core's values are approved by the industry, and that the precedent is that any future fork will not be considered Bitcoin by users and exchanges.

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That's why the case for Bitcoin is so poor, and the coin is so ridiculously overvalued at present. Regardless of whatever else happens, the Core fork will never be upgrading to a larger blocksize, ever. While one can debate the position of whether it's more likely or less likely that the Core fork becomes dominant, it's extremely risky to hold bitcoins right now because the odds of the Core winning out are nonzero. Never upgrading to a larger blocksize is an idiotic and illogical position that will result in all future value being gained by other coins rather than Bitcoin.

This is not like other events in bitcoin's history where the effects of external forces were unclear or where there was a debate over the best path forward. In bold: the Core's claims are fundamentally untrue because they are limited by technical constraints. The coin cannot grow much larger than it is now, with or without the Lightning Network. The 100:1 ratio of information posted on reddit, rigged news sites, and expressed in biased "prediction markets" like that at Bitfinex is patently false and the result of an intentional campaign by the Core developers to mislead the public.

If the Core fork wins, I suspect that there will not be an immediate crash, because I've noted before that most market participants seem to be ignorant of how the Bitcoin network works and have never bothered to transfer their coins out of exchanges. Instead, smart people will recognize that cryptocurrency is not going away. Bitcoin will stagnate or slowly decline while other coins see a surge greater than the one that occurred earlier this year. ETH stands to make gains on the back of its upcoming upgrade, but I personally think a huge run on the anonymous cryptocurrencies like DASH is due. The anonymous coins will be held back from widespread adoption by the unwillingness of some companies to associate themselves with them, but most have solved the blocksize problem and have competent developers. Litecoin remains undervalued, given its widespread acceptance and the fact that people like us have completely switched to it for most transactions, but we fear that the Core could decide to "pivot" from Bitcoin after a Segwit2x win and declare Litecoin the "true" coin, sending all its developers over to Litecoin. That's a danger for another post that I'll write about preventing in a future post.

In conclusion, supporters involved with the four forks arguing above are all stuck in the past. None of the forks represents a solution that will allow bitcoin to be usable for anything other than speculation. The cryptocurrency industry has already moved on and it has a solution to the blocksize problem. This situation itself shows that when a blockchain becomes full, more coins arise to fulfill the demand. Smart users have long left Bitcoin and are using networks like litecoin to process their transactions much more quickly and cheaply. There is no need for a "single coin" anymore. Let the Bitcoin developers fight it out to the death. While they rip each other to shreds over their principles, the world is moving on without them.