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 But how is that different than fiat currency, where miners decide (by fiat) that your old bills are no longer valid?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.