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.

Miners

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.

Exchanges

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.

Conclusion

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.

EXCHANGES

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

MINERS

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

WALLETS

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

OTHER

Bitangel.com /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)