Bitcoin's second near-death experience, aftermath of the scaling debate, the SEC - Crypto year 2017 and what's to come in 2018

2017 has been one of the most turbulent year in crypto history to date. We have seen important changes in technology and the political climate, divides in the community, as well as wild jumps in prices of many cryptos. I would like to take a moment to talk about a few key takeaways from this year and what I think had the most impact on the future of crypto.

Bitcoin's second near-death experience

Bitcoin has been declared dead so many times it has basically become a meme. As of the time of writing, there have been 222 obituaries proclaiming the death of the currency. I'm not here to talk about those, but about a feeling you could get from old-timer Bitcoiners.

I've been in the community since 2011, and I have experienced two moments where Bitcoin's future was uncertain. I came in right around the first notable bubble, when the price soared to the unthinkable... $30/BTC (or about ~$40 in the polish markets). After that bubble has popped, the price began to decline. Slowly creeping down, taking with it confidence of many bitcoiners. At the time nobody could tell for certain what was going to happen - whether the coins will become worthless, or will we see something different happen entirely.

People nowadays despair when Bitcoin drops 30% from all-time-high peak, but back in 2011, we saw Bitcoin go down to about $2 per coin, or a decline of about 93%. The future of the project was uncertain, everyone was depressed, and for me, that was Bitcoin's first near-death experience.

Of course, we recovered. After that, when the next bubble came, you had more confidence that Bitcoin will bounce back. We've seen it before. "There is no bubble like the 2011 bubble" I tend to say.

In 2017, we had to deal with the scaling problem that has been anticipated since at least 2015. We had to figure out what solution might be the best - whether to go with big blocks, or go off the chain. At the same time, we had to anticipate that ever since The DAO and Ethereum's split, any major, contentious change to the Bitcoin protocol would create a similar split. Piled on top of that we had the covert ASICBOOST scandal and over a year of the community being forcibly divided in discussing the scaling solutions.

In other words, the pressure was rising from all sides and something had to give. At the same time, many sides have remained rigid, not willing to make a compromise. Instead we saw warring solutions - SegWit, 2x, UASF, etc. In the end we saw a group trying to reach a solution - "SegWit now, 2x in half a year", which allowed SegWit to activate but would backfire when that second part was to come due.

However, before SegWit could be activated, we had a different fork be proposed - Bitcoin Cash. Increasing the block size and changing a few other things. However, this one didn't wait to reach a majority, instead opting to declare a fork happening and going through with it.

The period following the announcement has been Bitcoin's second near-death experience. The future was once again uncertain - would this split in mining power mean some crazy oscillations in the difficulty? Would the currency retain its value after the split? Would one chain dominate the other and just take over? These were uncertain times in which the altcoins thrived.

The forks came and went, Bitcoin is still around, so is Bitcoin Cash. We now know how Bitcoin responds in this situation, so we will be ready in the future once more. "There is no split like the 2017 split" I suppose?

The aftermath of the scaling debate

Even though SegWit has been activated, we are still seeing a lot of transactions waiting to be confirmed in the mempool. With the lightning network being months away from being ready, it seems the transaction fees will keep on increasing. We can also see an interesting trend lately - people trying to bully companies into integrating the "optional" SegWit into their system to lower fees. It's somewhat disheartening to see. I hope that in 2018 we will see an empty mempool again...

Another important event that took place this year was the failed attempt to follow through with the SegWit2x agreement and the subsequent backlash against the "transgressors". We've seen old-school bitcoiners wanting to change Bitcoin's POW to spite the miners or force various businesses to "sign a very simple pledge that acknowledges that Bitcoin is not ruled by miners in order to be linked from bitcoin.org". Luckily neither of those have gotten any traction and could be written off as a pendulum effect to the SegWit2x continuing up to the 11th hour before being called off.

The last unfortunate aftermath of the scaling debate has been the decisive split of the Bitcoin community. Up until the SegWit / Bitcoin Cash split I had hopes there could be some reconciliation (1, 2). After the scaling debate would be over and the project could be back on track that we could come back together and bury the hatchet. However, once a split happens and both sides survive long enough, there is no going back - there are people financially tied to one end but not the other that understandably won't leave their side. We had some high-profile people supporting one side or the other, and what seems like layers of narrative being spun on both sides (proclaiming something is being implemented because of X, but in reality it's done because of more selfish reason Y, for example - invading Iraq because of WMDs, while in reality it might be because of oil or the like). It's unfortunate that we have failed to keep the community together in the first place and to bring it back together before the differences were irreconcilable...

Here's to hoping we can learn to at least respect and tolerate one another and remember what we were fighting for in the first place...

Crypto securities and the SEC report

The DAO has been an important project that has already shaped the industry despite or perhaps precisely because its failing. It has split the Ethereum blockchain in twine, and this year it has given us something rather unexpected - a SEC investigative report. It concluded that The DAO has been a security, which has had a significant impact on the ICO community. Now you have to seriously consider whether you're creating a security or a utility token when creating an ICO and follow with the appropriate requirements.

This has created a new wave of interest in the community. Some people are embracing being a security and taking a full advantage of that, while others are moving away from being a pseudo-security not to be found guilty of fraud or other regulations.

The crypto-securities have definitely been dominating my conversations over the last months and I have no doubt they will be the big news in 2018. I also heard some rumours from credible sources that at least one notable project has been declared to not be a security, but I can't disclose what it is until some official announcement unfortunately. So there is development happening on both sides of the spectrum, which is always good to hear.

Conclusions

The Bitcoin scaling forks and splits have been a major event in the Bitcoin's history. They have left a lasting effect on the community and technology. This year we have also seen some important report coming from the SEC that has already began to shape the ICO landscape. We are likely to see that become a major influence of what 2018 will look like.

Here's to 2018 and what's yet to come!

What is Bitcoin in the light of hard forks?

This year has been one of the more controversial years for Bitcoin thus far. We have already seen a number of important forks happen - SegWit, Bitcoin Cash and Bitcoin Gold, and we're scheduled to witness some other forks soon - Bitcoin Cash doing a hard fork, SegWit2x looming ever closer, and we might even see some emergency PoW change hardfork in response to SegWit2x. Amidst all of that, many people are asking themselves, debating and fighting over an important question - "What is Bitcoin?" (that iconic question).

The power of the name

Earlier this year, there was a small debacle as to what Bitcoin Cash should be called. It seems that some of its opponents wanted to dismiss the fork by calling it "Bcash" to further distance it from the Bitcoin project. It seems the "Bitcoin" name by itself holds value like any other brand, otherwise we wouldn't have so many projects using it:

How many Bitcoins do we have? (source)

In response to Bitcoin Cash being called Bcash, some supporters of that project started calling Bitcoin Cash by just "Bitcoin", and referring to the SegWit side of the fork as "SegWit Coin".

While at the start it might not seem like much, a definition of what "Bitcoin" is and which side of a fork gets to call itself that is really important. Bitcoin is a currency with over 125B USD market cap, a liquid market on numerous exchanges, and countless of projects using it, many of whom would barely be able to follow what's going on in this debate. A fork of Bitcoin, on the other hand, has to start out with nothing and build up that market almost from scratch.

This is why contentious forks are so problematic and why such a simple thing as replay protection is controversial - whoever wins in the fork and gets to call itself "Bitcoin" will be the project that matters, while the loser won't matter anymore. A fork with a hard replay protection is easy to dismiss as an altcoin, while one without is much easier to pass on as an upgrade to the protocol, as Bitcoin has historically never done replay protection (while it seems Ethereum might be getting that as a standard in the future).

So what is Bitcoin, really?

With all of those forks past and future, many people have to ask themselves - "What is Bitcoin, really?". Gavin Andresen's definition has been a good guide so far:

“Bitcoin” is the ledger of not-previously-spent, validly signed transactions contained in the chain of blocks that begins with the genesis block (hash 000000000019d6689c085ae165831e934ff763ae46a2a6c172b3f1b60a8ce26f), follows the 21-million coin creation schedule, and has the most cumulative double-SHA256-proof-of-work.

It might, however, be worthwhile to start drilling down the definition and listing all of the important semantics that have or might be important in the future.

So Bitcoin could be defined as:

1. A blockchain
2. Beginning with the genesis block hash 000000000019d6689c085ae165831e934ff763ae46a2a6c172b3f1b60a8ce26f
3. Containing only validly signed transactions
4. Containing only not-previously-spent transactions
5. Containing no more than ~21M coins
6. Following the ~130 year coin distribution
7. Continuously, publicly mined
8. Double-SHA hashed
9. With a difficulty adjustment every 2016 blocks
10. Mined using a PoW algorithm
11. Following the chain with the most cumulative work
12. With a block limit of 1MB
13. ...

There are many such nitty-gritty details to list and rank. An important exercise for a lot of people is to rank these various features, and in case of a contentious fork - figure out which of those features might be changed.

So for example, if Bitcoin Gold is creating a fork that changes the PoW algorithm and doing private mining for awhile, versus Bitcoin Cash changing the block limit and changing the difficulty adjustment algorithm, we have forks that change the features 10 and 7, vs 12 and 9. Following this ordered list, Bitcoin Cash would be less contentious (which is not to say - not contentious at all) as it alters features lower down the list.

So would Bitcoin be Bitcoin under Script being changed to Simplicity? SegWit2x changing the block size? A fork that changes the PoW? Which part of the fork would be "more Bitcoin" than the other?

Of course, there is more to a fork than just such rules - there is a lot of politics involved, and sometimes a more controversial fork still remains dominant. Ethereum's DAO fork for example meant the "main" chain violated a very important rule - containing only valid transactions, but that side of the chain is still a lot more widely used than the "purer" alternative - Ethereum Classic.

Conclusions

Battling over which side of the fork is "the real Bitcoin" is more than just fighting over a name. It is the battle for market dominance, wide acceptance and legitimacy in the eyes of the laymen. The winner will be the world's best know cryptocurrency, while the loser will be hardly talked about outside of the crypto circles.

Seeing which side of the debate will endure the upcoming forks will definitely be a seminal point in the story of Bitcoin.

Blockstream vs miners - looking at the incentives around the SegWit2x fork

The past few months in the Bitcoin community have been filled with discussion of an upcoming hardfork - SegWit2x. There have been a lot of people voicing their opinion on the matter of whether that fork should be allowed to pass or not, but today I would like to look at who I believe to be two key players in this debate - Blockstream (opposing SegWit2x) and the miners, the core signatories of the New York Agreement. More specifically, I will be focusing on the incentives both of those parties have when it comes to dealing with SegWit2x.

What is SegWit2x?

SegWit2x was first proposed as a compromise between the various factions in Bitcoin that were trying to solve the problem of blocks being full. It aimed to both enable the activation of SegWit to enable off-chain transactions, and to increase the block size to 2MB to increase the number of transactions that can be processed on-chain. It was to be deployed in two stages - first by activating SegWit in the summer (which already took place), and then by increasing the block size in winter (which is still pending).

Basic incentives for everyone

When examining why people would be for or against a certain change, it is often useful to look at the incentives they have for being on either side of the fence. An incentive shared by every Bitcoin user and company is to see Bitcoin succeed, be used by more and more people and to gain in value. You can occasionally see someone stating the opposite (along the lines of "it's good the price is going down, it will slow the adoption rate so the project will be developed further before mainstream starts to use it", or people wanting to buy the dip in price), but most people that are invested in Bitcoin want to see it grow, that's pretty much a given.

Beyond that, things tend to get murky. You can see some ideologies come into play and so on. But if you focus on SegWit2x, the basic incentive for both sides appears to come down to the good old money...

Incentives of Blockstream and the miners

Blockstream is a for-profit company. As such, it is expected it will increase in value and, at least eventually, start generating revenue. While it had some projects that seem to be a money sink, the core business plan seems to still focus on sidechains - "sell[ing] side chains to enterprises, charging a fixed monthly fee, taking transaction fees and even selling hardware" (which the Blockstream CEO even explicitly confirmed). The original SegWit proposal was introduced by Blockstream's co-founder.

So with this, we have a clear picture - Blockstream's revenue stream will come from off-chain transactions. Now, let's look at the other side of the debate.

Miners are paid directly in BTC by the blocks they mine. They mint new coins with each block, and they also collect fees for any transactions they include in that block. At the moment the block reward is 12.5BTC, and the fees add up to about 0.5 to 2 BTC on average. Pretty straightforward and as described in the original whitepaper.

So the miners are incentivised to include as many transactions in their blocks as they can, giving priority to those that pay more fees than the others per unit of size.

Clash of incentives

Both sides of this debate get their money from the same source - transaction fees. Blockstream wants more transactions to flow through their proprietary service to collect more fees from institutions and individuals. The miners on the other hand benefit from more transactions taking place on the blockchain - they earn transaction fees only for the transactions that are included in the block and get nothing from off-chain transactions until they come back onto the chain. With finite amount of money flowing through the network, this is a classic zero-sum game - the more transactions flow through your preferred channel, the more money you have and the less money your opponent has.

In an ideal scenario, we would let both of those options onto the free market and let the consumer choose what they want to use. Some would choose off-chain transactions for their speed, others would prefer on-chain transactions for the immutable records, etc. In a truly free market, the best product will win and the market will reach equilibrium. However, one side is currently at a disadvantage.

The size of the blocks is currently fixed at 1MB and SegWit has been activated on the network. This means that the miners have a finite amount of space to work with, while Blockstream and similar service providers don't have to do much to promote themselves - when the consumer will see on-chain transactions being too expensive for them and the blocks being full, they will by necessity make their way onto their platform to be able to transact.

Moreover, SegWit transactions have a smaller "weight" to them, meaning you can put more of them in a block and even go over the 1MB block limit with them.

So we have a company that benefits from the traditional blocks being filled, while also giving preferential treatment to on board onto and off board from its proprietary services, while blocking others from increasing the overall throughput, all for "the benefit of the consumer". This is basically the Net Neutrality battle all over...

Internet access or block throughput, it's all the same in the end...

Dynamics of power

Looking at this only from the lens of money is of course a bit of a simplistic view of things. There is probably a lot more politics, ideology and power in play - SegWit2x is a hard fork to the Bitcoin network being pushed by the miners rather than the traditional core developers. If it is allowed to pass, it will show that they don't have full control over the project and thus remove them from a position of power, while giving the miners more power on top of the computing power they already hold.

Conclusions

If you look at things from pure monetary perspective, the fight over SegWit2x is a fight about where the transaction fees will flow - whether they will be on or off the chain. Increasing the block size will mean more money will be going to the miners, while keeping it low will force more money to flow through SegWit-enabled services, and to a degree, through Blockstream.

SegWit2x is also a struggle for power in the space - who will be able to make changes to the protocol and how things will be handled in the future.

The struggle might be framed in many ways - allowing an average user to run Bitcoin on RaspberryPi, the centralisation of power in the hands of the miners or core developers, an attack on the Bitcoin network, etc. How much of that is genuine concern and how much of it is propaganda from either side it will be hard to discern.

But in the end, it's probably about money and power...