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Is Bitcoin threatened by a civil war?

New technology often finds itself going through periods of tumult. This is nothing new and bitcoin turns out to be no different. Within the last several years, technologists have been debating over how to adapt the currency's software to allow it to handle more transactions and meet the increased demand. This debate has become so large and heated that it threatens to throw bitcoin itself into chaos, a phenomenon most clearly seen in the recent plunge in bitcoin's price.

The conflict threats to "fork" bitcoin, splitting it in two essentially. Each branch would run a different version of the cryptocurrency's software. Bitcoin's principal innovation has been its blockchain, a public ledger of all the transactions ever performed with the cryptocurrency. A fork would generate two versions of the ledger, creating practical problems, like coins that could vanish, and philosophical ones, like agreeing on which blockchain represents the one, true, bitcoin.

All hell reached a high point last week when bitcoin's top exchanges issued a joint statement explaining how they would deal with the split, called a hard fork. This acknowledgement of the very real possibility of a fork sent bitcoin traders skedaddling to sell their holdings. Bitcoin fell 24% over two days, from March 16, though it has recovered significantly.

Both camps have doubled down on their positions, and the use of strong force is growing louder. There is talk of of changing the proof-of-work algorithm that bitcoin runs on, which could render the bitcoin mining industry, which earns millions a day in revenue, useless in one fell swoop. Miners—who process transactions and also increase the total supply of bitcoin in circulation—are now threatening legal against developers who are working on such a proposal. There’s also a widely circulated conspiracy theory that involves John McAfee, the anti-virus entrepreneur who’s embroiled in a murder case in Belize. McAfee is supposedly colluding with a powerful Chinese miner to force a fork.

The Blocksize Debate

The debates over how to grow bitcoin's transaction capacity is known as the block size debate. This argument has divided the bitcoin world into the Bitcoin Core and Bitcoin Unlimited camps. The Core group, trading under the current BTC ticker, wants to solve the transaction problem by implementing an ingenious workaround called Segregated Witness, or SegWit, that will effectively increase the blocksize from the current 1 megabyte to 2 megabytes. For those of you who do not know what SegWit is, I will go through a quick summary of what it is.

Segregated Witness was developed by Bitcoin Core and Blockstream developer Dr. Pieter Wuille. It is expected to improve Bitcoin's performance in a number of ways, while some even hope it might be the scaling solution that helps bring some peace back to the Bitcoin community. It is essentially where data, or more specifically data related to signatures are removed from bitcoin transactions making them smaller in size. This in turn makes the blocks smaller meaning more transactions can be included in a block. The technical version is, "Segregated witness (segwit) is a soft fork that, if activated, will allow transaction-producing software to separate (segregate) transaction signatures (witnesses) from the part of the data in a transaction that is covered by the txid."

The Bitcoin Unlimited camp, which would trade under a new ticker symbol BCU, wants to remove any restriction on block size and thus transaction capacity. But that would force a hard fork and two bitcoins would exist in the market. Unlimited is backed by major miners, and part of its pitch is that miners should decide on block sizes. It proposes to do this by letting miners set their own caps for blocks, reasoning that eventually, miners will come to an agreement about what the optimal block size should be.

However, supporters of Core argue that the Unlimited code is riddled with bugs. Indeed, last week a bug was exploited, sending 70% of Unlimited nodes offline thus reducing the amount of processing power devoted to implementing. Core is also making a larger point about who controls the bitcoin network.

They don’t like the idea of miners setting block sizes because they believe it increases centralization of bitcoin. Without a block size cap, powerful miners can simply mine bigger blocks, and thus be responsible for larger chunks of the bitcoin network, entrenching themselves further.

So, who is winning?

What is intriguing is that one exchange has opened what is effectively a prediction market for a hard fork. It lets traders buy tokens representing the adoption of either Core or Unlimited. If Unlimited isn't adopted, and a fork doesn't occur, then Unlimited tokens become worthless. In this scenario, Core is winning: tokens representing its adoption are worth four times the Unlimited tokens. 

But, don't hedge your bets yet and buy tokens representing the adoption of Core. About 40% of the processing power, or hashrate, on the bitcoin network supports Unlimited, compared to 60% supporting Core, according to analytics site Coin Dance. And the gap is quickly closing.

In order for Core’s SegWit proposal to be adopted, 95% of hashing power must be devoted to it, according to a threshold set by its developers. Unlimited doesn’t have a fixed threshold. Instead, it relies on a rather circular logic: It can only be adopted if miners decide to admit blocks larger than the current 1 MB, but miners would only have an incentive to do so if other miners did the same.

As one would expect, Bitcoin Unlimited has gained the support from some of the larger mining pools. However, the mining community is only a part of the overall network. Service providers, exchanges, and wallet operators are not too keen on what Bitcoin Unlimited proposes. Without that critical support, the chances of BU succeeding are limited.

A hard fork for bitcoin could mean serious disruptions for miners, who operate industrial-scale facilities, the well-funded exchanges, and the myriad startups who have raised $1.5 billion in venture capital collectively since 2012. A lot is riding on the question of how to scale bitcoin, and the conflict is showing no signs of easing up.

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