By now, I’m sure you’ve heard about the ongoing block size war. For the few of you who have been living under a rock, Bitcoin has been rapidly approaching it’s hardcoded 1MB block size limit, and an all out war among core developers, pool operators, and bitcoin companies has erupted. BitcoinXT is the first shot fired in that war. It has the potential to destroy not only Bitcoin, but arguably, also itself. But, before we discuss that, let’s briefly touch on the powers at play here and their stance. Most involved can be divided into one of four distinct groups, they are:
Against BitcoinXT. Against block size increase (for now)
This group is against any change to the protocol that would result in a hardfork. Their reasons are varied. Arguably, the most influential entity in this group are some of the Chinese pool operators, who feel larger that blocks would put them at a significant mining disadvantage due to current network conditions. They may be more receiving to such a fork in the future when networking conditions are more favorable.
Against BitcoinXT. Against block size increase (period)
This group wants nothing to do with a block size increase. To them, the block size issue is not an issue at all. Their view of Bitcoin is that it should only be used to remit large amounts of money. Smaller amounts should be settled either offchain or on sidechains. This way, the network need not be forked. Another common concern among this group is that if Bitcoin scales up, it will become more centralized.
Against BitcoinXT. For block size increase
This group wants to increase the block size in the near-term future, but believes that BitcoinXT is the wrong way to go about it. They view BitcoinXT as a hostile takeover by a minority group.
Self explanatory. This group believes that the debate has gone on for long enough. They want their larger blocks, and they want them now. This group believes that a minority influence has been preventing Bitcoin from growing.
Distilling it down
That is a very basic overview of what is going on. Several articles could easily be written about each group’s viewpoints, and where they hope to see Bitcoin in 5 years. I don’t want to delve into that, but if it interests you, here are some good starting points: 1, 2, 3.
Interestingly enough, Satoshi (or at least, someone pretending to be Satoshi) has weighed in on the issue with some strong words, going so far as to say he would “declare Bitcoin a failed project” should Bitcoin XT take hold. Ouch. Satoshi has used this email in the past and it has been validated within the past month, so this comment was either made by him, or someone who managed to hack the account. Either way, regardless of the poster’s true identity, the post makes a powerful statement.
Getting to the point
Putting all the politics here aside, the Bitcoin ecosystem really has two powers at play: the mining entities and the economic entities. Interestingly, each derives it’s power from the other. The miners mine because the economy give their efforts value. The economy functions only because of the security provided by the miners. This is a very delicate balance, and a disturbance to either side could cause a great deal of harm to Bitcoin.
Bitcoin XT currently lacks consensus, but, at the end of the day, it is miners that control whether or not XT takes hold. But, even if BitcoinXT was supported by the majority of miners, this does not mean that the economic powers will follow suit. What if some big exchanges or companies like Bitpay refused to support BitcoinXT? What about the users? Will every Bitcoin user and company migrate over to XT just because the miners say so? Likely not. The uncertainty and panic that this rift would cause would be unlike anything Bitcoin has ever seen before. Trust in cryptocurrency would be absolutely shattered, and it would take years to recover from this doomsday scenario, if recovery were even possible. I’d go as far to say that it could very well put Bitcoin in an early grave.
With how much disagreement there currently is, it would be impossible for XT to experience a clean switchover. The ecosystem is far too fragile to able to deal with that. For that reason alone, I believe that XT is not even worth considering.
What the fork?
A lot of people don’t understand what will happen when XT forks off, or the implications it will have for them. Let’s start by visualizing the situation using the wonderful mspaint:
BitcoinXT is currently compatible with bitcoin (and will remain so until it has 75% of mining power), and is currently represented by the blue line (as is bitcoin). Should XT ever attain it’s 75% majority, the block size will be raised to 8MB. When XT creates a block that is >1MB (represented by the yellow dot), it will fork off and create it’s own network (represented by the orange line). Since Bitcoin only recognizes blocks that are <1MB as valid, this block will be discarded. Bitcoin will continue along it's own path, the blue line. The two networks are now entirely independent and incompatible with each other.
This creates some interesting and complex scenarios. Any bitcoin held in an address prior to the fork block is not only bitcoin, but also bitcoinXT. This is where things get murky. Mismanagement of addresses or certain types of transactions could result in the effective loss of bitcoin and/or bitcoin XT. Should XT ever come to fruition, bitcoin users would have to be extra careful in order to make sure that they are not accidentally destroying their XT, as it will hold some value. Along this line of thinking, there is another problem to worry about… Exchanges.
The exchange problem
It’s become quite commonplace for users to relinquish control of their coins over to a third party, such as an exchange. For these users, BitcoinXT will be their undoing, should it ever take hold. Because they do not control their private keys, they would own zero BitcoinXT. Whether or not they could claim XT would be at the mercy of the exchanges. It’s not too difficult to imagine a scenario where an exchange, for one reason or another, refuses to distribute XT. They could easily argue that users deposited only BTC, and are therefore not entitled to XT. Maybe they just don’t want to deal with the headache that properly distributing XT would cause. Or, more simply, perhaps they don’t support XT, and refuse to dole it out as a form of defiance.
The threat of XT is very real. As of last week, 44% of hashpower is currently voting to support 8MB blocks. Just yesterday, the first XT block was mined on the mainchain. For XT to take hold, 750 of the past 1000 blocks need to vote in favor of XT, so this is far from damning. However, those of you holding BTC on an exchange should take this as a wake up call, and pull your money out into an address that you control. If you don’t, you face the possibility of losing ALL of your investment. Even disregarding the XT, holding coins in an exchange is a bad idea, as evidenced by Mt Gox and several others before it.
If there’s one takeaway from this article, it should be that holding coins on an exchange is a very, very bad idea.
For the above reasons, I do not think that Bitcoin XT is the way to go. I am of the opinion that the block size limit needs to be lifted eventually (Moore’s law will see that processing massive blocks becomes trivial), but now is not the time, and XT is not the way.