The Potentially Dangerous Hard Fork in Bitcoin

Bitcoin’s Most Important Fork
Bitcoin’s Most Important Fork

Bitcoin’s market capitalization now exceeds Goldman Sach’s and many of companies in the Dow Jones Industrial Average. Governments, financial institutions, and investors are focusing increasing attention on this crypto currency. In approximately one week the most important hard fork of the bitcoin blockchain will occur. It is known as Bitcoin Segwit2x. Unlike prior hard forks , it is heavily debated, and has some market watchers nervous that if this fork fails it could seriously damage the whole crypto currency market.

A hard fork is a change to the bitcoin protocol and in effect tries to improve the bitcoin protocol by creating a better version of bitcoin. This coming hard fork is an attempt to increase the block size. The argument is that if the size of blocks is increased, the time to confirm transactions will be reduced and fees reduced. There have been prior forks to achieve the same goal (Bitcoin XT, Bitcoin Classic, and Bitcoin Unlimited). These attempts have basically not been of much significance. They were all done under the same method known as the Bitcoin Improvement Proposal. The Segwit2x fork is being done under what is known as the New York Agreement. This is an agreement among many ,but not all, of the bitcoin community. The increase in block size will mean that the Segwit2x will not be backwards compatible. Hence the network of bitcoin nodes must update their nodes so as to avoid splitting the blockchain. In order to get the update on nodes there must be consensus or replay protection. The goal of Segwit2x is to improve the existing bitcoin blockchain going forward. The recent Bitcoin Cash fork was meant to create a new and different blockchain for Bitcoin Cash. The Segwit2x fork wants to be in effect part of the existing bitcoin blockchain but going forward with greater block size. The stated goal of this fork is to replace the present bitcoin protocol.

The danger of this fork is that if there are two coins created there would be two separate and distinct blockchains with shared history. This means that transactions could be valid on both chains.

This is dangerous since if a party initiates a transaction on one chain, the same transaction could be “replayed” on the other chain. Hence in effect there is a double spend. One of the new bitcoin and one of the segwit2x coin. This has historically been addressed by designing replay protection. The New York Agreement and the present plan for Segwit2x does not provide for replay protection. This is a source of great concern. In effect it will mean that senders of one coin can easily end up unintentionally sending both coins and hence more then expected.

Because Segwit2x does not call for replay protection and the legacy bitcoin blockchain does not have it there is concern that this hard fork will open the door to major problems. Will this occur? At the moment it looks like it will not happen. But if it does, it does not bode well for the existing bitcoin holders.

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