All eyes on bitcoin and SegWit

The deadline is tomorrow. All eyes are on bitcoin and the outcome of its divorce.

Just like any divorce, it’s impossible to make sense of unless you follow the story from the very beginning. But nobody can remember the details of what happened way back when. So both parties rejog history to fit their narrative of a calm and rational self.

The result is two different histories and a lot of drama reconciling the two. Eventually both sides decide it’s better to walk away and do their own thing without all the drama.

Bitcoin’s split has all of this. And so, in order to write about it, some simplifications are impossible to avoid. Do you really want to know the details? My friend Sam Volkering can help you, and show you how to profit too. But it’s the conclusions that are crucial.

First, what is the divorce scheduled in for tomorrow? It’s all to do with too much data. Bitcoin works by making vast amounts of information available to everyone, sort of like the internet itself. Because everyone has it, it can’t be fudged.

Unfortunately, bitcoin is so popular that the internet can’t keep up. It’s like when you try to attach your photo album to an internet-based email provider – there’s a limit to the number of photos it can handle. A way to simplify the information that makes bitcoin work is needed. The question is how.

Bitcoin’s users came up with two options

The less popular one refused to back down. And so bitcoin will split in two, sort of. It’s more of a breakaway movement. The proponents argue their new version of bitcoin, called Bitcoin Cash (BCC), will be proven superior to bitcoin original over time. Meanwhile bitcoin original will change to a Segregated Witness (SegWit) method.

SegWit reduces the amount of information which buzzes around the internet constantly to keep the bitcoin system public and therefore honest. It gets rid of some of the information included in every bitcoin transaction – the witness section, which makes up 60% of the data.

It’s a bit like moving the identification of who is who in a contract to an appendix. What matters to the system is that it was verified sufficiently, not specifically who verified it. Without all that information included in the bitcoin’s immediate system, it needs 60% less data flow per transaction, so it’s faster. Until that improvement gets eaten up again by even more bitcoin transactions.

Bitcoin Cash’s solution is to increase the size of the information allowed in each block, or bundle of data. It’s upgrading the email system to allow bigger files. Eight times bigger. This is a much more comprehensive solution. But it doesn’t have as much backing. And in cryptocurrencies, backing is everything.

Which system will win out in the end? The better one.

The key issue remains – can bitcoin become mainstream if the world can’t handle the amount of data cryptocurrencies need to function?

If you take a look at what we know, that’s a good question. A book called Attack of the 50 Foot Blockchain is a good example of this. It points out we lack the things needed to make bitcoin work well. But that may be like arguing the smartphone will never exist because it would have to be the size of an iPad. It ignores progress, innovation and consumer choice.

So does the fork matter? Not necessarily. It’s a trading opportunity. There’s a worry that Bitcoin Cash’s smaller backing leaves it open to manipulation before it clears the hurdle of respectability or is simply ignored out of existence. One of the two should happen eventually.

The surprising thing here is that tomorrow bitcoin owners will discover they own as much Bitcoin Cash as they have bitcoin.

 

Until next time,

Nick Hubble
Capital & Conflict

Category: Investing in Bitcoin

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