Preparing for Segwit2x and the hard fork

You may have read about the ongoing Bitcoin scaling debate. If you’re margin lending Bitcoin today, you should understand how the various Bitcoin scaling scenarios may affect your lending.

Background

Currently, the Bitcoin block size is 1MB, which has struggled to support Bitcoin’s growing transaction volume. You may have experienced this congestion in the form of longer confirmation times and higher transaction fees. There have been many proposals to solve this issue, with much confusion and misinformation alongside them.

There are two primary schools of thought for alleviating the congestion problem.

  1. Segregated Witness, or Segwit, proposes to increase the number of transactions on each block by removing signature data from the block without increasing the block size. This frees up capacity for more transactions on each block. Segwit blocks are compatible with existing Bitcoin blocks, so Segwit activation would create a soft fork of Bitcoin.
  2. Emergent consensus aims to allow the block size beyond 1MB, as determined by the consensus of Bitcoin nodes, allowing more transactions to be put on each block. Bitcoin Unlimited has been the most popular emergent consensus implementation although it appears likely to be replaced by Bitcoin ABC. Miners who choose to run a version of Bitcoin with a block size that is not 1MB will create a hard fork of Bitcoin.

Segwit

We believe Segwit will be activated, which will increase transaction capacity. Bitcoin Core’s version of Segwit implements BIP 141 and is unlikely to reach the 95% of signaled support required for activation as mandated by its deployment method (BIP 9). This has prompted other Segwit deployment methods to emerge. There are two possibilities which are likely to result in the activation of Segwit.

  1. Segwit2x implements Segwit, then increases the block size to a fixed 2MB at a later date. BIP 91 is the deployment method for Segwit2x, and it’s designed to decrease the threshold for accepting Segwit. After Segwit2x is released by July 21, 80% of the last 336 mined blocks must signal support for Segwit to lock in BIP 91. BIP 91 activates a few days later, and any blocks that don’t signal support for BIP 141 will be orphaned. This will eventually allow BIP 9’s 95% activation threshold to trigger, locking in Segwit. This is considered a Miner Activated Soft Fork (MASF). By the time Segwit activates, the longer BIP 91-activated chain will be the only valid chain. Around November 18, the block size increases to 2MB, which will create a hard fork of Bitcoin.
  2. User Activated Soft Fork (UASF) is a method implemented by Bitcoin nodes to pressure miners to signal support for Segwit. If Segwit has not been locked in by August 1 (and it almost certainly will not be), nodes that are running UASF software (BIP 148) will reject any blocks that do not signal support for Segwit. Miners running BIP 148 will be mining on a split chain. Since 100% of blocks on this new chain would signal support for Segwit, BIP 9’s 95% activation threshold is triggered, activating Segwit on that chain. Note that “user-activated” is a bit of a misnomer, since the soft fork must be triggered by miners.

Currently, over 88% of blocks signal their intent to deploy Segwit2x, and Segwit2x blocks have already been mined. Coin Dance shows you the support signaled for Segwit2x in the last 1000 and 144 blocks. This implies that the BIP 91 lock in should ostensibly occur. We believe Segwit2x is likely to activate and successfully implement Segregated Witness and nullifying UASF.

The number of nodes supporting UASF BIP 148 is low. Since Segwit2x is likely to happen, UASF should not cause a persistent fork on August 1. What happens in the unlikely event that there is a persistent fork with UASF? If less than 50% of miners are running BIP 148, then both the Segwit-activated chain and the non-Segwit chain will persist. If your hosted wallet is ready to support both chains (or if you hold your own private key), you will have coins on both chains. If more than 50% of miners are running BIP 148, then eventually the Segwit-activated chain will become the longest chain and will be adopted by the overall network.

Bitcoin ABC (Bitcoin Cash)

Some miners have expressed their intent to hard fork Bitcoin on August 1, most notably BCC. The only way to guarantee that you’ll end up with both versions of Bitcoin after the fork is to take possession of your keys.

Bitcoin Unlimited

You may have heard of Bitcoin Unlimited and be wondering how it fits into the ever changing landscape. At this time, it appears Bitcoin Unlimited will be replaced by Bitcoin ABC. Given that many of the miners running Bitcoin Unlimited have pledged support for Segwit2x, we believe miners will be abandoning Bitcoin Unlimited in favor of either Segwit2x or Bitcoin ABC.

Should I pause my margin lending?

It is safest to pause your Bitcoin margin lending. If you wish to hold your own private keys in preparation, then you’ll need to pause your lending up to 2 days in advance and withdraw your coins from Poloniex.

We believe that Segwit2x activation does not pose any significant risks to margin lending. A soft fork will leave your existing Bitcoin as is. However, any hard forks that occur on August 1 may result in you not receiving the new versions of Bitcoin.

In the event that BIP 91 does not activate before August 1st, a persistent fork will likely occur, preserving two active coins (Bitcoin Core and BIP 148). If your hosted wallet is ready to support both splits of the chain (or if you hold your own private key) then you’ll have access to both.

Note that any consequence of Bitcoin scaling will not affect other cryptocurrencies in any technical capacity. However, expect heightened price volatility throughout the market.

Should I take my Bitcoin off of Poloniex?

It is safest to take your coins off of Poloniex and take possession of your private keys. If you wish to hold your own private keys in preparation, then you should disable your bot at least 2 days in advance and withdraw your coins from Poloniex.

We don’t see a risk of Poloniex losing any of your Bitcoin on the main chain as a result of Segwit2x. Any hard forks that occur on August 1 may result in you not receiving the new versions of Bitcoin.

It’s also possible that the uncertainty and volatility will lead to a large surge in volume on Poloniex, which may cause delays and freezes in Bitcoin withdrawals. We also cannot guarantee the technical robustness of Poloniex during periods of unusual trading activity.

What are important dates I should be aware of (all dates UTC)?

All dates below are approximate as there are many factors that can affect them.

July 21 — Segwit2x is due to be released. Note that there are already miners running the beta version, which means BIP 91 could lock in earlier than originally scheduled.

July 23 — Assuming at least 80% of miners are signaling support for Segwit after July 21, BIP 91 should lock in after about 2.5 days. Note that it’s possible BIP 91 could lock in earlier.

July 25 — 336 blocks after BIP 91 locks in, BIP 91 will activate. Blocks that do not signal support for BIP 141 will be orphaned.

July 29 — If BIP 91 has not been locked in at this time, then it’s not likely it will activate before the UASF flag day deadline.

August 1 — If BIP 91 is not activated and BIP 141 is not locked in by this date, nodes running UASF will begin rejecting blocks that do not signal support for Segwit. If any miners are running UASF, a persistent fork will occur.

August 10 — Segwit BIP 141 locks in by reaching the 95% support threshold mandated by BIP 9.

August 23 — Segwit activates when 2016 blocks have been mined after lock in.

November 18 — Segwit2x hard forks to 2MB block size when 12,960 blocks have been mined after Segwit activation.

Should I be worried about Bitcoin Unlimited and a contentious hard fork?

Poloniex has officially stated that it has no intention of supported Bitcoin Unlimited. However, we do believe the BCC hard fork is likely, so we recommend that you stop lending your Bitcoin on Poloniex by August 1, as you should take possession of your private keys.

Recommendations

  1. Do not send (or receive) any Bitcoin between July 25th and August 5th. There’s a risk transactions during this time period could be reversed.
  2. Pause your margin lending if you want to make sure that you receive every version of Bitcoin that emerges after the hard fork(s).
  3. If possible, you should take possession of your Bitcoin private keys to ensure you have access to your coins on the new BCC chain. Without direct access to your private keys, you won’t be guaranteed to have access to your coins on the new BCC chain, although it’s possible some exchanges will make them available to you. You should personally weigh the risks and technical challenges associated with holding your own private keys relative to the risk of BCC representing a significant percentage of the network and your exchange not offering support for BCC.
  4. Expect exchanges to halt deposits and withdrawals leading up to and throughout these dates.
  5. This does not technically impact any other cryptocurrency, although expect volatility to continue across the market.