Does SegWit drop the security of Bitcoin down a notch?

Phil Champagne
Aug 27, 2017 · 6 min read

I have semi-frequent debates with goldbugs who believe Bitcoin is a fad, a fake asset, and many other evil concepts you can think of. Ironically, they often do agree that the “Blockchain” is marvelous. It’s funny for me to see goldbugs and leftists share the same view on Bitcoin: “The currency is bad but the blockchain is great”. Obviously, on the currency front, they do not agree for the same reason. While the left sees the currency as being bad because it is not controlled and mandated by the government, the goldbugs will see it as wrongly competing with gold and silver as a safe haven asset. And yet, the blockchain, being decentralized and distributed, would not exist without a native currency embedded in it which is used to reward the miners tasked to maintain the Bitcoin network.

The typical arguments the goldbugs throw against Bitcoin are several, among them:

  1. The government will block it. **This will require shutting down the Internet which will bring back the economy to the 1970s/1980s — would they really want that? Will all governments do this? If not, it will still run in the countries that don’t.
  2. It is an invention of the NSA and will be used by government to enslave us. **This is in contradiction to the first point, and strangely I’ve sometime heard the two statements coming from the same person. Who cares who invented it, the genie is out of the bottle and sharp pro-voluntarism experts are creating variants or improving it. Beside, as opposed to everything at the NSA being secretive, Bitcoin is open source, decentralized and distributed.
  3. The government will seize your bitcoins or make it illegal. ** Never mind that this argument can well apply to gold and silver as well. Never mind the fact not all country would go this route, and that of the two (gold and Bitcoin), bitcoins are the most easily “transported” out of such country. Think how it would have been great for Jews in 1930s Nazi Germany to escape with their bitcoins not being seized — as opposed to their gold.
  4. If there is an EMP from a Solar flare or an EMP attack, Bitcoin and the Internet is dead. ** Well, that will be an ugly world, it is a possibility but I hope it to be a very low probability. It’s basically the “Mad Max” scenario. Although once the Internet is back, the blockchain will resume where it was. Also, mostly likely this will only affect part of the world, the Internet and the Bitcoin network will continue running elsewhere, with your Bitcoin protected since your digital signature is needed.
  5. Bitcoin is not backed by anything hence it is worthless. ** And gold is back by? Value is a social construct. A society will place value based on some form of utility or feature that a given object or element provides. Satoshi Nakamoto made an interesting point on this subject, comparing Bitcoin to Gold by saying Bitcoin, just as gold, has a limited supply, but is a dull metal with no value for jewelry or industrial use but has one special feature: can be transmitted electronically easily anywhere. That indeed has value. (Chapter 59 of http://BookOfSatoshi.com)

With SegWit, we have seen intense debate among Bitcoiners. Both side have points, but I want to bring up a concern I have with Segwit as well as a suggestion. Bitcoin is composed of a series of block containing transactions with their signatures in them. This mean that if you were living under a rock for a year and emerged later, you could look at the blockchain, confirm it has a high proof of work (leading zeros in the Proof of work proving what are you are looking at is not a forged blockchain) and you can also verify that every prior transactions was properly signed without relying on any third party. (Either all prior transactions or only those from which bitcoins you are receiving now originates).

Now with SegWit transactions, the miners and nodes do not have to keep signatures around once the latest blocks has been propagated. Let me point to an argument by the goldbugs that can apply to SegWit transactions.

Imagine a coordinated Internet shutdown after a world wide currency crises blocking any credit related payments to electricity and Internet providers, except perhaps in say… some part of China where the bulk of the Bitcoin mining farms are located. Once the power and the Internet is restored, people reconnecting would not have the ability to verify if any of the bitcoins that were stored in SegWit addresses involved in transactions during the shutdown are really legitimate transactions. All nodes and miners left running during this shutdown now become the “3rd party” on which you have to rely to confirm a very crucial point: was these coins really sent by their respective owners.

What are the odds of this happening? Likely weak — well I certainly hope so — but the problem is that it is not zero. Having your bitcoins in a SegWit address is then somewhat a similar risk (perhaps lower) to having them in a reputable Bitcoin exchange that potentially could be hacked one day. Perhaps the exchange will never be hacked, it will always be ahead of the fight, but perhaps a flaw will be discovered one day in their infrastructure. Who knows. And that’s why everyone suggests keeping the bulk of your Bitcoin in private addresses for which you control the keys (or shared keys with other trusted folks — like you store half of the keywords in some place and the rest elsewhere).

I hope Bitcoin wallets will give the ability to users, when they create segwit transactions, to choose whether the remaining balance (change address) goes to a SegWit or non-SegWit address, and make it a default to have it go to a non-SegWit address. As much as the pro Segwit crowd would like everybody to go full SegWit, the bulk of your storage should be kept safely in non-SegWit addresses. Only those bitcoins for your “checking account” that you intend to move into say, the Lightning Network, would then be in a SegWit address.

Disagree? Think I am wrong? Please comment below. I’m hoping the risk are limited as much as possible, and I definitely have no idea of the probabilities of this happening, but it’s not impossible in a “force majeure” type of event. I would have not kept the bulk of my bitcoins in a SegWit address if Bitcoin was around during World War II. This anachronism might sound silly, but it is excellent at giving the perspective I want to communicate.

I’m certainly happy for the benefits that Segwit will bring in terms of making it possible the introduction of Lightning Network and MAST into Bitcoin. We certainly need it to make it easier and cheaper for bitcoin transactions. But I believe this comes at the cost of additional risk, granted likely low probabilities. But if they were to happen, the stake would be high: any bitcoins in SegWit address could be taken away. Be safe, do not keep the bulk of your Bitcoin wealth in any exchanges nor in Segwit addresses.

UPDATE

Jameson Lopp replied to this story on farcebook:

If a small group continued extending the chain and refused to provide witness scripts to participants who rejoined later, they’d have a tough time convincing the newcomers that their chain didn’t contain fraudulent transactions. The SegWit scripts themselves are not stored in the legacy blockchain space, but commitments to the scripts are — they are stored in a merkle tree in each block’s coinbase transaction. The specifics are described here: https://github.com/.../blob/master/bip-0141.mediawiki...

To which I replied:

Understood. On that tail-end risk, what you are saying is if the all nodes coming back from cyber winter EMP discovered this only longer chain (beyond where they left off) they will not accept it and resume. Worst case, we have a fork.

Regards

Phil Champagne

Author, http://BookOfSatoshi.com

)

Phil Champagne

Written by

VP Investor Relations, Hayek Lab, Inc. Commercial Real Estate Investor, Author http://BookOfSatoshi.com and Hammock Income.

Welcome to a place where words matter. On Medium, smart voices and original ideas take center stage - with no ads in sight. Watch
Follow all the topics you care about, and we’ll deliver the best stories for you to your homepage and inbox. Explore
Get unlimited access to the best stories on Medium — and support writers while you’re at it. Just $5/month. Upgrade