Bitcoin prices stabilize, but the test has just begun...

In recent days, the encrypted digital asset market, which has been gloomy for a long time, has experienced long-lost sunshine. OKCoin currency bank data shows that since July 17, Bitcoin has experienced six consecutive gains, reaching a high of 19,800 yuan on the 21st.

In an efficient market, most of the valuable information has been reflected in the K-line trend. As far as Bitcoin or the entire encrypted digital asset market is concerned, the risk of Bitcoin forks is an important trigger of the previous sharp decline, and the recent recovery is largely due to the fact that the BIP91 plan has begun to be recognized by mainstream miners. In the short term, the alarm of Bitcoin forks has been lifted.

However, the alarm has not been completely lifted. Within 3 months of the successful activation of BIP91, there will be a hard fork to expand the 2M block size. At that time, the real test will really come.

What is the test? Testing the tenacity of the Bitcoin blockchain, if it forks because of several conflicts of interest, Bitcoin will no longer be the Bitcoin sought after by everyone, and its value foundation will inevitably be seriously damaged, which is a result that no one wants to see.

Therefore, the test of Bitcoin has only just begun.

Where does the risk of blockchain forks come from?

For most investors, blockchain forks are still an unfamiliar term. As the name suggests, the so-called fork means that the original blockchain is split into two or more blockchains. Since the blockchain is a public ledger that records Bitcoin transactions, since there are multiple blockchains, it means that there are multiple different versions of the Bitcoin ledger, and naturally it is regarded as the emergence of multiple Bitcoins.

Just like Ethereum, a hard fork occurred due to the TheDao incident, which resulted in two blockchains, and two Ethereum coins, ETH and ETC, appeared.

So how did blockchain forks occur?

Let’s start with the consensus mechanism of the blockchain. As we all know, the blockchain is jointly maintained by peer-to-peer decentralized nodes. There is no authoritative organization that can have the final say. The orderly operation of the blockchain relies on everyone's consensus, that is, there is a set of recognized standards for key matters such as which transactions are acceptable and which nodes have accounting rights. This set of standards is deployed in the underlying protocol of the blockchain for automated execution.

The problem is that when nodes in the blockchain run different versions of the underlying protocol, inconsistencies in the consensus mechanism may occur. That is, some nodes think that some blocks are in compliance with the rules and agree to access the blockchain, while some nodes think that they are not in compliance with the rules and refuse to recognize them. At this time, when the nodes do not update the underlying protocol to remain consistent, the blockchain will naturally fork into two or more.

Someone may ask, why do nodes run different versions of the underlying protocol? Wouldn’t it be great if everyone updated in time? It may seem like a simple matter of updating software in a timely manner, but it is not.

First, the blockchain is a decentralized network operation model, with nodes scattered around the world. They are in different time zones, and some are constantly online and some are often offline. It is impossible to update all nodes at the same time. Therefore, the upgrade of the underlying protocol of the blockchain will almost certainly lead to a blockchain fork. Secondly, based on various factors, some nodes are opposed to the upgrade, which is the fundamental reason for the long-term blockchain fork.

As for why some nodes object? It's not difficult to understand. In a business society, asking everyone to 100% agree with a certain point of view or approve an upgrade is an impossible task in itself. Sometimes, if there is a serious conflict of interest, it is normal to split into two or more factions. Unfortunately, there are serious conflicts within the community over whether the underlying Bitcoin protocol should be upgraded or not.

Conflicts of Interest and Temporary Compromises

The author mentioned in a previous article that there are some limitations in the current underlying protocol of the Bitcoin blockchain, which have seriously restricted the development and prosperity of Bitcoin. The first is the limitation of block size. The current block size of Bitcoin is 1M, which can only process 7 transactions per second, which seriously lags behind development needs. The second is the poor scalability of the Bitcoin blockchain, making it difficult to deploy more complex innovative applications.

As far as this conflict is concerned, the focus is on block expansion. It has become a consensus to expand the block capacity, but there are different opinions on how to expand the capacity.

The ideal solution for miners

As far as miners are concerned, they hope to directly relax restrictions on blocks, and have successively proposed different expansion plans such as 8M, 4M, and 2M.

The Bitcoin Core team expressed opposition. Whether it is upgraded to 2M or 8M, with the popularity of Bitcoin transactions, one day it will still not be enough, which means expansion. The larger the block, the higher the computing power requirements, which means that fewer and fewer nodes have the ability to run the full-node blockchain, which will easily lead to the centralization and monopoly of computing power, that is, the blockchain can only be maintained by a few large mining pools.

The ideal solution for the Core team

As far as the Core team is concerned, they hope to deploy SegWit (Segregated Witness), that is, through the separation of transaction information and verification information, when part of the data is removed, space will be made available for more transactions. In this way, the transaction throughput of the entire Bitcoin network will also increase, and the effect of block expansion will be achieved in disguise. After deploying Segregated Witness, the Lightning Network can be introduced to move small transactions off the blockchain. The blockchain only undertakes the final clearing function, greatly reducing the load on the blockchain.

The miners objected. Whether it is Segregated Witness or the Lightning Network, they will fundamentally harm the interests of miners. There are two motivations for miners to mine. One is the income from Bitcoin issuance brought by the block accounting rights, and the other is the transaction fee income from accounting. If the transaction is taken off the blockchain, it means that there is no need to pay fees to the miners, which is obviously unacceptable.

The problem is that without the support of miners, the upgrade of Bitcoin’s underlying protocol will become empty talk.

Conflict and compromise

Due to the delay in reaching an agreement between the two parties, the expansion and upgrade of Bitcoin was delayed from 2015 to 2017. The Core team took the lead and planned to vigorously implement the BIP148 solution to achieve the purpose of deploying Segregated Witness. Its activation date is the early morning of August 1, 2017. At that time, if the nodes represented by miners fail to follow up and upgrade BIP148, the Bitcoin network will face splitting, including upgraded BIP148 nodes and non-upgraded nodes, and the Bitcoin blockchain will also be divided into two.

In a sense, patience has been worn away. Since we can't reach an agreement, we will fork.

In view of the bifurcation risk of the BIP148 plan, the trading price of Bitcoin began to plummet starting on July 10. In just 7 trading days, the closing price of Bitcoin fell from 17,762 yuan to 13,500 yuan. The entire encrypted digital asset market was in mourning, with cuts in half and cuts in the chest everywhere.

As a result, the compromise BIP91 plan emerged and was supported by miners. The purpose of the BIP91 solution is to lock SegWit before August 1 and be compatible with the BIP148 protocol. This means that as long as BIP91 is successfully activated before August 1, by then, whether it is a node running the BIP91 protocol (supporting the miners’ proposal) or a node running the BIP148 protocol (supporting the Core team’s proposal), both parties will be compatible with each other and will not cause a fork in the blockchain.

Due to the support of miners, the BIP91 plan was successfully activated on July 21, which means that the BIP148 plan planned to be activated on August 1 became harmless and the blockchain fork alarm was lifted. Stimulated by this news, Bitcoin rose rapidly.

There will still be a battle in the next three months

But the problem is not over yet. The reason why BIP91 is supported by miners is because it is a bundled solution of "SegWit + 2M block expansion". It deploys Segwit first, and then automatically upgrades the 2M block expansion protocol within 3 months, taking into account the interests of miners and the needs of the Core team to deploy SegWit.

The problem is that locking Segregated Witness in advance through the BIP91 solution only requires the computing power to reach the 80% threshold, and does not require the support of the Core team. This means that the activation of BIP91 does not fundamentally resolve the dispute between the two parties - block expansion, but only delays the time.

There is no problem in deploying Segregated Witness through BIP91, but the Core team may not agree to the 2M block expansion within 3 months. Therefore, the Bitcoin blockchain will still face the risk of forking in the next 3 months.

The value of Bitcoin comes from a stable ecosystem and the investor confidence it inspires. If a fork can easily occur just because of the interests of a few parties, investors' confidence in Bitcoin will be affected. If your confidence is fundamentally shaken, how can you have a good future?

Therefore, this war is not over yet, and the test of Bitcoin has just begun.