How to Prepare for a Bitcoin Hard Fork
Worried about being stuck on the wrong side of a potential Bitcoin hard fork? Bitcoinist explores what regular users and holders should expect.
Bitcoin at a Crossroads?
Although the scaling debate has been going on for years, never has it been so urgent as it is now. As speculators continue to push the price to new heights and new users enter Bitcoin, the network is reaching full capacity.
The two major scaling proposals, SegWit and Bitcoin Unlimited (BU), are currently vying for Bitcoin users’ hearts and minds. At the same time, many are wondering what will happen to their holdings in case of a Bitcoin hard fork.
By definition, a hard fork is “a permanent divergence in the blockchain, [which] commonly occurs when non-upgraded nodes can’t validate blocks created by upgraded nodes that follow newer consensus rules,” such as that of Bitcoin Unlimited.
Bitcoin has forked in the past due to an error that allowed one user to mine a disproportionate amount of coins. However, this would be the first time that Bitcoin would go through a hard fork with supporters on both chains, a moment that could create two coins.
This is due to the major philosophical split in the Bitcoin community related to the notion of what Bitcoin is and should be. Bitcoin Core, which is responsible for over 95% of code development to date, believes Bitcoin is akin to ‘digital gold,’ whose main strengths are “security, irreversibility, and political-independence, instead of speed or fees,” as described by Core developer, Luke Jr.
The other believes in the all-inclusive “everyday cup of coffee” idea that Bitcoin should scale via bigger blocks and used as peer-to-peer “digital cash” for small and big transactions alike.
Lessons from Ethereum
Last year, we got to see a first-hand example of what could happen in the case of a hard fork that has users, miners, and companies on both sides of the fence. Ethereum hard forked into two different blockchains, Ethereum and Ethereum Classic, in a bid to return the siphoned funds from TheDAO back to investors.
Ethereum Classic is the original blockchain, the one that kept the original rules before the hard fork, and whose adherence to the immutability (i.e. irreversibility) aspect attracted supporters as a result. What is now called “Ethereum” is the blockchain, in which the the stolen funds were restored back to the DAO investors.
Following the split, exchanges reacted by adding Ethereum Classic as another altcoin pair due to support for the original chain. Meanwhile users who held ETH funds on said exchanges also received the equivalent amount in ETC coins, which has managed to find its own niche in the crypto space since.
In retrospect, the chain-splitting was arguably a blessing in disguise as both camps got what they wanted while Ethereum price has recently surpassed its pre-fork highs.
Will the Real Bitcoin Please Stand Up
The Bitcoin scenario would not differ greatly from what was seen in Ethereum. With supporters on both blockchains, it is likely that both would be kept alive, making the schism in the Bitcoin community official.
Bitcoin holders would get to keep coins on both sides of the fork. Users will be free to keep both coins, which can be seen as the “safe play,” and trade accordingly as the two chains vie for users, hashrate, and trading volume.
Bitcoin expert Andreas Antonopoulos explains:
Users: If you hold bitcoin and there is a HF, you will now own bitcoin on both forks. You don't need to do anything.
— Andreas (@aantonop) March 13, 2017
Miners, however, are required to either choose a side or to split their hashing power on both blockchains. But which chain will be worthy of the “Bitcoin” name is being debated.
Former BTCC COO Samson Mow notes that in the event of such a split, Bitcoin Unlimited would be seen as the “new altcoin” by major exchanges.
— Samson Mow (@Excellion) March 9, 2017
This was corroborated by Director of Engineering at Coinbase, Charlie Lee, who said the Bitcoin Unlimited would indeed be listed as an altcoin under the likely BTU ticker. It’s also likely that if exchanges list Bitcoin Unlimited as BTU, users would be compelled to follow suit.
Meanwhile, BU supporters claim that the longest blockchain (i.e. one with more hashing power) must be referred to as the original “Bitcoin.” But Lee disagrees saying that “when 2 chains are following different consensus rules, [the] longest chain does not matter at all.”
See for example the ETH/ETC hardfork. Different consensus rules. No one cares which chain is longest (i.e. more work). Users decide which they want to call Ethereum.
Preparing for a Hard Fork
Although it’s hard to tell exactly which Bitcoin services will support Core, BU or both, users can expect their coins to be available on both chains.
Keeping your bits on your own personal wallet, in which you control the private keys, is advised, as this would ensure that your coins are credited on both blockchains.
One could then access the BU coins via the Bitcoin Unlimited client and the original chain’s coins via any wallet that supports Bitcoin Core. Keeping coins on an exchange is not recommended.
“Coins on an exchange are not yours. That’s true regardless of any possibility of a fork,” Antonopoulos notes.
However, if you do store your coins on an exchange, the most likely event would be the exchange will credit your coins on both chains, though it’s a decision that will be left entirely up to the exchange operators.
To play it safe, keeping your bits on your wallet and keeping your funds in cold storage/offline is highly recommended.
Civic CEO Vinny Lingham shared the following advice to all Bitcoin users:
I recommend to people in Bitcoin to have two pots. One is your long term BTC holdings, cold storage. Never sell those. Trade the other pot.
— Vinny Lingham (@VinnyLingham) March 13, 2017
Could both “Bitcoins” co-exist? Or will one eventually take over the other one? Share your thoughts below!
Images courtesy of nodecounter.com, Twitter, Shutterstock