The Bitcoin apocalypse is coming in mid-November

Some time in mid-November, barring some truly miraculous reconciliation, a group of Bitcoin companies are going to launch a new version of the Bitcoin protocol that will split the block chain into two parts. This has been a topic of much debate and hand-wringing within the Bitcoin community for the last several months, but has been largely ignored by the rest of the tech world because this is not the first time this has happened. The bitcoin chain has been hard-forked at least five times, most recently last August when Bitcoin Cash (BCC) launched, an event that was preceded by a great deal of wailing and gnashing of teeth. Since BCC launched, the value of both chains has risen dramatically, at least when measured in US dollars.

But, as they say, this time it's different.

The new split, scheduled to take place in mid-November, is called SegWit2X. The SegWit part, which stands for Segregated Witness, refers to a new way of specifying transactions within a Bitcoin block to allow more transactions to fit within a single block, thus increasing the capacity of the network. SegWit is already up and running, having launched on August 24. The launch was so smooth that no one outside the Bitcoin community even noticed.

But the 2X part will almost certainly not be so smooth. To understand why requires getting a bit into the weeds of both the technology and the politics of Bitcoin. But the TL;DR is that the 2X fork is going to launch with an intentionally omitted feature that all previous forks have had, called replay protection. Without replay protection, the blockchain will not divide itself cleanly into two chains the way all previous hard-forks have. Instead, it will be a fight to the death between the 2X chain and the original chain, from which only one victor can emerge. So there are three possibilities: either 2X will win, or the original blockchain will win, or Bitcoin will descend into chaos from which it will likely not recover. The chances of the third outcome are high enough that if you own Bitcoin in any significant amounts it would behoove you to take it very seriously.

One of the reasons that the SegWit2X issue is both seemingly intractable and difficult to explain is that it is rooted in a fundamental difference of opinion about what Bitcoin is, or at least what it should be. On one side are those who believe that Bitcoin is (or should be) money, currency, a medium of exchange, a competitor to the U.S. dollar and the Euro. On the other side are those who believe that it is a commodity, a store of value, more similar to gold (or oil or pork bellies) than to shekels.

Unfortunately the design of Bitcoin has some limitations that mitigate its usefulness as a currency. In particular, the rate at which transactions can be processed is limited. A new block can be mined only about every ten minutes or so, and the size of the block is also limited. Thus Bitcoin has a hard limit not only on its supply, but also on the rate at which transactions can be processed. And that limit is currently much, much too low for Bitcoin to be a practical alternative to fiat currency.

The seeds of the impending crisis were planted last August when some members of the Bitcoin community endorsed a plan called the New York Agreement (NYA) for increasing the capacity of the Bitcoin blockchain. The NYA was a two-step plan. The first step was to rearrange how data inside a block was represented so that more transactions could fit in a block (this is the "segregated witness" or SegWit scheme mentioned earlier). The second step was to double the size of a block. That is the 2X part of SegWit2X.

All this sounds perfectly reasonable and innocuous, and the first step -- adopting SegWit -- went off without a hitch in August. One of the reasons it went off without a hitch is that SegWit is a backwards-compatible change so it didn't require updates to Bitcoin wallets. Retail Bitcoin users were therefore mostly unaware that this change was even happening.

But 2X is different. It is not a backwards-compatible change. A block that is too large is invalid under the current rules, and so current code will reject such blocks. In order to maintain consensus after the adoption of 2X, everyone has to update their code, otherwise consensus will diverge. There will be one chain that includes 2X blocks, and another chain with doesn't, and no obvious way to tell which is the One True Chain.

In the past month or two there have been frantic attempts by prominent members of the Bitcoin community to convince 2X advocates to add replay protection, thus making a clean break between the 2X chain and the original chain, the same way that the Bitcoin Cash fork did. The 2X advocates have refused, citing the NYA, and secure (at least apparently) in their belief that enough people will update their code that there will be no doubt that 2X is the One True Chain. The anti-2Xers (or, if you prefer, the pro-replay-protectioners) counter that if the 2Xers are wrong it could completely destroy faith in Bitcoin. It's a game of chicken with literally billions of dollars on the line.

The irony here is that everyone agrees that the capacity of the Blockchain needs to be increased. The disagreement is over when and how. The 2Xers argue that Bitcoin is already straining under the current demand, something needs to be done sooner rather than later, and reneging on the NYA would be a betrayal that would cause more problems than it solves. The anti-2Xers argue that the NYA should not be binding because it was negotiated behind closed doors, and that a change of this magnitude needs to be more carefully considered before it is adopted.

The elephant in the room is what many see as Bitcoin's core value proposition, the supply limit of 21 million coins. This limit is often advertised as being inviolable because it is mathematically enforced, but that is only true as long as everyone is running the code that enforces that limit. The 21-million coin limit is enforced by exactly the same mechanism that currently enforces the block size limit. If the one can change, so can the other. So far that argument has not seemed to dissuade the 2X advocates from proceeding.

All this is going to play out one way or another some time in mid-November. Just thought you'd like to know.