in cryptocurrency •  last year

Bitcoin currently suffers from long transaction time and high fees because the network has not been able to handle the increase in demand. The community is split concerning this issue. There are two main propositions at this moment. One propositioned by the users (User activated soft-fork, also called BIP148 or UASF) and one by the large miners (Segwit2x). UASF is set to start at August 1st.

In this article, we cover how both of those solutions affects the current Bitcoin network. In order to do this, an explanation of how the bitcoin blockchain currently works is necessary.

If you are already familiar with the bitcoin block structure, skip this part.

How does blocks function in the bitcoin blockchain?
Blocks are the foundation of a blockchain. The network assigns a number to each block and after a sufficient amount of confirmations from the miners, the block is part of the blockchain. Each block contains data, mainly transactions. Today the maximum block size is set to 1MB which limits the amount of transactions the block can store. If a transaction does not fit in the current block, it will be put in line to be processed in the next block.

Bitcoins high traffic at this moment results in a lot of transactions does not fit in the 1MB block. This in turn results in longer transactions time but also higher fees. Making a transaction fit in the current block is similar to an auction. You make a bid, the fee you are willing to pay, and the highest fees are selected by the miners to go into the block.

In theory there are a few ways to solve this. The two solutions currently discussed are:

Increasing the block size to fit more transactions
Reducing the data size of the transactions going into the block
They both bring positive and negative consequences which favours either the miners or the users, which is the main cause of the arguments within the bitcoin community.

Soft Fork v. Hard Fork
Explaining the differences between UASF and Segwit2x requires a basic understanding of the differences between a soft fork and a hard fork.

Any time a node in a blockchain network changes the code it is running, this is a fork. Imagine the blockchain as a railway which is constantly built as the train moves forward. When a node or several nodes decide to use another code, there will be a fork in the railway. Some may continue to run the old code, in which case the train will split. There are now two trains heading in separate directions after encountering the fork in the railway.

In some cases, this split is irreversible and the chain will split in two. This means that there will now be two different bitcoins. Anyone who holds bitcoin at the time of the split receives both coins. This is a hard fork.

In other cases, the code allows for nodes that do not run the new code to still mine blocks on the new blockchain. This is a soft fork. If a majority chooses to run the new code, it forces the other nodes to either adapt or hard fork.

fork bitcoin

User Activated Soft Fork (UASF or BIP148)
The core developers and the community pushes for a soft fork. The soft fork enables Segwit. Segwit stands for segregated witnesses.

So what does Segwit do?
A transaction contains a lot of different pieces, and one of them is the transaction identification. This part makes up a bit portion of the total data going into the block. Segwit will split the block in two parts, separating the identification from the rest of the transaction data. The transaction data size shrinks and more transactions fit in the new block, thus increasing the bitcoin network capabilities.

Segwit also enables something called the Lightning Network which enables users to make smaller payments almost instantly without a fee. This article does not cover the lightning network but we are going to publish more information about it at a later point.

The main critisism against UASF is that it is a temporary fix. Once more people use the bitcoin network, Segwit will not b

e enough to keep it going. A hard fork-solution is scheduled down the road if bitcoin goes down the UASF route.

Segwit2x is the miners proposition. Jihan Wu, owner of Bitmain, is the representant of the miners.

Segwit2x is a hard fork that also activates segwit to speed up transactions. In addition to this, Segwit 2x will increase the block size to 2MB (currently 1MB). This allows more transactions to fit into each block. Segwit2x receives a lot of criticism as a larger block size makes it more difficult for smaller miners to compete. It will centralise the bitcoin network and give Jihan and other big miners more control. This is detrimental to the core idea of bitcoin that Satoshi Nakamoto presented in his white paper in 2008.

Whichever way bitcoin decides to go, any consensus will surely have a positive effect. The current internal struggles has put bitcoin to a standstill and allowed competitors such as ethereum to gain a lot of market share from the former lone giant of cryptocurrencies. If or when bitcoin forks, either hard or soft, it is likely a lot of capital that has gone from bitcoin to ethereum and other altcoins will flow back into bitcoin.

Disclosure: I own a small amount of bitcoins at the time of writing this article

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