On November 17th 2017, some of the “miners” of the Bitcoin blockchain (people who use computing power to create new “blocks” – or coins – on the chain) wanted to create a “hard fork” of the currency, known as “Segwit2x”.
Whilst this was abandoned at the last minute, it left a number of “investors” questioning the stability and veracity of the Bitcoin technology. Not only is it open to changes, but the decentralized nature of the product make it scarily open to a new type of attack — changing the underlying code of the digital currency.
This article will explore why the “hard fork” was unsuccessful, and ultimately what it means for “investors”, traders and technologists alike. We’ll also explore the nature of what a “hard fork” actually is…
How It Works…
Firstly, to appreciate how this works, we need to understand what “Blockchain” and “Bitcoin” actually are. This might be a little difficult if you are not a seasoned technologist.
Bitcoin is what’s known as a “cryptocurrency”. This is a new type of financial ledger which is stored on a decentralized database known as a “blockchain”. Blockchain is the real magic behind Bitcoin and so it’s important to understand how that works before looking at the crypto side of things.
Blockchain was developed in 2008 as an open source technology by a group of software developers. This technology put a single idea at the core – a decentralized database which basically meant that computers (known as “nodes”) with access to the db would be able to “share” updates to the data.
The importance of Blockchain cannot be overstated. It basically means that data can be stored in “3D” which means that you’ll be able to verify its history and keep completely up to date with all the improvements it may have. This will mean that instead of having the “old” setup of a set of standalone files, or databases with rows that never change, people will be able to see where the data has come from and what it has contained within.
This is ONLY possible because of the way in which the “blockchain” system is tied to a much wider network (through the Internet). Very similar to how “torrents” work, if a “block” in the chain on ANY “node” is updated, every block on other “nodes” is updated to match.
The idea of a “currency” built on this technology might seem absurd. However, there are several things which have made it stick. The most important thing to realize is that each cryptocurrency is simply a PUBLIC LEDGER of financial transactions. These ledgers are encrypted with specific “algorithms” (which is where the term “crypto” comes from).
The type of encryption is determined by a core algorithm, which is basically where each crypto currency gets its name. For example, “Bitcoin” (which is a single blockchain on its own) has only 21 million potential blocks (or “coins”) which can be created by its algorithm. This is partly where some of the price spikes of Bitcoin have come from. You’ve got to be careful or you could fall victim to a scam.
The main problem for many of these “cryptocurrencies” comes in the form of a core part of the blockchain infrastructure – “forking”. Like “forwarding” an email, “forking” allows developers to split a codebase into two separate formats. In the case of these cryptographic algorithms, it means that their underlying value proposition (that they are untouchable by governments) may not be so secure…
What’s A Hard Fork?
A “blockchain” is basically a series of data “blocks” from a single base.
For example, an “email conversion” would be considered a rudimentary “blockchain” (with each message being a “block” on the chain). Each time a new message is added to the “chain”, you would say that a new “block” has been updated.
Now, the way this works today is to have a central server through which ALL updates are meant to be sent. In the case of email, this would likely be the email service provider.
With blockchain, there is “no” central provider. Instead, there are 100’s or 1000’s of “nodes” who manually update with the latest “blocks” added to a chain. This is what gives blockchain its decentralized nature, and is why it’s very popular with people who wish to retain control of their privacy.
The problem is that whilst each chain can be secured with a hash, it’s often the case that people may wish to “split” the chain and add extra blocks – in the case of email, for example, sending the latest email to a co-worker or boss. A “fork” is like a train junction – where you can only go one way…
This is not an issue with “normal” blocks/chains, because any users who wish to adapt to the new “blocks” will simply have to switch to the “forked” data.
However, with “crypto” currency chains (where each encrypted block represents a “coin” or delimiter of currency value), it means that the “old” currency could become nul and void.
This is a major concern for many of the crypto currency developers, and “investors” as one of the major predicators of value (that the coin cannot be tampered with) actually has a MAJOR backdoor which is wide open to exploit…
Is Crypto ‘Safe’?
The idea that crypto currency replacing fiat currencies (as touted by many coin exchanges) is farcical. The reality is that the majority of cryptographic currencies on the market today are likely to have ONE “killer feature” which they’ll be used for in the wider world.
For example, Ethereum’s killer feature is meant to be “smart contracts” (whereby if you pay someone to walk your dog, you’re able to “send” them money digitally without the need for a bank’s consent). Bitcoin’s killer feature was meant to be the complete decentralization of a currency. Whilst this idea is still valid, it’s only existent if the currency holds a value that can be transacted in the “real world”. If ANYTHING undermines that value – real or speculative – the whole house of cards would come crashing down. If you need more information on crypto security you can follow that link.
For all the speculation about “fiat” currencies, they are backed by massive amounts of resources, military altercations and huge populations. Bitcoin, Ethereum and the rest have absolutely NO backing in this sense. Their “value” is based on the trust within their respective ecosystems. So whilst “crypto” currencies are generally quite “safe” (by anyone’s standards), they are not a recommended form of investment unless you are looking for something very speculative.
What The Failed Segwit2x Fork Means
Segwit2x was meant to be a completely different way to manage the “Bitcoin” chain of data.
The problem that many Bitcoin “miners” have discovered is that the file size of the entire Bitcoin “chain” is now over 100GB, which makes updating any of its “blocks” extremely difficult. The solution to this was to simplify the codebase and remove many of the older references / headers which was causing the older version of the currency to be so slow to change/edit.
Whilst the fork never happened, if it did go through, it would have meant that there were effectively two types of Bitcoin algorithm (coin) in the world. This would mean that the veracity of the original algorithm would have been undermined, diminishing the value of the currency…
This was evidenced by the price drop of Bitcoin to around $5000 per coin (still overpriced) when the fork was meant to take place. The price rebounded to around $7000 afterwards (mainly driven by speculation again). Buy some now and put them right in there into those Crypto Wallets.
Ultimately, what it means is that the underlying problem of Bitcoin (its unregulated nature) has shown itself to be probably the Achilles Heel of the idea — if enough “miners” (the people who run computers that calculate the next blocks on the Bitcoin chain) had got behind the fork, it could have changed the CORE codebase of the Bitcoin algorithm, leading to at least two versions of the coin in the world.
Much akin to if the US government decided to offer another type of investment vehicle (besides the bond and dollar), the result of a “split” in the Bitcoin currency would have invariably been the devaluing of its “value”, which incidentally could have lead to the bursting of the bubble as a whole.
The reality of “bitcoin” is that it’s full of snakeoil salesmen who are trying to capitalize on others’ misunderstanding of a new technology. We saw a similar thing happen with the “social” craze 5+ years ago. Whilst “social” was an important development, it wasn’t anywhere near the transformative technology most people predicted. As such, the similar could be said about “Bitcoin”… in that since no-one has ultimate control over the asset, it could end up imploding on itself.