The Fork Wars: What is Bitcoin Independence Day?

August 1st marks a monumental date in the world of digital currencies, it is recognised as Bitcoin Independence Day. The day serves as a symbolic reminder of the moment when Bitcoin demonstrated its resilience, decentralisation, and sovereignty by overcoming an attempt at control exerted by a group of powerful interests within the community. Today is its sixth anniversary.

Free and open-source software (FOSS) plays a crucial role in the modern technological landscape, fostering innovation, collaboration, and transparency. The essence of FOSS lies in its accessibility, allowing users to access, modify, and distribute source code freely. This aspect of openness not only empowers individuals and businesses to customise software according to their specific needs but also promotes a culture of shared knowledge and community-driven development.

When it comes to Bitcoin, FOSS plays an integral part in its decentralised nature and security. The Bitcoin network relies heavily on open-source software implementations, allowing anyone to participate in the validation and creation of blocks. This decentralisation enhances the system’s resilience against attacks and censorship while ensuring that no single entity or authority can control the entire network. The transparency and auditability of FOSS contribute significantly to Bitcoin’s trustworthiness and have made it a robust and groundbreaking cryptocurrency with a global impact.

Bitcoin, as an open-source project, is designed to be a decentralised and democratic system. This means that Bitcoin’s code can also be freely examined, modified, and distributed by anyone who wishes to do so, in alignment with FOSS principles. This quality also extends to decision-making regarding changes or upgrades to the Bitcoin protocol. These decisions are generally made by reaching a consensus among the network participants, primarily the developers, miners, and node operators.

However, situations can arise where consensus is not met, often due to differing viewpoints about the direction or scale of the project. In such instances, the Bitcoin network can undergo a process known as a ‘fork’. A fork can be either ‘soft’ or ‘hard’, depending on the compatibility of the changes with the existing blockchain.

In a ‘soft fork’, changes are backward-compatible, meaning that nodes running the older software will still be able to validate transactions and blocks created by nodes running the newer software. This often results in the older version slowly becoming obsolete as more participants upgrade to the newer version.

In a ‘hard fork’, on the other hand, the changes are not backward-compatible. This means that all network participants must agree to upgrade to the newer version. If consensus is not met, two separate blockchains can continue to exist simultaneously.

A chain split, or hard fork, is a significant event that can occur in a blockchain network, resulting in the creation of two or more distinct branches or versions of the blockchain. This happens when a group of nodes (participants in the network) upgrade or modify the blockchain protocol in a way that is not compatible with the existing rules followed by another group of nodes. This happened with Ethereum last year following the so-called Merge.

The evolution of Bitcoin has been characterised by heated debates and occasional splits, or ‘forks’, leading to the birth of new cryptocurrencies. The history of Bitcoin’s most notable forks – Bitcoin Cash and SegWit2x, reveals key tensions in the Bitcoin community about the best way to scale the network to accommodate more transactions.

The Bitcoin network has a hard-coded limit on the size of blocks, which are groups of transactions that are processed together. For years, the limit was 1MB, but as Bitcoin’s popularity grew, this constraint led to slower transaction times and higher transaction fees, creating a scalability problem.

The New York Agreement (NYA), also known as SegWit2x, was a proposal made in 2017 that sought to increase the block size limit of Bitcoin’s blockchain to 2 megabytes (up from 1 megabyte), in addition to implementing Segregated Witness (SegWit). The agreement was controversial for several reasons.

Firstly, critics argued that the process bypassed the established consensus mechanism within the Bitcoin community by essentially gathering support from a group of industry heavyweights, rather than the broad base of users and developers. They saw it as an attempt by a select few to exert control over the decentralised network.

Secondly, the technical changes proposed by the agreement were contentious. Many were concerned about the potential for network instability due to the increased block size, while others saw the adoption of SegWit as unnecessary or potentially damaging to Bitcoin’s core principles. Despite garnering significant support, the NYA was ultimately abandoned after several signatories pulled out amid the intense community backlash.

The User Activated Soft Fork (UASF) was also a pivotal event in the history of Bitcoin that marked a significant turning point in the ongoing scaling debate. This mechanism was proposed as a means of implementing the Segregated Witness (SegWit) upgrade, which aimed to increase Bitcoin’s block size limit and improve the network’s scalability.

Historically, the initiation of soft forks has been in the hands of miners who exert influence over the network. However, a UASF transfers this control from miners to nodes. Instances may arise where the broader blockchain community disagrees with the majority of miners, and in such scenarios, a UASF becomes pertinent. The benefit of the UASF framework is that a soft fork is activated by the blockchain economy itself, encompassing individual users, wallet services, exchanges, and other stakeholders.

The UASF was unique and important because it gave power back to the users of the network, rather than miners or larger corporations, to decide on the changes to be made to the protocol. In essence, it allowed the node operators who supported the upgrade to reject any block that did not signal for SegWit, enforcing the change from the users’ side.

The successful implementation of the UASF in August 2017 demonstrated that, despite the decentralised and sometimes contentious nature of decision-making in the Bitcoin ecosystem, users can successfully coordinate to enforce significant changes, thereby reasserting Bitcoin’s decentralised democratic principles. UASF and the victory of Bitcoin users over businesses within the ecosystem is celebrated yearly, now known as “Bitcoin Independence Day” on August 1st.

In late 2017, the Bitcoin community was divided over how to address the issue of how to increase the number, speed and cost of transactions on the Bitcoin blockchain. One group proposed a solution called Segregated Witness, or SegWit. This would move some non-essential data out of the blocks, freeing up space to accommodate more transactions. However, it was seen by some as a patch rather than a long-term solution.

Another faction within the community argued for a more radical approach: increasing the block size from 1MB to 8MB, allowing for more transactions in each block and, consequently, a greater transaction capacity overall. This group initiated a hard fork in August 2017, creating a new currency called Bitcoin Cash (BCH).

Bitcoin’s core developers and many users supported SegWit, and so the original Bitcoin blockchain adopted SegWit in August 2017 as well. However, to appease the faction that wanted larger blocks, an agreement was reached to implement a second part to the upgrade, called SegWit2x, which would double the size of blocks to 2MB later that year.

The planned SegWit2x upgrade was highly contentious. Critics said it was a dangerous and unnecessary risk that could split the Bitcoin community and its blockchain, leading to confusion and a potential loss of value. Supporters said it was necessary to keep Bitcoin transaction fees low and transaction times fast.

The principal concern related to SegWit2x’s lack of built-in replay protection, a security feature that prevents transaction replay across two chains in the event of a hard fork. Critics said this could potentially allow malicious actors to duplicate transactions from the SegWit2x chain onto the original Bitcoin chain, or vice versa.

Without replay protection, if a user were to spend their coins on one chain, an attacker could ‘replay’ that transaction on the other chain, leading to potential loss of funds. SegWit2x’s lack of built-in replay protection was a major point of concern because it could potentially allow malicious actors to duplicate transactions from the SegWit2x chain onto the original Bitcoin chain, or vice versa.

Due to this, many within the Bitcoin community perceived SegWit2x as an attack on Bitcoin, since it could lead to confusion and loss of funds for unsuspecting users. In addition, some saw the push for SegWit2x as an attempt by a relatively small group of businesses and miners to exert undue influence over the Bitcoin protocol’s development and governance. The lack of consensus and these concerns ultimately led to the cancellation of the SegWit2x upgrade.

In November 2017, facing a lack of consensus, the proposed SegWit2x upgrade was abruptly called off. This marked a significant event in Bitcoin’s history, which began August 1st, earlier that year, known as ‘Bitcoin Independence Day’, as it signalled the cryptocurrency’s resistance to control from powerful entities.

After the failure of the New York Agreement (SegWit2x), the Bitcoin ecosystem saw a number of notable forks:

These forks represent different philosophies and approaches within the Bitcoin community on issues such as scalability, privacy, and the centralization of mining power. Each has had varying degrees of success and acceptance within the broader cryptocurrency community.

Despite the cancellation of SegWit2x, the debate over Bitcoin’s scalability is far from over. The debate that occurred when Bitcoin Cash and SegWit2x were proposed, highlights the challenges inherent in governing a decentralised network where no one entity has control. It also underscores the delicate balance between adhering to the original vision of Bitcoin, while adapting to meet growing demand and technological change.

The ongoing Bitcoin scaling debate centres around how to increase the transaction capacity of the Bitcoin network. Bitcoin’s current design allows for a limited number of transactions per block, causing delays and higher transaction fees as the network becomes congested. Three proposed paths forward are the Lightning Network, Ark, and Chaumian eCash.

The Lightning Network aims to solve the scaling issue by moving small or frequent transactions off-chain, allowing instant transactions and reduced fees. It uses smart contract functionality in the blockchain to enable private payment channels.

Ark, with its unique approach, proposes an alternative solution to Bitcoin’s scalability problem. Rather than following Lightning Network’s model of establishing off-chain payment channels, which require inbound liquidity management, Ark offers significant UI improvements by its introduction of Ark Service Providers (ASP), which manage liquidity instead.

Chaumian eCash, a concept originally proposed by David Chaum in the 1980s, is now being reconsidered as a solution to Bitcoin’s scalability issue, with projects like Fedi and CashU leading the way. These projects seek to leverage the principles of Chaumian eCash — anonymous, efficient digital cash — to enable faster and more scalable Bitcoin transactions.

You can find out more about these proposed Bitcoin scaling solutions on the Bitfinex blog.