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I wrote this piece whilst laying down on a reclining bus seat traveling from Sapa to Hanoi, Vietnam. Last night the proposed Bitcoin upgrade Segwit2x was cancelled and the price of one Bitcoin traded above $10,000 for the first time.
For some the cancellation of Segwit2x is being hailed a success whilst for others it is a disappointing development. Why the different opinions?
(For a brief overview of what Segwit2x is see A World with Three Bitcoin)
There is a vocal group of stakeholders in Bitcoin who oppose a block size limit increase because, broadly, they think it will diminish Bitcoin's censorship resistance and decentralisation.
These people believe one of Bitcoin's most important features is the ability to personally validate one's Bitcoin transactions by maintaining a full copy of the blockchain (this isn't necessary to use Bitcoin). To do this a person's computer needs to routinely download the blockchain and store that information. By keeping blocks limited to 1MB they believe more people have the ability to do this (because it supposedly keeps the cost lower).
The belief is that by having more people validating Bitcoin transactions by use of a full copy of the blockchain, Bitcoin's decentralization is enhanced and this provides censorship resistance. Decentralisation is held in high regard because a less decentralised system with fewer participants means an attacker has less places to attack, which potentially increases the chance of success for the attacker.
Additionally, smaller blocks supposedly help increase decentralisation of Bitcoin mining (the process of securing the network) since larger blocks may favour more capitalised miners due to the higher cost to download bigger blocks.
So, when Segwit2x was cancelled these stakeholders were overjoyed because the block size limit will remain 1MB (at least in the immediately foreseeable future).
Supporters in the other camp wanted the limit to increase to 2MB now, and most were hopeful of further increases later. These people are also in favour of decentralisation and censorship resistance, they just think a modest increase from 1MB to 2MB doesn't materially affect those goals.
The block size limit increase was championed to help double Bitcoin's network capacity, which is currently about three to seven transactions per second. The benefit then being the ability to serve more users with lower transactions fees.
In recent months Bitcoin transactions have hit the capacity ceiling limited by 1MB blocks and average fees have skyrocketed from about $1 to sometimes above $10. It is highly likely Segwit2x would have provided immediate relief and reduced average fees to below $1 again. Lower fees are a goal of the 1MB supporters but they haven't proposed a solution to provide immediate relief.
Since Segwit2x is no longer proceeding, average transaction fees will likely remain several dollars. This significantly limits Bitcoin's usefulness as "Peer to Peer Electronic Cash" - the goal described by Bitcoin's creator. Why? Because you probably won't buy a product priced at say $20 using Bitcoin since with the transaction fee it'll cost you maybe $25. You're probably going to stick with using dollars to make the purchase.
Since I'm currently in Vietnam it got me thinking about whether or not the average person here may one day use Bitcoin. I'm told that a typical wage is about $200 per month and a meal costs a couple of dollars. So you can see that Bitcoin in its current state isn’t practical for use as currency here due to the high transaction fees.
If people want Bitcoin to be widely adopted across the globe as a means of exchange in places like Vietnam then the transaction fees must come down substantially. Other solutions to achieve this apart from increasing the block size are in development, but are at best a year or two away.
Or perhaps Bitcoin isn't meant for use by everyone?
Many people in Bitcoin no longer advocate for the Bitcoin creator's goal. Instead they think Bitcoin will become "Digital Gold" - act as a store of value rather than a transactional currency. Whether or not this is possible or a worthy goal is beyond the scope of this blog.
Those people who were in favour of Segwit2x now have to re-evaluate whether they think Bitcoin can achieve what they want it to achieve. Maybe they will try to have the block size limit increased later or maybe they'll pursue their goal with another cryptocurrency.
The Bitcoin experiment continues and I'll post more blogs later as things develop. In the meantime, you can read about associated tax implications at Taxation of Bitcoin in Australia.