Saturday, November 11, 2017

Segwit2X Is Still Go - Complete Wealth Transfer From Legacy Bitcoin To Bitcoin Cash In Progress

October 26 2017  Email from Jeff Garzik Segwit2X is full steam ahead.
November 8 2017 Segwit2X Cancelled announcement by 6 industry leaders.

Since Segwit activation on 23 August, the Segwit2X team had endured 2 months of relentless bashing from the small blockers, all the while remaining mostly silent. So what happened between October 26 and November 8? It can't be for the lack of consensus which was the reason given. They already knew there was never going to be consensus. Something unexpected happened, causing them to push the "kill" switch. What was it ?

This Happened



                               BTC        BCH        TOT

 26 Oct                   12.16        1.33        13.49
27 Oct                     9.11         3.97        13.08
28 Oct                     7.37         4.29        11.66
29 Oct                     8.51        0.60          9.11
30 Oct                   10.46       0.38         10.84
31 Oct                    11.07        0.43         11.50
01   Nov                  9.72        0.45         10.17
02 Nov                   11.49       0.46         11.95
03 Nov                    9.76        1.99         11.75
04 Nov                    8.52        1.68        10.20
05 Nov                   10.51        1.02        11.53
06 Nov                  10.52        1.25         11.77 
07 Nov                   9.86         1.24         11.10
08 Nov                  11.16         1.22         11.38 

From October 27 the hashrate for Bitcoin dropped by over 30%.

In my previous post I postulated that the Segwit2X hard fork is a billion dollar windfall opportunity for miners. It is inconceivable that miners can let this opportunity go by, without exploiting it.

My guess is that a consortium had indeed hatch a plan to take advantage of this opportunity. I suspect that they approached Jihan Wu and he turned them down. Bitmain is a Billion dollar international business with venture capital investments and cannot be seen to be tainted by any fallout from this "Billion Dollar Hiest". If you look at the names of the other signatories, aside from Jeff Garzik, all are well known names in the Bitcoin space, operating front end customer based businesses. These people are distancing their businesses and themselves from the fallout, when "the shit hits the fan". Jeff Garzick provided credibility as he is lead developer.

Sure enough within 12 hours this response was posted. This message by Bitpico

"We are carrying out the fork regardless as everything is set in motion. Backing down the difficulty right now is a strategy. Wonder why 30% network hash-rate disappeared? It’s ours; the miners that will continue what is set in motion... A handful of humans cannot stop what they have no control over..."

This message was dismissed as FUD and trolling. I disagree. I think they are deadly serious. There is too much money at stake. Since then they have also put up a website bitcoin2x.org.

Can They Execute ?
1) A Consortium Of Miners.
Examine the miners pie chart. The pool ratio for the 4 days and 24 hours are fairly similar. We don't see a drop out of any single pool or group of miners. Suggest a consortium working together. From the table above, they do seem to control 30% of the hash power as they claim.

2) The Play
I see this play out in two parts. First the flippening ( Pivot to Bitcoin Cash ) and secondly the Segwit futures. For the flippening they start by taking huge positions in Bitcoin Cash at around .05BTC.

Possible mining share breakdown on the separate chains.

Bitcoin Cash  : Bitcoin.com, Viabtc, Unknown : 30%
Segwit2X       : Consortium, Unknown : 40%
Segwit1X       : Antpool, Bitfury : 30%

Come 16 November both Segwit chains will be slow. We may get 1 hour blocks on the Segwit2X chain, and even longer on the Segwit1X chain. Bitcoin Cash will have very fast block times and the number of transactions processed on this chain will also escalate. As the price of Bitcoin Cash increase miners will move from Segwit1X to Bitcoin Cash and this chain (Segwit1X) will be the first to suffer the Chain Death Spiral. In the meantime, the "Rouge" miners will continue mining the Segwit2X chain at a loss.

Will the exchanges recognise Segwit2X as Bitcoin if it has the greater accumulated hashing as announced before the fork was cancelled? I doubt it. They will more likely view it as an attack on Bitcoin and refuse listing them. If other exchanges like Hitbtc start listing their coins then the game changes again, and that will be another complication.

How long would they continue mining at a loss? My estimate is that with 30% of hashpower it will cost them approximately 1 million dollars a day. They will make many times that with the gains in the price of BCH. I think they can continue this stand-off for as long as is needed.

When the "Rouge" miners are sure that Segwit1X is no longer viable, or if Segwit2X hard fork off the network, they will abandon the Segwit2X chain as well and move over to Bitcoin Cash. By then even Antpool cannot save the day. Both the Segwit chains will be "dead". Only 1 chain will be left - Bitcoin Cash ---> Bitcoin.

Bitcoin Cash Is The Real Bitcoin

Will the real Bitcoin please stand up

Bitcoin. Its a matter of trust.

The futures play was easy. Intially it must be to purchase BT2 tokens and make them BTC for a huge profit, then proceed to the flippening. The Segwit2X cancellation announcement was probably unexpected. It stopped this play by tanking the futures, however they were able to pick up tens of thousands of Segwit2X tokens for pennies, and are now selling to high risk taking investors betting that Segwit2X will become the new BTC.

No Segwit2X free dividend

3) Bitcoin has no masters and takes no prisoners
The announcement signed by just 6 people cancelling the hard fork, is in itself ludicrous. This is not how Bitcoin works and they know it. Did they really expect the miners to just abide by their proclamation, leave their money on the table and walk away from billions of dollars? Get real please. Legacy Bitcoin's seeds of destruction was sown when "self imposed managers" surreptitiously forced the back door activation of Segwit. The consequences and the follow on effects after Segwit2X activates, just dawned on them, and they find themselves "staring into the abyss".

People holding legacy bitcoin are going to lose their money, investment and nest egg, through no fault of their own. I can't even begin to think on how this fallout will devastate peoples lives. This will be a total wealth transfer from BTC to Bitcoin Cash. The lesson is simple. Leave Bitcoin alone. Bitcoin has no masters and takes no prisoners.

4) Disruption
If disruption to their services is what they hope to avoid by cancelling Segwit2X, I am afraid disruption is what they will get. Bitcoin is immutable code. Not managed protocol. Only Bitcoin Cash will remain on the current most secure Proof Of Work. There will be no more "opportunistic and contentious forks" from the Bitcoin blockchain in the future, after this episode plays out.

Bitcoin Cash does not need anybody to confer upon it the name Bitcoin. It just is. It always was. Should Bitcoin Cash worry about "Rouge" miners? I think not. We don't fear "Rouge" miners. Only  "Rouge" developers.

Core will have to change Segwit1X POW to survive and proclaim their chain to be the real Bitcoin. But it wont work. A chain with a different proof of work is not Bitcoin. They can tinker with Segwit on their chain as much as they like but without the economic incentives to follow, they will soon lose interest.

5) Final Analysis
a) I feel sorry for people who bought bitcoin after 1 August 2017. Theirs will be a huge loss. Buying in at up to $7500 and seeing it go to zero. Some of these people climb onto the bandwagon trusting bitcoin to be a store of value. To some this will be their life savings and they will see it disappear. I cannot express my sadness for these people. I covered this in my posts

BTC Is Dead. Long Live BTC.

BTC Is Dead. Long Live BTC, Updated and Explained ELI5

b) People who own BTC before August 1 got their allocation of Bitcoin Cash. The sad part is that most were persuaded by the dominant crypto media and forums to sell their Bitcoin Cash and buy more BTC. If they had taken that advice, they will end up penniless. Lesson for the media is, inform and educate, not indoctrinate. Will they learn? NO. At least they will know the pain of those they hurt if they took their own advice.

c) For fund managers who have divested their holdings of Bitcoin Cash, there will be much explanations ahead. Segwit1X without EDA protection always had a non zero existential threat of going to zero, a victim of the Chain Death Spiral. Not great to wake up one morning only to see a 100 million dollars bitcoin fund go to zero.

d) Coinbase would actually come out smelling like roses because they would have protected their customers from heir own folly, by witholding their BCH until January 2018.

5) Fear Uncertainity and Doubt?
In my earlier posts I placed a caveat hoping that I was wrong because the implications of people losing money and their savings through no fault of their own is too horrendous to comprehend. I am now convinced that I was not wrong. I am afraid. Very afraid.

Will this kill Bitcoin. Of course not, but hopefully we can put in place some programs to minimise the negative human cost of this momentous wealth transfer and its' aftermath. There will be many who will not believe in this coming apocalypse. All I can do is warn and inform. Must add that my posts have been censored from r/bitcoin.

6) Can It Be Averted?
Sadly no. In the long term, only one coin can remain on the current Bitcoin Proof Of Work, unless both coins have EDA. In the short term, that is in 4 days, some miners will start mining Segwit2X, thus starting this whole process of destruction and renewal of the Bitcoin landscape. I had previously expected it to happen in two stages. First the demise of Segwit1X and an extended tussle between Segwit2X and Bitcoin Cash over several months. It is now clear that the time frame for both these events has been compressed and will play out next week. When the dust settles, Bitcoin Cash will be the only coin left standing and will go on to achieve the predicted valuations of 1 million dollars a coin. I suppose we have to break eggs to make omelette.

We will know in 4 days nevertheless. When in doubt "Follow The Money". 



Footnote: Legacy Bitcoin mempool exceeded 100K. The chain is unusable for the majority of users. This is only 4 days away from the activation of Segwit2X. It is going to get worse. Much worse. Was not going to post until after the fork but the cancellation of Segwit2X changed that.