Analyzing the SegWit2x Hard Fork

Analyzing the SegWit2x Hard Fork

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There’s been a lot of speculation and rumors about some changes that are about to take place in the world of cryptocurrencies. Particularly, Bitcoin, the biggest of them all is about to suffer a change in its infrastructure that’s supposedly going to improve it and this may or may not have significant consequences for the people who use the currency. To better understand this, we must first get in context about the current landscape of the market, so let’s quickly recap the series of events that lead us to the point we are now.

The New York Agreement

In May of this year, a great amount of companies signed what’s now called the New York Agreement. In this document, they state their support for a controversial upgrade in the bitcoin protocol commonly called the SegWit2x proposal. This proposal consists of two main changes to what was the current Bitcoin protocol by the time it was signed:

  1. It would enact an optimization called Segregated Witness (hence the SegWit acronym) which would significantly alter the way transactions take place.
  2. To increase the network’s block size from 1MB to 2MB sometime after the SegWit upgrade takes place.

The first phase of the upgrading process took place on August 1st and it activated successfully the SegWit optimization on all the nodes that were part of the fork. This triggered a countdown for the second part that is set to enter into effect when the block 494784 makes it to the blockchain. Although it can’t be predicted with exact precision, this is expected to happen around November 18.

Reactions

This move has had varied responses in the Bitcoin community, although most of its members are rather positive about it. In fact, the New York Agreement was signed initially by 58 companies 22 countries that put together represent more than 80% of the industry’s hashing power and over $5 billion on blockchain transactions. It’s worth noting that these numbers have varied since the initial signature of the agreement because some companies have opted out and some others have decided to join.

Not all reactions towards the agreement have been positive, though. The Bitcoin communities from Brazil and Argentina, for instance, have shown their concerns about the update to the algorithms. They claim that while they do support any intentions to improve Bitcoin’s protocol, they consider that the SegWit2x update is “ill-advised and unwarranted” for several reasons made public in this statement.

The SegWit2x proposal has been very controversial, but it is already on its way to reaching full deployment, so it is important to be prepared for the possible outcomes and the motivations behind this big, sudden change in the infrastructure of the world’s biggest cryptocurrency.

Understanding Forks

A cryptocurrency fork happens when two different nodes of a blockchain find a valid hash simultaneously. Both of these nodes will spread the hash they found to their peers and as a consequence, some of them will add a new block to the Blockchain based in one hash and some will add the other in the same spot of the blockchain. In the end, two different blockchains exist, meaning a new cryptocurrency, birthed from the original, starts circulating.

This is almost surely the scenario that will play out once the block size is increased. The Bitcoin nodes that don’t adopt the new protocol will still function under the old model of bitcoin and will most likely adopt a new name to keep their operations running. This kind of event has already happened at least once this year with the birth of Bitcoin Cash and many other times with other cryptocurrencies.

Motivations and Benefits

Both aspects of the SegWit2x update solve different problems that are currently affecting the Bitcoin market. First, the SegWit optimization allows more transactions to be stacked into a single block. Currently, it takes about ten minutes for a block to be processed by the Bitcoin protocol, this would allow a few more transactions to be processed in the same amount of time.

After the size of the blocks is increased, then transaction times and fees should be reduced drastically, helping all companies, miners, developers, and users involved in the Bitcoin market. This is a very much needed improvement in a market where some transactions can take several days to be processed. These issues were the main motivation to impulse these changes, and even though a part of the community is not willing to adopt this change, everyone agrees that all improvements with good intentions are welcome.

Benefits for Investors

Experience says that forks always have a significant impact on the market value of cryptocurrencies. Although it is uncertain whether this impact will be positive or not. It depends mostly on the expectations of the investors for the future of the currency after the change in the blockchain goes into effect.

For example, when the SegWit upgrade was implemented in August, a fork took place and Bitcoin Cash was born. Their approach towards faster blockchain transaction was a little bit different, but they still managed to come out with a high market value above what Bitcoin was worth the moment before it happened. On the other hand, Bitcoin rose significantly much more and actually reached unprecedented heights.

If this event repeats itself, then the prospect for Bitcoin for the upcoming months is very optimistic. However, you must be very cautious during the following days after the fork. Companies backing up the SegWit2x proposal do not plan to change the name of the currency resulting from this upgrade, so there could be a conflict with the blockchain maintained by the nodes who won’t adopt the change. You can invest as much as you want before it happens, but try to keep transactions at the minimum while the dust settles.

Whether you are an investor or not, this fork represents an important inflection point in the history of Bitcoin, and keeping an eye on the outcome might open some door for you.

Please share your opinion about the news in the comments.

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