– Time for a public service announcement. So I have a previous video that really outlines all the different changes that are going on in the proposed features that are kind of at play for scaling bitcoin, but I’ve received a lot of questions lately around what the consequences of that might be, what a hardfork means for the network, and some kind of tactics in a way that you can minimize the risk when this all goes down.
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Now I really recommend you go watch my other video for kind of a technical breakdown of what Segwit is and what all these changes are, but in a nutshell, there is a new feature that users really want, but miners were initially very skeptical about. Now in recent months, miners have reluctantly agreed that they will activate this feature, but users kind of aren’t buying it and so they have a contingency plan called UASF which is supposed to go live on August 1st. And we’re really getting down to crunch time right now. The miners’ agreement is supposed to go live before August 1st, some time in late July, and users still don’t believe it’s going to happen and so there’s a good chance that UASF activates on August 1st.
To compound all this, some miners have actually said that if UASF activates, then they’ll go on fork again and create a user-activated hardfork which will just create more network fragmentation. Now I personally feel that a lot of this is just kind of muscle flexing on both the users’ side and the miners’ side around who controls the ability to say, yes, we will have this feature activated or not. Ultimately, my wish is that the users, the miners, and the bitcoin core developers could come together to agree on this, but that’s just not the case. And I kinda think that the miners have the most power here because they secure the network as it stands today with the proof of work that they’re submitting in order to mine blocks.
What’s the risk facing the users of the network?
So a lot of people are wondering, “What’s the risk facing the users of the network?” Essentially there’s a chance, and it’s getting more and more likely as we edge closer to the day, that bitcoin is going to fork in some shape or form into multiple block chains. So you’ll have bitcoin A, bitcoin B, and maybe bitcoin C. In a way, this is kind of actually testament to how resilient bitcoin is and this is kind of consensus working as expected or as designed in that anybody can fork the network if they want to play by a different set of rules. But it does have the potential to create all sorts of havoc with the network, and just the everyday use of the platform.
An analogy of this is imagine tomorrow there were two versions of Twitter and your login credentials worked on both versions of the site, TwitterA.com and TwitterB.com, and all history and all of the followers and everything that you’d done in the past was the same. The difference is that everything moving forward would be based on which version of Twitter you decided to post on, was it Twitter A or Twitter B? And obviously if the people that you follow were only posting on Twitter B, but you were viewing and logged in to Twitter A, you wouldn’t see what they were posting. And so while history is kind of locked in place, everything beyond the point of that fork or the multiple forks that could happen is uncertain and the network becomes fractured.
Well, the network fracturing has all sorts attack vectors that open up and there’s actually the potential for users losing money in all this kind of craziness. One of these attack vectors is called a replay attack and you’ve probably heard of this before. The way it goes is this. If there’s bitcoin A and bitcoin B, and I say, you know what, I really believe in bitcoin B as the chain I’m going to use and I continue to transact on that. So I start sending and signing transactions on bitcoin B and everything is working as expected on that chain. But because I’ve signed that and it’s cryptographically valid, somebody else on bitcoin A can take that same transaction and move the money out of my account on bitcoin A. Now the reason this becomes a problem is when networks fracture, users think, well, that means I can basically double my money, right?
I have the coins on the A and the B block chain. But the problem is if you start moving them around on the block chain that you favor less ’cause you’re like, I wanna cash these things out, somebody could take those transactions and empty out your wallet on the more valuable chain that is probably going to be the long-term one. So ultimately you don’t want to be transacting around the time of a fork or be underfork until you’ve seen how things have settled out. So if a fork occurs, the network can start acting weird and clients, you know, there’s many ways of interacting with bitcoin, different clients on mobile and desktop and web. They aren’t built to handle that network fork and so they start acting a little bit screwy. And for this reason, you’re going to see services such as Coinbase that have just announced that this is what they’ll do with their exchanged GDAX.
They’ll start halting all bitcoin transactions until they’ve had time to go away and figure out a game plan. Now because of this, it is super important that you hold your own private keys. If you have bitcoin currently stored in a service where you don’t have access to your private keys, or somebody else has access to and manages your private keys for you, you want to get off that service before we hit the end of July. And these are services like Exchanges, Bittracks, Gemini, Poloniex, but also online wallets like Zappo or Coinbase, that kind of thing, because as centralized companies, they’re gonna halt all service until they’ve figured out a way to minimize risk to their users. They don’t want to be liable for people losing millions of dollars in bitcoin because there’s these replay attacks and all sorts of other attacks happening as the network kind of fractures.
So the first piece of advice is to get your bitcoin off any centralized exchange or wallet into a client where you control your private keys. I personally store my bitcoin in a mix of paper wallets and a desktop client called Electrum, but I also did a video which I’ll link below that you should go check out about the different security risks of different levels of wallet. Really what you want to do is avoid the first category I mentioned in that video, which is the centralized wallets where you have no control over your keys. The reason this is so important is that if you have the keys that means you can unlock the coins that you own on any chain, no matter how many times it forks. A good thing to watch out for will be on Twitter and in the release notes of these clients to see how they’re handling or preparing for the upcoming fork.
I know Electrum, for instance, and the reason I’m a fan of it is that they’re gonna have a dialogue which actually allows you to select the chain that you’re looking at and interacting with. So while I believe they’ll default to the UASF fork if that happens, they’ll offer you the option to switch and make sure that you retain your private keys so you can use it wherever you want. The other second critical piece of advice is on July 31st and beyond, stop transacting, doing anything on bitcoin for a few days. Just sit and hold on your keys until you’ve figured out what is going on. In the days following a fork, we’re gonna get a lot more clarity around what the future might hold.
Now I don’t like speculating on price, but this kind of thing does have a huge impact on market confidence and you can kind of imagine the press attention it’s gonna get if bitcoin fractures or is deemed to have broken overnight. Historical block chain forks, something like Ethereum and Ethereum Classic, show that the hash rate of the network divides and often the price kind of goes inline with the hash rate distribution. So if 60% of miners go off to one chain, then that’ll probably get 60% of the current value and if the remaining 40% go off to another chain, the additional 40% of the current value will probably go there. There will be a split that takes place and it’s really up to the exchanges whether they decide to list both bitcoin A and bitcoin B, or they draw a line in the sand and say, “No, we’re only supporting the longest chain “or this one that we favor.”
So just to recap, the two main takeaways. One, you should get your money out of any centralized wallet or exchange and into a client where you control the private keys. Number two is that on July 31st and beyond, for a few days, do not send any transactions on the bitcoin network to avoid any susceptibility to replay attacks, attack vectors. Wait and see how things pan out. ‘Cause if you are frantically sending coins on different chains, there is a chance that you will potentially lose your money and this has happened to people in the past on, say, Ethereum, where there were block chain forks.
Again, I’ll link my two videos below, one explaining in more detail the kind of technical implications of what I’m talking about, but also too some wallets that you should look into for securing your private keys and your bitcoin before this all goes down. We have couple of weeks until this all takes effect, but I think that things are gonna get more and more choppy and more likely head towards a fork as we get close to the end of the month. So it’s a weekend right now. Go and mark your to-do list to secure your private keys in preparation for what’s gonna happen. Nobody can really predict how it’s gonna play out, but one way or another, it’s best for you to hold those private keys and then just wait it out when everything goes down.
Ultimately, I don’t think this is something to be too worried about as long as you’ve taken the safety precautions that I’ve mentioned, and the network’s gonna resolve itself in one way or another, it’s just about minimizing your risk and making sure that you’ve taken all the precautions you can. I hope this was helpful and answered your questions. If you have any further questions, just put them in the comments below and I’ll make sure to get back to you. All the best and good luck. I’ll be monitoring as well all of this situation as it unfolds over the coming month. It’s gonna be interesting.