Termed as 'civil war' by many, Bitcoin's scaling debate has developers, miners and technical experts locked in a heated debate for the past two years.
Due to its growing popularity, bitcoin transaction volumes have increased exponentially which has now led to congestion in the network. As a result, it now takes more time and fee to verify transactions.
The scaling debate has stalled the technology’s development and now again poses uncertainty in which direction it is headed and what impact will this new tussle have on bitcoin's price.
The scare of a probable hard fork led to a massive sell-off in the cryptocurrency market over the past one week, where it nearly lost half of its market cap.
To solve the scaling issue, a group of bitcoin users committed to activate a user activated soft fork (UASF) on August 1. If a consensus is not reached by the deadline, there will be a blockchain split, leading to the formation of two currencies.
Here's a quick guide on what is about to happen and what one should do to secure their bitcoins during these turbulent times.
What is SegWit?
Short for segregated witness, it is a scaling solution proposed by the Bitcoin Core team. It aims to incorporate more transactions in the same block by removing signatures.
By August 1, if majority of miners (by hash power) do not show signal support for SegWit and only a few do, then this will lead to bitcoin’s blockchain to split in two — a hard fork.
What is a Hard Fork?
A hard fork is an event where a blockchain splits into two separate ledgers, based upon a fundamental change in rules governing the software’s protocols.
On August 1 at 05:30:00 GMT+0530 (India Standard Time), the bitcoin blockchain may experience what is known as a chain split.
A hard fork has previously been witnessed for Ethereum.
"This is not uncharted territory though; we have seen chain splits before, most noticeably in the case of Ethereum and Ethereum Classic, last year," Charles Hayter, Co-founder and CEO of CryptoCompare told Moneycontrol.
"Although there were hardened divisions, the divorce of those two chains began as a disagreement and turned to an amicable conscious uncoupling as both projects took different paths in monetary policy and more," he added.
What risks does a hard fork pose?
During this scenario, any bitcoins received could disappear from a user's wallet or can be a type of bitcoin that other people will not accept as payment, until the situation is resolved.
If this battle escalates further there is a chance for bitcoin’s exchange rates to drop sharply, even close to levels of zero.
"There are a number of risks from a hard fork situation — the risk of nefarious battles between chains where hashing power of miners may be pitted against supporters of the UASF is perhaps one of the more extraordinary of these," Hayter said.
"Attacks on the network by more hardened factions of the divide could cause problems for transactions as well. There could also be large delays in difficulty re-adjustments and block times on the lower hash power chain as mining difficulty re-targets," he added.
What precautions to take ahead of August 1 conclusion?
1. Bitcoin users should be aware of their wallets or exchanges intended path, post fork. Some exchanges, or services, don’t allow you to make a local backup copy of your private keys.
2. Some exchanges are looking to lock down withdrawals and this might be a consideration for some individuals who do not want to be at the mercy of a third party.
3. The key thing is to make sure your private key is yours or that you are with a reputable provider who manages keys on your behalf and will allow you to take advantage of both sides of the fork, Charles Hayter advises.
4. Bitcoin.org further advises users to stop accepting Bitcoin payments at least 12 hours before the August 1 deadline. "Although 24-48 hours earlier may be safer," they add.
5. If there are two chains, your private key will work on both, leaving you with the same number of coins you had at the time of the fork on both chain.
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