The Blocksize War – Chapter 21 – Victory

Chapter 21 of the book The Blocksize War is published below. The full book is available on Amazon. As a reminder, 50% of any profits from physical book sales will be donated to Médecins Sans Frontières, a charity that provides medical assistance to people affected by conflict, epidemics, disasters, or exclusion from healthcare.*

* Note: Applies to sales up until the earlier of i. the death of the author and ii. January 2031

The Blocksize War – Chapter 21 – Victory

On Wednesday, November 8, 2017, at 4.58pm UTC, with just one week to go until activation of SegWit2x, an email was sent to the SegWit2x mailing list from Mike Belshe, also signed by the other prominent SegWit2x supporters. The email was essentially an unconditional surrender; phase two of the NYA was officially abandoned. The SegWit2x supporters had little choice: had they gone ahead, it would merely have resulted in a new alternative coin that would have been less popular than Bitcoin Cash. It is at this point, 816 days after the war commenced, that I mark the formal cessation of hostilities.

The Segwit2x effort began in May with a simple purpose: to increase the blocksize and improve Bitcoin scalability. At the time, the Bitcoin community was in crisis after nearly 3 years of heavy debate, and consensus for Segwit seemed like a distant mirage with only 30% support among miners. Segwit2x found its first success in August, as it broke the deadlock and quickly led to Segwit’s successful activation. Since that time, the team shifted its efforts to phase two of the project – a 2MB blocksize increase.

Our goal has always been a smooth upgrade for Bitcoin. Although we strongly believe in the need for a larger blocksize, there is something we believe is even more important: keeping the community together. Unfortunately, it is clear that we have not built sufficient consensus for a clean blocksize upgrade at this time. Continuing on the current path could divide the community and be a setback to Bitcoin’s growth. This was never the goal of Segwit2x.

As fees rise on the blockchain, we believe it will eventually become obvious that on-chain capacity increases are necessary. When that happens, we hope the community will come together and find a solution, possibly with a blocksize increase. Until then, we are suspending our plans for the upcoming 2MB upgrade.

We want to thank everyone that contributed constructively to Segwit2x, whether you were in favor or against. Your efforts are what makes Bitcoin great. Bitcoin remains the greatest form of money mankind has ever seen, and we remain dedicated to protecting and fostering its growth worldwide.

Mike Belshe, Wences Casares, Jihan Wu, Jeff Garzik, Peter Smith and Erik Voorhees

With Bitcoin XT, Bitcoin Classic and Bitcoin Unlimited all falling, and now BTC1 being formally withdrawn by the proponents, the war was over. The large blockers were exhausted; they could see their methodologies did not work and there was no way they were going to launch another contentious hardfork proposal. After more than two years of intense war, this was a sensational victory for the smaller blockers. They finally had their way, not only with respect to the blocksize limit itself, but crucially with respect to how to change the protocol rules. It was now, finally, widely accepted that arranging meetings with large corporates in the space and trying to decide on changes to the protocol rules would not work. The majority of miners also did not have the ability to relax protocol rules. If one wants to change the protocol rules, one has to persuade and campaign for the support of end users and investors, who need to opt-in to the new rules. It was ordinary users who had the final decision-making power, and this was the financial sovereignty that made Bitcoin unique and compelling. After an astounding victory, the small block narrative, that end users had to agree to protocol rule changes, was finally seen as compelling. 

However, not everyone agreed. Some people, particularly some of the large blockers, interpreted the war as a battle between Bitcoin Core and the miners. In their minds, Bitcoin Core had won and the miners had lost, therefore the Bitcoin Core developers now controlled Bitcoin. This view was still held, despite the fact that Bitcoin Core never implemented the UASF. In some people’s minds, the idea of a system controlled by end users is too difficult to grasp. Instead, they look for somebody or some entity who controls the system. Some people cannot fathom the idea of a system which has global consensus, but lacks a leader. In their minds, in 2015, Gavin was the leader, then it was Jihan and now it was Bitcoin Core. As for whether Bitcoin really is the leaderless system it proclaims to be and whether this will always remain the case, the jury is still out. However, after the drama and shenanigans of the blocksize war, one thing is clear: there is still hope that the claim is true.

When news of SegWit2x’s abandonment was released, it caused a tremendous increase in the value of Bitcoin Cash, which was now the last coin standing as far as the large blockers were concerned. On Sunday, November 12, 2017, as the wider cryptocurrency bubble was in full swing, Bitcoin Cash had a monumental rally. Before Mike’s email a few days earlier, Bitcoin Cash traded at around eight percent of the Bitcoin price. However, a couple of days later it reached a peak of around 48 percent of the Bitcoin price, before crashing shortly afterwards. As Bitcoin Cash reached the peak, most small blockers were still delighted about their recent victory and celebrating. However, it is difficult to believe that they didn’t have a few nervous moments contemplating the possibility that they could lose their crown as the largest market capitalisation coin. The rally was said to be driven by retail investors from South Korea, who in this period were particularly frenzied when it came to cryptocurrency markets. However, the rally quickly fizzled out.

During the Bitcoin Cash price boom of November 2017, the large blockers were incredibly excited about their massive gains. Some of those I spoke to had purchased more Bitcoin Cash at the height of the bubble, hoping it would overtake Bitcoin. There was a large block Telegram group at the time called “Chain Death”, referring to the potential death of the Bitcoin chain and rise of Bitcoin Cash as the dominant coin. I did not have access to this group, however a member showed me some of the chats on his screen. The group included many prominent large blockers and, during the price rally in November 2017, the activity was intense and the atmosphere in the group was one of sheer jubilation.

The idea of “chain death” was that, at some point, the Bitcoin Cash price would increase, due perhaps to its superior utility as a medium of exchange. This would then make Bitcoin Cash more profitable to mine, driving miners away from Bitcoin and towards Bitcoin Cash. At this point, the Bitcoin chain would grind to a halt and not be extended. Bitcoin would then die and Bitcoin Cash would reign supreme. Of course, Bitcoin had a difficulty-adjustment mechanism to defend against this, however that took two weeks to adjust. In the minds of the large blockers, it was possible to kill the Bitcoin chain before this difficulty adjustment occurred. In the minds of small blockers, this hope from the large blockers was sheer idiocy. After all, the small blockers were the patient ones; they would just wait for the difficulty to adjust, no matter how long it took. There was also the matter of the Bitcoin Cash difficulty adjustment, which is much faster than the two weeks in Bitcoin. If the Bitcoin Cash price increased and more miners joined, the Bitcoin Cash difficulty would increase, thereby driving miners back to Bitcoin before the Bitcoin difficulty ever adjusted downwards. The large blockers never seemed to appreciate this aspect of the difficulty adjustment, at least not in this period.

On November 15, when the SegWit2x activation point finally came around, it emerged that the client was full of critical bugs. The hardfork was supposed to occur at block height 494,784, however, for some reason, the BTC1 clients became stuck two blocks early at height 494,782. Due to errors in the implementation, the client implemented some aspects the hardfork two blocks earlier than expected. This could have been a disaster for exchanges, which intended to take snapshots of user balances at the hardfork block height. In addition to this, there were other critical bugs in BTC1, making mining on the SegWit2x chain impossible. Jeff first denied there was a problem, before fixing the issue a few days later. Due to these catastrophic bugs, the SegWit2x chain never existed and no blocks on the chain were ever produced. However, even more important than the technical failings of SegWit2x was that it was also defeated using political and economic means. A resounding defeat when looked at through any one of the relevant lenses.

On December 20, 2017, there were more Bitcoin Cash trading shenanigans. Coinbase had listed Bitcoin Cash and, in the excitement, the coin traded as high as US$8,500. A record in US dollar terms, but not as high as the November peak in Bitcoin terms. As soon as the coin listed, Coinbase couldn’t handle the demand and the system experienced large delays. This was very much a botched listing, and some of the small blockers, who did not have a favourable view of Coinbase due to its support of Bitcoin XT, Bitcoin Classic and even Bitcoin Unlimited, took a dim view of the situation. They accused Coinbase of insider dealing-related offences, essentially leaking this information to large blockers before Bitcoin Cash was listed.

As for Roger Ver, who had been a relentless promoter of larger blocks and a hardfork, he had now become the major promoter of Bitcoin Cash, along with Bitmain. They arranged conferences, events, parties, encouraged merchant adoption, gave away merchandise and free coins, all promoting Bitcoin Cash. They must have spent tens of millions of dollars tirelessly promoting the coin for years.

However, in spite of these efforts, the coin never really gained traction compared to Bitcoin. Over the next few years, Bitcoin Cash underperformed Bitcoin with respect to price. Not only that, but Bitcoin Cash even had lower on-chain transaction volume than Bitcoin, when on-chain throughput and a blocksize limit increase was said to be the primary driver behind the coin. Even worse, by March 2018 it emerged that Bitcoin Cash on-chain volume was even lower than SegWit volume on Bitcoin. SegWit had increased on-chain transaction volume faster than Bitcoin Cash. The main narrative behind Bitcoin Cash, larger blocks, had been almost entirely obliterated. However, the key point to the large blockers was not about actual transaction volume, it was about philosophy of surplus capacity; such that, if demand did come, blocks would not fill up.

When this war was ancient history, in August 2018, Bitmain attempted to conduct an IPO in Hong Kong. The listing documents indicated that Bitmain invested more than US$888 million into Bitcoin Cash. This was the majority of the free cash flow the company had generated in the 2017 cryptocurrency bull market. At this point, the price performance of Bitcoin Cash had been weak and the company had experienced heavy mark-to-market losses. Jihan had been a passionate advocate of larger blockers and a relentless warrior in a fight that lasted more than two years. However, he had let this cloud his judgement and made poor investment decisions. Bitmain incurred heavy losses in Bitcoin Cash.

In part due to the difficulties of conducting a hardfork in Bitcoin, the Bitcoin Cash community opted for a different approach. They conducted a hardfork every six months, in May and November of each year. In November 2018, just over one year since Bitcoin Cash had launched, there were tensions in the Bitcoin Cash community. Craig Wright (The “fake Satoshi”), who had been propped up by many members of the large block community in the past, pops his head into the story once again. Craig had wanted the blocksize limit to be increased to an even more aggressive schedule than many other sections of the Bitcoin Cash community wanted, repeating and regurgitating many of the narrative points the large blockers had used in the blocksize war a few years earlier. Exploiting the scheduled hardfork date of November 15, Bitcoin Cash split into two coins: one following Bitcoin ABC, and one following Bitcoin Satoshi’s Vision, Craig’s chosen coin. The Bitcoin ABC side kept the name Bitcoin Cash, while Bitcoin Satoshi’s Vision became known as BSV. As a result of the split and the resulting uncertainty, the value of Bitcoin Cash compared to Bitcoin continued to decline. Just as the small blockers had expected, some of the large blockers began to slowly see merit in the idea that, in the event of a dispute over the rules, the original rule set is a key schelling point. If one diverts from this philosophy, the risk is that the coin continues to split into smaller and smaller factions. The large blockers were painfully experiencing this first-hand. 

On November 8, 2018, at the height of the battle between Bitcoin ABC and BSV, Roger Ver, arch large blocker, said the following in a revealing video blog:

One thing that I guess I have learnt a little bit here, is that the [Bitcoin] Core people previously were really really really opposed to any sort of contentious hardfork and I think there is some merit to being afraid of that, because we are seeing right now the damage that can be caused by having a contentious hardfork

At the time of writing in early 2021, Bitcoin Cash trades at around one percent of the price of Bitcoin and it is widely accepted in the space that the path chosen by the large blockers in the summer of 2017 was not the most effective way forward.

However, with respect to the narrow issue of blocksize, the resounding victory for the small blockers does not prove they were correct. On the face of it, Bitcoin has been a tremendous success. Bitcoin has appreciated significantly in value over the years, and the digital gold thesis is proving more relevant. The more patient small block approach looks to have been correct. However, perhaps a moderate blocksize limit increase hardfork, to buy more capacity for a few years, could also have been a good path to take. If this path was chosen, maybe Bitcoin would have been even more successful and retained more merchant adoption. We will never know.

While there is uncertainty over who was right on the narrow blocksize issue, there is now little doubt when it comes to the broader issue of the flexibility of the consensus rules and how to change them: the small blockers were on the right side of history. For some of the more extreme small blockers, this was never in doubt: end users always controlled Bitcoin, and the large blockers never had a real chance of winning the war. However, from reading this book, you may reach a different conclusion. The large blockers could have won this war, and they came pretty close. At the start of the conflict, the large blockers had significant support. It was only due to an extraordinary series of events, and several monumental tactical blunders from the large block camp, that crisis was averted and the small blockers succeeded in changing the minds of the community and eventually emerged as resounding victors. 

In essence, this story is about how the small blockers had constructed a more compelling and attractive narrative than the larger blockers. A new form of money where the users set the rules, simply made for a better story than a high capacity, low fee, global payment system, irrespective of the truth of either claim. Money is ultimately a collective confidence game, the small blockers proved themselves to be quite effective players of the game and for this they were rewarded, with their victory.

Over this two-year battle, the small blockers and users had overcome the miners and the large businesses in the space, and, despite their large blocker adversaries investing literally hundreds of millions of dollars into the cause, the small blockers won an incredible and resounding victory. Bitcoin demonstrated that it could be the user-controlled money, that it was always meant to be. 

However, there is no guarantee this user-controlled money characteristic will persist forever. The blocksize war only bought Bitcoin time, several more years. This war may only be dry run for the challenges to come, when the primary beneficiaries of the centrally-controlled monetary systems finally realise the potential of user-driven money and they may not like it. These future battles may be over censorship resistance, rather than scaling and the blocksize limit. This time, the financial and political establishment are likely to initiate the conflict. They may throw considerable resources at the problem, and the pressure on the system will be immense once again. No doubt history will repeat itself, as the establishment fail to appreciate some of the nuances in the incentives, making blunders on the way, providing users with potential tactical advantages to exploit. The outcome here is far from certain. 

However, at least for now, the dream of a world where ordinary people have ultimate and direct control over the rules that govern their money, lives on.