Dr. Adam Back on Bitcoin Scalability, the Dangers of SegWit2x, and the Future of the Sidechain Technology

16.10.2017

SegWit2x, a Bitcoin hardfork expected to become effective this November, is among the most talked-about and somewhat disputable matters in the community. ForkLog talked with Dr. Adam Back, the CEO of Blockstream and one of the world’s leading Bitcoin developers, to find out what’s that dangerous about it, and how to prepare yourself for that.

We met with Mr. Back at the recent Hackers Congress in Prague’s Paralelni Polis where he also spoke on the issues of Bitcoin’s privacy, fungibility and scalability (video available here).

Aside from SegWit2x, we also managed to talk about the recent emergence of Bitcoin Cash, the exchanges’ stance towards the fork, and the role of full nodes in the ecosystem, as well as the sources of today’s ideological standoff in the community, and the sidechain technology Liquid that Blockstream has been developing for a few years now.

Photo: Pavel Sinagl, Paralelni Polis

ForkLog: Blocksize debate is the hottest topic at the moment. Tensions are high, and one of the latest big news was about Bitfinex making a statement on possible SegWit2x fork. At the same time companies like Coinbase still failed to express their position clearly. What’s your view on the current situation on the market?

Adam Back: Any exchange has two basic possibilities; one is to support two tokens, something that Bitfinex is proposing. The first thing they announced was futures contract, and the second thing was about how they handle the hardfork. Basically, they are not intending to change the ticker, so Bitcoin stays BTC, and the new fork becomes B2X. They also said something interesting which is, that even if B2X would get more hashrate they would still consider Bitcoin as BTC.

I personally think it’s a good decision because otherwise things would be confusing for someone who is not following the events closely. If some people have Bitcoin in their investment portfolio or they bought it a long time ago, they might be not tracking it and it’s very confusing and concerning if its name changes. I mean, you thought you owned it, then you look at it and you see the price has changed. I think there were cases when people bought the wrong coin because the name was confusing, like Bitcoin Cash. There were two tickers, they tried to choose BCC, and it was the coin that already existed [Bitconnect – ForkLog]. So it’s important the name is unambiguous for users who are not technical experts.

I think Bitfinex’s point is that they are not taking sides so that they don’t confuse people that trade. They have to be unambiguous and they don’t want change the name of the traded token. Some other exchanges seem to be undecided on what to do yet.

So far there hasn’t been too much volume on the future contract, but it’s looking like Bcash with the forked coin value being maybe 25 per cent at the best.

The bigger question is, if it continues it will get very confusing for users. You have to be sure that if you go to a shop and pay with Bitcoin, you don’t pay to a Bitcoin Cash address or Bitcoin2x address. If this happens someone has to reverse it, to do things manually to undo the mistake. And, of course, it gets worse with the replay attack protection when you can see transactions on both chains. So, it seems like it is going to create a lot of work for a lot of people, and confuse a lot of people.

ForkLog: At some point B2x developers rejected the very idea of implementing the replay attack protection, then it looked like they were willing to change their minds. Still, there’s plenty of confusion and contradicting reports.

Adam Back: Well, they implemented something, but it looks like they are going to change it again. There were discussions that they were going to change it to a different mechanism. So what I think possibly might happen is it will be like what happened with Bitcoin Cash. Originally they didn’t want any replay protection at all and said ‘no’, but then a number of exchanges said “Hey, we won’t list it if you don’t have replay protection.” So just days before the launch they added replay protection. It was kind of dangerous in terms of not much testing. But it looks like the 2x development guys, mostly Jeff Garzik, are thinking about it. Yesterday I saw Jeff talking about using a special address that is intentionally invalid on the 2x chain so you could send to it to split coins. But it looks like they are considering changing it.

Photo: Pavel Sinagl, Paralelni Polis

ForkLog: All this might sound too complicated to regular users.

Adam Back.: That’s the thing, right? It’s a lot of work for the companies, but they have programmers. So what this means to regular users like you and me? It took me a lot of time to split my Bcash coins and I was very nervous inserting my keys because I didn’t know if the software was good and it’s the same keys that control Bitcoin. So there’s a high possibility that people will lose money in that mess. Also, 2x is even worse than BCash. BCash at least had replay protection and its transaction format is intentionally different from Bitcoin.

ForkLog: So what is most likely scenario comes November?

Adam Back: Well, if nothing changes, I guess people will run split software, and exchanges will suspend trading, deposits and withdrawals. This will protect the exchange environment, but for all the people with smartphone wallets or HD-wallets, they’ll all have to read FAQs and ask the technical teams to help them to figure out how to be safe after the fork. So indeed, it’s quite complicated for many people.

ForkLog: Could there be risks that some companies, BitPay for one, could lose some part of their business after making statements on SegWit and SegWit2x and urging users to upgrade their software to the BTC1 client? People know BitPay as big processor which allows you to pay with Bitcoin, and I guess some users could be unprepared for such developments.

Adam Back: Presumably, they will have to support both. There are a lot of shops receiving Bitcoin, and when people come to a shop and they want to pay, they find 95 percent of the shops don’t accept what they want to spend. So I think they will have to accept both. It will be pretty confusing otherwise. Also, if they don’t change the address format, I don’t know. Bitcoin Cash made replay protection, but still there were a lot of people who sent Bitcoin to BCash addresses, and the other way around.

Basically, I don’t think many companies involved will have the time and resources to prepare for the fork between now and November. A number of them still don’t support BCash, and that was a while ago. And it was easier with BCash. There are exchanges where they are still holding your BCash.

ForkLog: There’s a lot of debate and contradicting views on the importance of full nodes. Is the economical majority’s role really important, maybe even to an extent where full nodes are capable of preventing forks?

Adam Back: You are definitely much safer with a full node than without one. Some of the smartphone wallets have features that allow connecting your device to your own full node, even on the Tor. On an important note, an SPV wallet can’t fully tell what’s going on, so in the event of this fork an SPV wallet can be confused.

ForkLog: Does this affect Electrum, which is quite popular among users?

Adam Back: It depends on the type of the wallet. Some wallets talk to a server and do what the server says; some older ones can be very confused. Sometimes they will see one network, and when they will want to get you to other peers, it’s a different network. So at least those wallets talking to a server they won’t get confused. This is, for example, what GreenAddress does, it talks to a server and checks the network, and if it’s a different network it gives you a warning and stops you. And you can also optionally configure it to talk to your own full node, so that in the end my wallet doesn’t do anything different that my network doesn’t agree with. Probably the best thing to do is not to do any transactions at all, for like a few weeks afterwards to see what happens.

Speaking of full nodes, if miners can force a change, and I think they can force anything these days. If we remember the first halving, when the miners’ reward went from 50 BTC to 25 BTC, there was a small set of miners that didn’t change the software and they kept mining 50 BTC. In the end everyone ignored their blocks. So basically it shows that economic full nodes of people who own their own Bitcoins and business as well that it is what controls the rules of Bitcoin. Miners might choose to mine Bitcoin or not, but those nodes will ignore them. So it doesn’t look much different from mining an altcoin that has the same Proof-of-Work consensus mechanism.

ForkLog: If you take a look back in the past, like five years ago, it at least seemed that people were happy to play the same game and follow the same rules. When do you think it all started in the first place with different people, different groups of developers pushing their own ideas about how Bitcoin should work? Was the main incentive economic or political one?

Adam Back: I think that people who were running services and shops, they really didn’t care as long it was cheap and easy. And then, with notable people starting using Bitcoin for different reasons, things got different. The most valuable and interesting transaction is a transaction you make with Bitcoin, because you want privacy or possibly you don’t want to send money from your bank account, or any other grey market reasons. So mostly people who are actually using Bitcoin where it’s uniquely valuable, they are not talking about it because they want privacy. In most countries things like debit cards and cash work just fine, but the other thing is there are countries with hyperinflation, and it’s interesting for them, because their own currency is so bad even Bitcoin looks good.

That’s about the valuable transactions. And then I also think there were people who had an idea that what is interesting in Bitcoin is its free and cheap transactions. But Bitcoin transactions are inherently more expensive because there is mining, which uses millions and millions of dollars every day. And then there are thousands of full nodes that you can see on the network, and all these things are expensive too. A central server is actually cheaper. So, if Bitcoin is just about cheap payments then banks can compete, they have lots of money, more integration, and more users. Where Bitcoin can compete is things that banks cannot do. And what banks cannot do is to give you instant signup. Actually, you don’t need any signup at all, just install the app and receive the money. Banks can’t do that for regulation reasons, and banks won’t allow you to send money to someone who doesn’t have a bank account.

Photo: Pavel Sinagl, Paralelni Polis

So I think the argument started because some people whose business was to popularize retail Bitcoin use weren’t too happy. I mean, it’s fine to popularize Bitcoin because people learn, but when you have to make a choice where you lose the permissionlessness and resistance to get cheap transactions. So that’s where the argument has started. And I personally think we can still get the scale without sacrificing decentralization and permissionlessness using things like Lightning Network. Also, if you end up making Bitcoin centralized, it’s not so interesting any more. If it’s run by big businesses likely using extensions like PayPal or Visa, then governments can say something like “Hey, stop that payment.” And it’s not even legal for them to ask to do that.

So, if you want to make cheap centralized systems you can do that today on top of Bitcoin. Just set up a web-site, hold the Bitcoins from people and transfer them to a bank account, make a federated version of it. There are people who transfer maybe a hundred dollars via bank and they don’t care about privacy. But this also imposes reduced value to Bitcoin.

The other problem is that people who want to do this, they don’t have enough expertise and resources to build it. It sounds good when you say you want to build such a system, but they don’t have the expertise. They go to developers and ask to solve issues, but developers are too busy, they’ve got a lot of work on Bitcoin scaling already, and they get no money for this so no one can tell them what to do. So you can look at it as an attempt to force the change so that retail use case gets the scale it wants.

ForkLog: What is happening with Blockstream’s sidechains project?

Adam Back: We have integrations with a number of exchanges, particularly in Japan where there are big volumes right now, in the U.S., then there’s also Bitfinex and some others. The point is you can put Bitcoin into a sidechain and you can transact it more quickly. So exchanges are using their own money, not the users’ funds. Now we are in a beta stage and when we go live in a few months’ time they will offer this option.

Also, in the next version we are adding fiat, so basically you’ll be able to deposit money into your exchange and get your coins or all other currencies that will be usable on another exchange. Partly why people are interested in Liquid is an opportunity to make money quickly so they can do arbitrage. Today moving bitcoins is only half of a trade, you also need to move dollars as well. But you have to wait for that other half of the trade, and with a wire transfer it can takes days or even weeks. So what Liquid offers is depositing the money via wire transfer, then you get the coins and you can store them in your account’s balance. Afterwards you can transfer them to a different exchange with the same integration.

Dr. Adam Back was interviewed by Andrew Asmakov

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Tags: Adam Back, Bitcoin, Blockstream, hardfork, Liquid, sidechains