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The Blocksize Wars: Bitcoin’s Existential Crisis - Part 2: The DAO Hack

May 21, 2023
byNDAX Labs

Big Blockers vs. Small Blockers

Increasing Bitcoin's block size didn't appeal to everyone. In order to keep transactions cheap, big blockers prefer not to fill blocks to the brim. Even so, small blockers believed that full blocks were needed in the long run.

No fee bidding occurs if there are no surplus transactions. If transaction fees are not charged, the miners would be less motivated to mine blocks as the block reward halved every four years.

In the fee market, this is known as a death spiral. It was apparent that small blockers favoured sustainability over faster adoption.

A number of conferences were organized worldwide to discuss scaling during the blocksize war. The first one was in Montreal and, when it became clear an 8MB block size increase wasn’t the best option, later again in Hong Kong. (It was pretty much over for Bitcoin XT, but there was still the possibility of increasing the size to 2 MB.)

Rather than doing a hard fork, Bitcoin developer Pieter Wuille was able to expand the block size without doing a hard fork. The new client wasn’t incompatible with the old one as a result. The solution was known as Segregated Witness or SegWit.

A hard fork and its potentially associated chain split were a major victory for small blockers. A major problem was SegWit's complexity. A lot of developers didn’t understand it.

To activate SegWit, 95% of miners (the overwhelming majority) would need to signal their support for SegWit first.

But the reason the SegWit soft fork was even considered in the first place was its ability to enable the Lightning Network–a Bitcoin 2nd-layer scaling solution that would relieve the Bitcoin network from even needing larger blocks. This meant that a single blockchain entry could contain millions of smaller lightning transactions that were settled instantly off the mainchain, and then ‘settled up’ on the Bitcoin mainchain in one big bundle at some later time.

Higher demand and smaller blocks led to rising fees that dissuaded merchants. For the big blockers, who were more concerned with Bitcoin's business side (mainstream adoption and usability), this was frustrating.

Mike Hearn's Resignation and the Rise of Bitcoin Classic

Due to frustration with the debate, Mike Hearn, who developed Bitcoin XT, declared Bitcoin a failure in January 2016 and sold all his coins.

The co-CEO of Bitmain, an equipment manufacturer and operator of mining pools, Jihan Wu, somewhat replaced Hearn post-resignation.

The industry's major players supported Bitcoin Classic after Bitcoin XT was pronounced dead. But when it came to its activation, Bitcoin Classic had massive weaknesses, which could only be understood by highly technical people.

There seemed to be a major crisis emerging and a split coming up for Bitcoin. Despite the fact that the large block side was more powerful than ever before, the small blockers still had tricks left in their arsenal. A devastating collapse seemed imminent for Bitcoin.

Craig "Faketoshi" Wright

A new player joined the game after Jihan Wu: Craig Wright. One of the big blockers, Craig Wright, claimed to be Satoshi Nakamoto. Moreover, well-known American software developer and Bitcoin contributor Gavin Andresen publicly stated that he had seen cryptographic evidence in support of this claim.

It was at this point that things began to go south for the big blockers. Many people believed in Faketoshi (despite the fact that he was an obvious con man, a fact recently ruled in a UK courtroom in 2022).

Wright simply lacked the necessary technical knowledge to answer questions regarding Bitcoin's protocol. As opposed to simply proving Satoshi's identity with the cryptographic signature required to move the first coins mined by Satoshi, Wright wrote a blog post ‘stating his identity’.

The DAO Hack

Another incident that enabled small blockers to gain an edge was the Ethereum DAO hack.

In response to the theft of 3.6 million Ether held by the DAO, the Ethereum Foundation decided to implement a hard fork, restoring all funds to users.

(In the aftermath, Ethereum broke up into Ethereum and Ethereum Classic, with Ethereum Classic retaining the unforked blockchain of ETH. It is also worth mentioning that Ethereum Classic is still alive despite the hard-forked Ethereum being many times bigger today.)

It was a preview of what the miners might encounter if Bitcoin was hard-forked, which was a scary picture. It was unlikely that Bitcoin Classic would replace Bitcoin. The two would split and coexist. With Bitcoin Classic losing traction, Bitcoin Unlimited emerged as a new idea, thanks to big blockers.

Bitcoin Unlimited

In addition to the block size limit, Bitcoin Unlimited also wanted to change other things, resulting in an unreliable project and a difficult communication process. By this point, tensions in the community were rising and the war was becoming more heated.

In the past, big blockers were sure they’d win once the market decided which Bitcoin was better. That assumption turned out to be incorrect.

Token prices for Bitcoin Unlimited never exceeded 20% of Bitcoin's price. By the end of 2017, Bitcoin Unlimited tokens were worthless, and there were no Bitcoin Unlimited-related chain splits.

SegWit testing on Litecoin

In addition to Bitcoin, Litecoin had an activation threshold of 75%. In fact, the small blockers discussed Litecoin as a good way to test out SegWit.

Because Litecoin gained a step ahead of Bitcoin's development, the Litecoin community welcomed the soft fork with enthusiasm. (Litecoin had also been subject to the same block size debates.)

Whatever the case, SegWit was implemented on Litecoin in May 2017. During the course of these actions, a new strategy emerged: User Activated Softfork (UASF).

Instead of miners needing to signal for SegWit, users could run a node that signalled for SegWit. If sufficient blocks were sent to SegWit nodes, the miners would also need to switch to SegWit if they wished to accept non-SegWit blocks.

Although the UASF hadn't been used yet, the fact that this worked proved the miners were not in control of the network at all. Bitcoin nodes and the end-users were/are.

The New York Agreement

A short time later, the New York Agreement brought the war to a new height. In May 2017, Barry Silbert (whom you may know as the founder of DCG–(Digital Currency Group) which owns GBTC (the Grayscale Bitcoin Trust)–a publicly traded bitcoin vehicle, and the largest bitcoin holder today) met behind closed doors in New York with Jihan Wu. During the meeting, there was an agreement regarding the direction Bitcoin should take going forward.

It hoped to resolve the conflict through a soft fork and a hard fork. It basically boiled down to one thing for small blockers while the large blockers’ agenda amounted to an attack on Bitcoin users and miners by bitcoin institutions. This was the first time Bitcoin fended off an attack vying for protocol control: And bitcoin walked away stronger than ever, and resolutely belonging to its users rather than large institutions–be they bitcoiners or banks.

SegWit, the first aspect of the contract, had problems during activation. It wasn't uncommon for miners to flag bugs all over the place and at inconvenient places, or be told they were running a client which wasn't even available yet. In brief; the kind of software update that has caused more than a few cases of Bitcoiner PTSD.

Nevertheless, SegWit was activated on Bitcoin. A situation that was almost unimaginable during the blocksize war. The reason? Due to the possibility of a soft fork initiated by a user. SegWit was activated, but this was only the first step of the New York Agreement…

Another part of the proposal was a hard fork to a 2 MB block size limit, referred to as the 2X of SegWit2x. But as far as industry players were concerned, it was supposed to remain Bitcoin (soft fork)--i.e. not a different, or new coin (hard fork).

As the large blockers became convinced that this part of the agreement wasn’t going to work, they started thinking of new solutions. It was only a matter of time before this new line of thinking yielded: Bitcoin Cash.

Bitcoin vs. Bitcoin Cash

During this time, Roger Ver also took part in the war. Bitcoin excited Roger Ver to no end, which is probably how he earned the moniker of Bitcoin Jesus. During the early days of Bitcoin, Ver promoted the currency relentlessly and was most interested in its payment features. During the block size war that followed, he became a major big blocker. Plus, he owned Bitcoin.com.

Bitcoin Cash was born; just one month after it was conceived, it launched. Meanwhile, some New York Agreement supporters began withdrawing because the implementation lacked replay protection, creating an attack vector.

The 2x part never got implemented. Even though Bitcoin Cash exists today, it does not hold a fraction of the market share (or hash power) of Bitcoin.

In an email sent to the SegWit2x mailing list on Wednesday, November 8, 2017, it was announced that the second phase had been abandoned. As a result, the small blockers prevailed. The battle was over. Or is it?

In summary, the blocksize wars were a battle for control over Bitcoin’s protocol rules, that culminated in 2017. It consisted of two camps: The small blockers wanted to keep Bitcoin’s block size small (like it is today), while the large blockers pushed for an increase in Bitcoin’s block size. In this debate over the data size of Bitcoin’s blockchain blocks, small blockers argued that blocksize needs to remain small to give end users the option to easily run a node (and therefore a more decentralized system), while the big blockers sought cheaper and faster transactions (by increasing the block size–solution that today has all but been made obsolete by Layer 2 scaling solutions like The Lightning Network). In the end, because Bitcoin cannot be controlled by anyone other than a consensus of its users (which includes miners and node operators as well as holders and transactors), the network’s main beneficiaries won out at the expense of large centralized institutions (who sought to centralize–and therefore exert more control over–the network). By defending the network’s integrity and decentralization, Bitcoin won and proved that it was truly not a network that could be controlled by large powerful institutions–whether banks, governments, or for that matter, important bitcoiners.

What Does the Future Hold for Bitcoin?

The more popular Bitcoin becomes, the more incentives there will be to co-opt it. As a decentralized and consensus-based protocol, increasing Bitcoin's infrastructure and systems will only make it more resistant to bad actors… But there is a need for more education on what Bitcoin is and why it matters (including its block size(s).

It seems the most important way to avoid a second Blocksize War–or any other existential crisis for the protocol–is to continue to encourage education, adoption, and to align incentives in the Bitcoin (and crypto) communities. In order to make Bitcoin a mainstream currency, we must remember what it represents and what it stands for; Our only chance for a truly neutral, decentralized and permissionless currency, and hence a crucial arrow in our quest to build a fair and prosperous future for everyone in the world.

Disclaimer: This article is not intended to provide investment, legal, accounting, tax or any other advice and should not be relied on in that or any other regard. The information contained herein is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of cryptocurrencies or otherwise.