Bitcoin: Social Crypto Networks
Social Crypto Networks
Just as Facebook, which is not currently a crypto-network, needs to maintain users to monetise their attention as the currency in its social network by charging marketing firms to display ads to users, the size of a crypto-network is a major driver of its price valuation. Without any underlying users, the network would not be of value to anyone.
However, with Facebook, the ‘currency’ in its network is paid to Facebook from marketers and users are not able to participate in those benefits beyond the utility derived from using the Facebook platform. Public crypto-networks that are inherently P2P may eliminate the need for a middleman, but maintaining the network size and growth rate is the key to its sustainability, utility and any resulting valuation.
P2P Transfers without the Need for a Trusted 3rd Party
While the need for trusted third parties has been replaced in crypto-networks, such as Bitcoin, there are still inherent risks, such as ensuring that there are enough users to generate enough transactions to give incentive to enough miners to support the network and the price of the digital asset that helps fuel it.
Bitcoin is no exception, and just like any crypto-network, there must be enough users in the Bitcoin network to generate enough transactions to support the demand (price), while incentivizing miners to process transactions and supply-mining newly-minted Bitcoins. Bitcoin‘s network follows a cyclical process and is comparable to other natural economic cycles within global marketplaces, across industries where commerce takes place.
All Bitcoin transactions are made between public Bitcoin addresses, where the respective holders of each Bitcoin address own a unique private key connected to the respective public address (except for coin-base transactions, which are created by miners when Bitcoin is awarded from mining a block).
Public Nature of Bitcoin
While purchasing or mining Bitcoin may come under the control of the law, anyone is free to do the math in order to generate a nearly-unlimited number of Bitcoin addresses for free, using the open-source public code, and this can even be done off-line, ideally on an air-gapped computer in order to reduce the likelihood of a screen-recording or keylogging malware. Therefore, safeguarding private keys is another challenge on its own and is where significant risk remains, as lost funds – whether due to hackers obtaining private keys or users forgetting or misplacing their private keys – means that lost Bitcoin is unrecoverable.
Private Key = Digital Asset
Each private key is akin to a secret password that is fixed and cannot be changed, and the address owner must safeguard this private key, as it is the sole backup to control their digital asset (unless the key is safeguarded by a 3rd party exchange).
Anyone who obtains access to your Master Private Key, known as a Recovery Passphrase or master seed, can access your digital asset. Therefore, safeguarding private keys becomes of paramount importance to protecting Bitcoin from theft or accidental loss due to forgotten or misplaced keys, as they are unrecoverable.
Elliptic Curve Cryptography
Master Private Keys are generated using an open-source computer code that uses complex math to generate very large, random numbers that are subsequently used in a multi-step, computational process (involving more random numbers), with each step independent of each other.
This process, which incorporates Elliptic Curve Cryptography (ECC), helps ensure a level of security that complies with some of the highest standards of encryption, making it nearly impossible or improbable to guess/hack/crack the private key.
Crypto assets, such as Bitcoin, follow some of the highest standards of encryption currently available, combining Elliptic Curve Cryptography (ECC), to generate public/private key pairs, and the Secure Hash Algorithm (SHA) for mining blocks (more on mining below).
Securing Digital Assets
SHA-2 was developed by the U.S. National Security Agency (NSA) and the SHA family, including SHA-3, is widely considered one of the strongest forms of encryption (sufficient even for military and government top secrets).
Although the SHA-2 family of algorithms was patented by the NSA, they were later released under a royalty-free license, on June 20th, 2007, and are, today, widely used on the internet.
Today, SHA-related encryption can be found in many common computer applications and services across the internet, as it is used for authentication (encrypting/decrypting) access to secure online services from both commercial enterprises and in free open-source software code/applications.
Mnemonic Passphrases for Recovery and Control of Digital Assets
SHA-2 is considered secure because the resulting private keys that are generated (in which case, with digital assets like Bitcoin, follow methods like BIP32 or BIP44, and then are converted into an easy to remember passphrase of 12-24 words, via methods like BIP39) have between 256-512 bits of entropy. Entropy is a rating of the inherent protection that passwords have against collision attacks (i.e. accidental guess or hackers trying to crack via brute force).
However, the risk for users to safeguard those keys is an entirely different responsibility and is where the significant risks lie because hackers could obtain those keys and access your digital assets, as described earlier.
The New York Agreement (NYA)
In May 2017, stakeholders in the Bitcoin community agreed to implement SegWit (short for Segregated Witness, under BIP141), which went into effect in August 2017, and it was agreed that a subsequent upgrade, called SegWit2x (S2X), would trigger a hard fork to the Bitcoin protocol code, once block 494,784 was reached, provided that 80% of miners signalled support.
SegWit2x, which will cause a hard fork, is the successor of SegWit, which only caused a soft fork. Bitcoin has already undergone two other hard forks, but the amount of value that transferred into those offspring chains was minimal, whereas with SegWit2x, 80% or more/less could transfer into the SegWit2x coin (more on that below).
SegWit2x was proposed as the second phase of Segregated Witness, but would require a hard fork to increase the block size from 1mb to 2mb, as per BIP141, which specified that 12,960 blocks (or roughly three months) after the SegWit soft fork, SegWit2x would be activated on block 494,784.
This was locked in because enough miners were signalling in agreement, by broadcasting the letters NYA in their mined blocks. Many miners and developers, however, do not support this hard fork and are contesting it, as can be seen on Twitter and other social channels, including mailing lists and GitHub repositories, as well as official statements from organisations such as Bitcoin.org.
Upcoming SegWit2x Hard Fork
The SegWit2x upgrade is expected to occur on November 14th, according to http://bashco.github.io/2x_Countdown, based on official data from the SegWit2x site, https://segwit2x.github.io/segwit2x-announce.html.
For this upgrade to occur, the network protocol needs to create a separate copy of the entire ledger that will contain a copy of Bitcoin’s ledger history, but the copied ledger will have its own unique cryptocurrency (coin) that will not be compatible, moving forward with the existing version of Bitcoin.
This hard fork event will result in the new S2X coin (or other names that may be used to describe it) being made available to holders of record on the Bitcoin ledger as of block 494,784. The coin will be connected (airdropped) to users’ existing compatible wallets, although it will be up to wallet providers to show this data by building on their software to point to the new chain, if they decide to support it.
Lack of Default Replay Protection May Put Users at Risk
One of the biggest concerns about the upcoming SegWit2x hard fork is that replay protection will not be included by default and users may be exposed to inadvertent replay attacks if they attempt to transact Bitcoin on either chain after the chain split.
Since replay protection will not be included natively in SegWit2x, custodial and non-custodial wallet providers and exchanges can opt-in to add replay protection by adding certain codes into their software, but that puts the responsibility on them.
Potential Confusion and Uncertainty Escalating Ahead of SegWit2x
The risk of replay attacks exists if users attempt to send Bitcoin on the first chain, but that transaction is replayed on the other chain and sent to a non-compatible S2X address, where the funds may be lost.
Furthermore, not all exchanges will even support the new coin, and for those that do, the naming convention of each coin, post-fork, may be conflicting across exchanges. Also, the amount of time it will take, supporting exchanges and wallet providers to make trading available in either chain post-fork in a safe manner to reduce the risk of users losing money to inadvertent replay attacks that may occur, remains unclear.
Price Volatility for Bitcoin and its Resulting Offspring SegWit2x Chain
Overall, it may be very dangerous, in terms of risk, to trade around the time of the fork, as transactions made on one chain may be replayed on the opposing chain, where coins could be lost if the receiver’s address is non-SegWit2x compatible, among other risks. Consequently, there may be massive price volatility surrounding the SegWit2x hard fork, since not all exchanges and wallet providers are taking the same approach to dealing with these risks related to the SegWit2x hard fork. This event will be a defining moment for Bitcoin’s future and used as a gauge for other cryptocurrencies that are public and decentralized, where governance is determined by the crowd.