Setting the record straight on the Bitcoin Unlimited exchange statement

[Steve Sokolowski]

Yesterday, a group of exchanges produced a statement on their procedures for when the Bitcoin hard fork occurs. While the document covered other topics, some of the most relevant points were that the ticker symbols for Bitcoin Core and Bitcoin Unlimited would be BTC and BTU, respectively. Several exchanges, including Poloniex, announced that bitcoins on loan would be paid back in BTC only. Of note is that Coinbase did not sign on to this agreement.

Some people were immediately up in arms about the idea that Bitcoin Core would use the ticker symbol "BTC," but I think that the argument over symbols is a sideshow. It simply makes sense that C stands for Core, and U stands for Unlimited. Ticker symbols will have little long-term bearing on the success or failure of either fork.

On the other hand, the most important part of the document, and the one that seems to be generating the least discussion, is that the signed exchanges will attempt to force Bitcoin Unlimited to change its code to prevent replay attacks. This is yet another reason to agree with me that a trend reversal occurred to a bear market, because replay prevention is never going to happen. Replay attack prevention requires one of the chains to modify the protocol in some way as to make it incompatible with the other fork. This could be accomplished by changing the serialized format of transactions, for example.

But an incompatible format introduces the same disaster that Segregated Witness will introduce to Bitcoin Core, in the event the Core can get it to activate. Working software will break, and since a lot of the software in the cryptocurrency industry is not profitable, most of the broken software, like now-obsolete wallets, will simply be taken offline. I would stop supporting Bitcoin Unlimited if its developers made a change to the transaction format to prevent replay attacks for the same reason I don't support Segregated Witness - it is a complex fix to a problem that does not need to be solved. Replay attacks can be prevented with a simple user-oriented program that sends coins to two different wallets simultaneously and which doesn't require everyone to upgrade the format of blocks, as it was with Ethereum.

More insidiously, that software will still work with Bitcoin Core, so block explorers incompatible with the changes will simply be automatically forked to Bitcoin Core. A demand for replay preventing in Bitcoin Unlimited only obviously favors the Core by forking the larger part of existing software to support the Core only.

There is another basic problem with this replay attack requirement. Unlimited developers will correctly ask why they should be the people who should implement it, rather than the Core, especially since Unlimited is not designed to fork until they have 75% of hashrate. The exchange statement is worded to portray Bitcoin Unlimited as a "breach of consensus," when consensus would likely be in their favor if a fork occurred. This requirement is going to turn into another one of these stupid battles between developers over who is "right" and which bitcoin is the "true bitcoin."

But all of that doesn't matter, because the statement won't hold for more than a few days after some other exchange that did not sign the document decides to list Bitcoin Unlimited anyway. This document is a golden opportunity for a smaller company like Novaexchange or Yobit to become the largest exchange in the world, in the case that they offered trading in BTU and everyone else were to adhere to the letter of this document. The statement is not legally binding, and therefore the bigshots are not going to sit around and wait while Novaexchange rakes in $100,000/day in BTU trading fees, like Poloniex did when ETC was first listed. I'll give it about 24 hours before the first exchange breaks ranks and lists BTU anyway, and then all the others will follow. These companies have investors to satisfy, and we'll see if the investors are willing to stand by while competitors take market share that will be permanently lost if BTU wins the day. It's not an accident that Coinbase refused to sign the document, given that they make little money from other coins and that following this foolish course of action could eliminate the market for one of their only two products.

Thus, those angered by this document can rest easy knowing that it is worth nothing, and that nobody is going to follow it when real money is on the line.

After making the statement, Bitfinex listed coin "futures" on the two forks. Investors can send bitcoins to Bitfinex, and then "split" a bitcoin into BCC and BCU. These paper tokens will be converted to the coins once the fork occurs.

While these markets would appear to provide insight into the preferences of investors, users who carefully review the terms will find that the BCU tokens expire on December 31 if no fork occurs. According to them, the tokens will be "confiscated and destroyed" on that date. When I last checked, the BCU tokens were worth just 14% of one BTC, which isn't surprising because this token is just as much a prediction market on when the fork occurs as it is on the values of the coins after the fork date. As each day passes, the BCU tokens will lose value, since the time remaining for a fork to occur and satisfy the conditions of the market declines. Smart investors don't invest in markets that are pre-rigged to decline.

Given their history of dishonesty and censorship, some Core members will likely try to advertise these tokens as proving that nobody will buy Bitcoin Unlimited after the network forks. Don't be misled; the reality is that the tokens' value is artificially suppressed by the likelihood of a fork. As hashrate increases on Bitcoin Unlimited, the value of those tokens will increase regardless of what people think will happen afterward. A way to make the market provide actual useful information is to promise that in the event of no fork, people can join the two tokens into BTC and get their money back, with no defined end date. I hope that other exchanges list equivalents to BCC and BCU that do not have an expiration date so that we can get a more accurate view of the relative value of the two.

In conclusion, exchanges, particularly Bitfinex, are either engaging in deceptive practices or are simply not evaluating the consequences of their decisions. The statement was worded to make it appear that the initial minority hashrate Bitcoin Core is the "true" bitcoin and that Bitcoin Unlimited will have no standing, despite Unlimited requiring 75% of the hashrate at the time of the fork. Rather than requiring borrowers to repay both chains if they were borrowing at the time of fork, Poloniex decided to haircut lenders and repay them in BTC only. They promised to demand replay protection, but will almost certainly renege on that promise when non-signatories list BTU anyway and rake in record profits. Bitfinex listed two tokens that, while described correctly in the terms and conditions, do not accurately represent the value of the assets they claim to follow.

Things like this are one of the reasons that I no longer buy or receive profit in bitcoins. The level of dishonesty, ignorant promises, and deceptive practices involved in bitcoin is unmatched by anything else I can think of, and it has surpassed the Wall Street traders that people claim to hate.

[pindabaas]

Thanks for this elaborate explanation Chris!

[pindabaas]

There is one point I don't really understand..

You're saying Segwit is a complicated solution to a problem that doesn't need to be solved..

Isn't it true that the confirmation times are now ridiculously high? You're saying BTC doesn't need to update in order to solve that?

[Mrrt]

He was just complaining about high fees and slow confirmations in his last post. Yes there's a problem. No, there's no problem.

BTU is a mongoloid of buggy, insecure code that threatens the entire ecosystem. Of course we put the onus on them to ensure replay attacks aren't an issue. They're the ones threatening to fork, so it's their responsibility.

Christ, I'm about to stop mining here if the crazy pollacks that run this place don't start making some goddamn sense in their rantings and ravings.