Bitcoin’s BIP110 Moment: Three Possible Scenarios

Here is the latest from the digital-asset markets: Bitcoin Magazine Bitcoin’s BIP110 Moment: Three Possible Scenarios Author’s note: In my view BIP110 is both useless and harmful, and I do expect it to fail (see scenario 1). Despite this I tried to write this article as factually as I could, entertaining different possible scenarios, as I do hope it may provide some clarity on this soft fork attempt. The OP_RETURN debate has escalated to the point where Bitcoin Knots implemented BIP110: a consensus protocol change that temporarily limits the size of OP_RETURNs and intends to reduce other types of data on Bitcoin’s blockchain as well.

However BIP110 does not have consensus: not everyone agrees there’s a problem that requires solving in the first place, nor that BIP110 solves it in any meaningful manner, while it restricts Bitcoin in potentially harmful ways. Most obviously, Bitcoin Core — still by far the most-used Bitcoin implementation — has not adopted BIP110, while only some 1-2% of hash power has been signaling support for it in recent weeks. Nevertheless, BIP110-nodes like Bitcoin Knots will soon — starting from block 961,632, to be mined on or around August 8 — reject blocks that don’t signal support for the upgrade.

Market Dynamics

Here are the three main scenarios for how that could play out. Scenario 1: (almost) no miners signalIf current miner signaling is any indication, this is the scenario to expect. From the perspective of anyone running Bitcoin Core or other non-BIP110 enforcing nodes and wallets (the vast majority of the Bitcoin ecosystem) blocks will be mined as usual, and transactions will be processed like normal too.

Anyone who’s not actively tracking these events on social media or elsewhere may not even be aware that anything unusual is going on, and in a practical sense for them there really won’t be; BIP110 does not affect them. The same is not true for anyone running Bitcoin Knots or other BIP110-enforcing nodes, however. Since their software will reject non-signaling blocks, they basically wouldn’t see any new blocks at all (or perhaps a few per week), and incoming and outgoing transactions won’t confirm (or incredibly slow).

In practical terms, these nodes would stall and become unusable. If this happens, BIP110 proponents will have to decide between waiting to see if things improve for them (see scenario 3), giving up (switching back to non-BIP110 software), or deploying a next protocol change, like hard forking to a different proof-of-work mining algorithm. Such a hard fork would possibly allow for mining with GPUs again, therefore letting more people mine new blocks to generate a blockchain with the BIP110 rules enforced.

Market Impact

However this would also mean that BIP110/hard fork nodes permanently split off from the rest of the Bitcoin ecosystem to essentially create a new cryptocurrency. (More on this below) Scenario 2: (almost) all miners signalThis is the scenario several prominent BIP110 proponents predict. In this scenario, when the mandatory signaling window starts, all miners will suddenly signal for BIP110.

Or at least, a majority of miners will signal AND reject any non-signaling blocks, so that all blocks that end up in the blockchain include a BIP110 signal. If this happens, all Bitcoin nodes (Knots and Core alike) remain compatible, and the signals in the blocks indicate that miners plan to start enforcing the BIP110 rules another two weeks later. BIP110-violating transactions should by early September no longer end up in blocks.

In essence, this is the success scenario for BIP110; although only a small faction of developers, miners and users pushed for it, the upgrade goes into effect across the entire network. …However even in this scenario there is an important caveat. Blockchain signaling is a useful coordination mechanism for soft fork deployment, but it technically does not guarantee that the new rules will be enforced.

Crypto markets are watching this development closely as investors weigh its potential impact on prices.