Update on the pending halving event

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Steve Sokolowski
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Update on the pending halving event

Postby Steve Sokolowski » Thu Apr 21, 2016 8:02 pm

On March 27, I posted my long-held belief that the block reward halving would be catastrophic for the bitcoin network at viewtopic.php?f=11&t=782. Now that nearly one month has passed, I thought I would review the predictions from that post and see where recent events have led. So far, it seems like most of the predictions have been accurate and remain consistent with outcomes B or C in the original post.

Bitcoin pricing

The price action for bitcoin, as I predicted in March, has started to tick upwards. I predicted an upwards climb beginning in late April because it is common across all coins for bubbles to occur before a block reward halving. Litecoin, for example, experienced a bubble right on schedule when its reward halved last year. These bubbles appear to be short-lived and driven largely by market psychology, as litecoin (and bitcoin before it) both declined after the halving actually occurred.

As predicted, there seems to be a great deal of ignorance and a disconnect between the two groups in the cryptocurrency industry. One group consists of bank CEOs, institutional investors, and many of the users of /r/bitcoinmarkets, who discuss bitcoin using indicators like Elliott Waves and RSI with little or no discussion of its network problems. The other group consists of actual users and merchants, who are impacted by increasing unreliability and long transaction times. The investors see positive indicators while people like us are actually selling our profits more frequently than we did earlier in the year to get out before the crash.

One of the reasons I predicted a rise in price to $600 before July was that the disconnect appears to be getting worse. Looking back at that post and comparing it to the sentiment in investment forums today, I actually think I underestimated how huge this disconnect actually is. A large part is due to news like OpenBazaar and Segregated Witness making big headlines; while the transaction processing issues are well known and no longer interesting to write about. There probably is some short-term profit to be made if you keep "bitcoins" off-chain so you can sell them quickly. The disconnect is most apparent on reddit and theymos's censored bitcointalk.org, where people are posting bubble charts that show green arrows pointing up to the thousands of dollars, as if the network wouldn't grind to a halt well before then.

Ethereum pricing

The one prediction where I was off was in the price of Ethereum falling only slightly. I thought that Ethereum would fall, but not as much as it actually has. I thought that Ethereum would fall to around $10, but it actually has been hovering around $8 recently. It's not clear exactly why Ethereum has failed to hold steady, but it seems that the number of posts on Ethereum forums and interest in development has slightly lessened. I think the rest of the chart remains valid and Ethereum price will recover (at least briefly) within two months.

An interesting occurrence of late is that the profitability of mining altcoins has fallen dramatically. Hashrate has moved from Litecoin onto other networks, and the price of almost all altcoins has been on a general downtrend. I suspect that the same factors at work with the bitcoin price have caused altcoins to move in the opposite direction. There seems to be a general sentiment that bitcoin's problems aren't all that bad after all, and therefore investments in altcoins are a poor idea. This trend is likely to reverse as bitcoin begins to fall.

Segregated Witness

Testing has begun on an implementation of Segregated Witness, a method of increasing the capacity of the bitcoin network. Some proponents of Segregated Witness also believe that there are other advantages like the elimination of the ability to change transaction IDs. Many of these people are excitedly pointing to a recent report that on a testnet, Segregated Witness allowed 3-4x more data to be sent across the bitcoin network.

That's great news, but nobody disputes that Segregated Witness could provide large benefits in specific circumstances. If everyone were using Segregated Witness, and everyone sent the type of transactions that most benefit from the algorithm, then it is undoubtedly possible to significantly improve performance. Unfortunately, as I pointed out in the last article, the real world does not resemble the environment of the testnet. In fact, simple transactions that are very common benefit little from Segregated Witness.

I see the timing of Segregated Witness as being a huge mistake. The Core has decided to release it at the worst possible time - right before a looming catastrophe.

In computers, as soon as there is at least one instance of an edge case, it has just as many coding consequences as two or ten instances of that case. What the Core is doing is pushing out unproven code right before the most important and dangerous time in bitcoin's history. If they continue on their current path, we are looking at an even worse situation than I predicted earlier. We will have the first Segregated Witness transactions appearing in June, and those first transactions are going to cause all kinds of software to break just around the time that the other factors begin to cause panic. That assumes that the same 90% of people who care little about network politics are going to care enough to adopt this solution when they failed to adopt any of the other solutions already proposed. And even if everyone agreed to adopt it, the people who send the most transactions need the longest time to upgrade software, so there will be close to zero blocksize benefit to Segregated Witness in its first months at the same time there will be the most compatibility problems.

The bottom line with Segregated Witness is that the Core had the opportunity a year ago to avoid the impending catastrophe. They not only neglected to take action while it was possible to get past the halving event without any problems, but they are now worsening the halving event's danger by choosing right now (instead of the Fall) to push the risk of Segregated Witness upon everyone.


I was correct about OpenBazaar releasing before the blocksize deadline approached. While Segregated Witness will have little time for uptake, the OpenBazaar release occurred early enough that usage of OpenBazaar can become more significant before the beginning of July. Additionally, OpenBazaar got a boost this week when a large darknet market went offline in what some believe is a scam. Some of the darknet's users have undoubtedly tired of repeated thefts with each centralized market going offline, and they will be looking for a more secure alternative.

OpenBazaar has seen an odd range of products listed for sale so far, but I would imagine that one type of product will initially emerge as the "go-to place" for purchase (like car enthusiasts or miners or drug dealers). Currently, transaction volume on OpenBazaar (http://bazaarbay.org/stats/day) is small, but the number of items, ratings, and other important stats is rising at http://bazaarbay.org/stats/month ("Nodes" is not a relevant metric.) An important fact to recognize about OpenBazaar that few seem to be pointing out is that the types of multisignature transactions that OpenBazaar uses with arbitration require more block space than do traditional "send money from one wallet to another wallet" transactions. One of the reasons why I look at the bitcoin network being inadequate for OpenBazaar is that its transactions are more complex than those of many other use cases.

Core development

An issue upon which I didn't comment in the first article was the focus of the Core developers, because the issue had not been apparent then. The Core development team has been adding huge numbers of features into "minor" releases on the 0.12.x branch with what many believe to be inadequate testing. While I agree about the testing, I also believe that these features have a far worse effect.

With the exception of the blocksize problem, the bitcoin network is fine as it is. The Core developers are producing code that doesn't need to exist, which means it needs to be continually tested, maintained, and debugged. The bitcoin community needs a fix to just one problem to explode in usage. Any other programming effort should be devoted towards reducing CPU usage or parallelizing operations, as CPU is by far the most limiting factor in hosting coin daemons. Bandwidth reduction through Xtreme Thinblocks would also be useful, as would be testing and stability improvements. However, nobody is clamoring for new transaction types and soft fork rollout masks or the like. Who cares about that stuff if it takes 12 hours for a transaction to confirm? Bitcoin has everything is needs already; just get it to work well!

The Core is completely clueless about their customer base's needs. They fail to realize that these recent releases are doing far more harm than good. Only 10% of the entire network has adopted these features. Even if people upgrade to the latest version of Bitcoin Core, most features will have so few users that developers will be running test cases for years to deal with a "nice idea" the Core put in. The greatest danger isn't that they are wasting time that could instead be spent implementing other things, but that these unnecessary features are going to actually set back the network by tying up future developers in neverending maintenance. This is one reason is why we refuse to upgrade to any client that supports Core 0.12.x features - because we believe that the Core is being irresponsible in this unnecessary feature creep. Until the blocksize issue is permanently resolved, Bitcoin needs a code freeze on all work other than performance, testing, security, bugfixes, and the blocksize issue.

The Core's focus on features rather than creating a fast, stable, and well-tested platform mirrors the mistakes made by many companies that eventually fail because the things that draw customers in don't work right.


In conclusion, I feel more negatively about the future of cryptocurrencies than I did last month. I still believe that option B (a bitcoin failure with Ethereum growth) is the most likely outcome. The predictions from the previous article are all either on track or slightly off.

Almost exactly on track is the bitcoin price, which is rising just as I expected in advance of the halving. A rising price that is disconnected from the network conditions introduces instability. When the halving bubble pops, the panic will be greater than if price slowly declined from its previous $420 level. Concurrently, OpenBazaar released almost immediately after I posted the last message, which is a great technical advancement but worsens bitcoin's outlook due to the increased volume of higher-than-average complexity multi-signature transactions it will generate.

Of those predictions that were slightly off, interest in Ethereum has fallen lower after Ethereum's last bubble than I thought it would. However, Ethereum has established itself as at least the second currency, and I still believe that Ethereum will see a surge as developers and investors seek a safe haven in June. Litecoin, on the other hand, suffered what could turn out to be a game-ending setback because community members didn't take action on the blocksize issue before bitcoin gets in trouble.

What I didn't foresee is that deployment of Segregated Witness seems to be accelerated. Whereas before I thought that Segregated Witness would simply be unreleased or unused by July, it now looks like the Core is poised to worsen matters by hastily throwing the switch on Segregated Witness to break a huge amount of software at the worst possible time. Once that first Segregated Witness transaction is mined, the people naively buying into the current "halving bubble" are going to see that their block explorers don't display the correct balances, or that their exchange didn't receive the right amount of money, or that their wallets throw exceptions.

People won't know whether their merchant or exchange is in error, whether wallet software was broken by Segregated Witness, whether they paid an inadequate fee, or whether the blocks are so full that their transaction was simply dropped from the mempool. The Core is making a huge mistake by trying to rush this upgrade at this critical juncture, and I hope that when I revisit these predictions again in late May, I'll be able to say that they decided to take a step back to focus on testing and to give the bitcoin network at least some shot of surviving the coming crisis.
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Re: Update on the pending halving event

Postby OldPaul » Fri Apr 22, 2016 6:44 am

Thank you Steve for such enlightening update of your previous March post. It's really hard to find such focused and objective statements elsewhere.
Looking forward for end of May update then :)
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Joined: Tue Jan 24, 2017 7:31 am

Re: Update on the pending halving event

Postby Auroy » Tue Jan 24, 2017 7:34 am

Well, that all ended well :). For a while I even had problems with this, thought it was my Internet connection but now I read this article and realized that was not the case.

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