There is growing tension within the Bitcoin community at the moment. You’re probably seeing terms like UASF, BIP148 and SegWit being thrown around and causing confusion with people who are new to the world of Cryptocurrency. This confusion, combined with the contradicting information that’s circulating the internet is bringing up a lot of questions, like:
Why exactly is everything supposed to come crashing down?
Right now there are technological limitations within the Bitcoin network that are becoming more evident as more and more people get involved in buying, trading and selling Bitcoin. These limitations limit the speed at which transactions can be processed, and also affect the ability to add future upgrades to help with transaction speed and capacity. The result is that transaction fees continue to rise steeply.
The limitations have been technically fixed with a code update (called SegWit), but due to the peer-to-peer aspect of Bitcoin, implementing this update is proving very difficult.
There are two groups of people within the Bitcoin community: the users (like you and I) and the people who process and verify transactions (these people are referred to as miners as they are rewarded with Bitcoins in exchange for their work). These two parties are on opposite sides of the fence when it comes to introducing this SegWit code. Users want their transaction fees to be lower, and to reduce transaction bottlenecks during high volume periods, which makes perfect sense. However, for the miners, introducing these updates will effectively reduce the number of Bitcoins they are rewarded for each transaction they verify, thus reducing their profit for doing this vital work.
For this update to be applied successfully 95% of the computers on the Bitcoin peer-to-peer network need to be running the new SegWit code, which Bitcoin miners are refusing to do.
Enter the UASF
The User-Activated Soft Fork (UASF) is a proposed solution to current transaction speed limitations on the Bitcoin network. As you can tell by the name this proposal comes from users pushing to implement the updates, and it essentially sets a deadline for a decision to be made either way by August 1st.
So what happens on August 1st? The plan is for all SegWit supporters to implement a version of the Bitcoin code that will prevent miners who haven’t updated their code from being able to process and verify transactions. Now this doesn’t sound like a huge deal, but it could have some very serious ramifications.
Immediate Consequences of the UASF
This is where things get a bit testy as the UASF could end in 1 of 3 possible ways, with no real indication of which way we are heading at this stage.
The first possibility is that the UASF is successful and the majority of the miners adopt SegWit before August 1st. This would mean everything seemingly went to plan for the users, with no adverse consequences.
The second possibility is if UASF is unable to gain support from the majority of miners, on August 1st it will essentially cause Bitcoin to fork off into two currencies, which is referred to as a Hard Fork. If the majority of miners have refused to upgrade to the SegWit code then the users and miners that are running the new SegWit version would immediately stop and revert to today’s version of Bitcoin, and things will stay as they are now. The biggest issue with this result is that there will be a split in the network for a period of time which will almost definitely cause delays in transactions and a lack of confidence in Bitcoin from the public. This will most likely be reflected as a panic in Bitcoin’s price and reputation.
The third possibility is that, when the UASF is implemented on August 1, only a slight majority of miners support the SegWit code. This situation would also cause a fork in Bitcoin, however because the majority are running SegWit there will be a strong incentive for the remaining miners to join the UASF, since the value of the coins they earn will be severely reduced as a separate currency.
The complicated part is that, despite this strong incentive, it is entirely possible that the miners who separate will still refuse to join the UASF and will permanently split off into a second coin dubbed Bitcoin Unlimited, with the UASF side of the fork remaining the official Bitcoin.
All three scenarios are possible and could happen anytime between now and August 1st, so it is wise to keep all of these consequences in mind.