As the Bitcoin ecosystem approaches what appears to be an impending hard fork, it is important to clearly state Bitfinex’s policies on hard forks.
First, we want to make it clear that Bitfinex does not intend to advocate for or against any particular hard fork. Miners have the prerogative to commit their hashing power to whatever projects they choose, including alternative and incompatible protocol implementations. However, our first obligation is to our customers, who often demand tokens on each chain in the event of a hard fork that lacks clear community consensus. At this time, we do not believe that there is sufficient consensus to identify a clear winner in the Segwit2x hard fork. Accordingly, our customers will have access to tokens on both chains.
We have a responsibility to foster, maintain, and support orderly markets that trade continuously 24/7/365. With a hard fork that lacks clear community consensus, we cannot suspend operations and wait for a winner to emerge. Leveraged trading requires that our markets operate continuously. On operational requirements alone, we must designate such forks as new assets.
As the proposed consensus protocol Segwit2x project appears likely to activate, we have elected to designate the Segwit2x fork as B2X, for now. The incumbent implementation (based on the existing Bitcoin consensus protocol) will continue to trade as BTC even if the B2X chain has more hashing power.
We are doing this for practical and operational reasons. Political considerations are irrelevant here. While we cannot change or re-assign ticker symbols, we can change the label or description associated with that ticker symbol. For the time being, BTC will continue to be labeled as “Bitcoin,” and B2X will be labeled as “B2X.” This will remain the case unless and until such time that market forces suggest an alternative, more appropriate, labeling scheme for one or both chains.
The lack of strong two-way replay protection in Segwit2x means that we must take steps to protect customer funds. At the moment of the fork, all deposits and withdrawals for both BTC and B2X will be halted until we are able to: 1. ‘taint’ our customers’ bitcoins to ensure withdrawals cannot be replayed on both chains; and, 2. ensure that we can properly credit deposits in the event a transaction is replayed on both chains. We expect this process to require at least 24 hours, and potentially significantly longer. If the the event happens, announcements will be made throughout the process to keep everyone up to date.
In the event of a hard fork that results in a chain split, Bitfinex is also faced with the challenge of resolving peer-to-peer financing issues. Because we have sufficient time to plan for this event we have elected to handle the accounting of peer-to-peer financed trading similar to how stock spinoffs, dividends, and distributions are handled in equity markets.
Specifically, in the case of a hard fork event, lenders will receive both BTC and B2X. Anyone that is short BTC/USD or long any BTC trading pair (ETH/BTC, LTC/BTC, etc.) will owe B2X to the lender, effectively making the user short B2X. An exception is being made where BTC is borrowed but is not in use as financing collateral. In that case, B2X will accrue to the lender. Users that are financed long BTC/USD or short any BTC trading pair will receive B2X.
This methodology is complex and operationally challenging, but we believe it to be, in this case, the most economically correct and fair approach for Bitfinex and our customers. Furthermore, we believe it is the only approach that will keep the BTC lending market functioning throughout a hard fork event.
Imagine a situation where lenders do not receive B2X. They would be incentivised to stop lending if a hard fork appears imminent. Consequently, lending liquidity could completely disappear, and Bitfinex would be obliged to begin partial liquidations of financed positions when BTC loans expire and cannot be renewed.
We believe that such a hypothetical outcome should be avoided. Our plan should prevent the negative consequences of this scenario and seems likely to allow the funding market to continue to operate.
It’s important for borrowers to understand that while their P&Ls may climb during a hard fork event, they will have offsetting B2X liabilities that will be applied to their accounts, though perhaps not immediately. At the moment that Bitfinex detects a B2X block that is incompatible with the existing Incumbent Bitcoin blockchain, we will immediately halt processing of any and all BTC deposits and withdrawals for all users, and freeze all movements for all currencies for any borrower of BTC.
This freeze will last until the B2X accounting can be adequately prepared and addressed. We expect the process to be quick and automated, but we cannot guarantee that it will be immediate. BTC borrowers can hedge or estimate this liability with newly listed Chain Split Token (CSTs). Depending on CST price discovery, we may also increase margin requirements as the Chain Split Event approaches. This should help users protect themselves from liquidations that might occur during potential large swings in the combined value of BTC and B2X in the aftermath of the Chain Split Event. Please note that the order book for the BT2 CST will become the order book for B2X after the fork, providing price continuity and avoiding temporary, but potentially large, swings in overall account equity.
More details on the specific procedures will be forthcoming, but we feel that it is important to address the economic implications as soon as possible, so that our customers can plan accordingly. Bitfinex staff will be available on Whalepool Teamspeak and Bitcoin Mumble servers from time to time to answer customer questions. We will also be building a FAQ document to clarify edge cases and other nuances as needed.