Coinbase is one of the largest cryptocurrency exchanges in the United States, and recently announced that it will implement SegWit (segregated witnesses). In case you’re unaware or need a reminder, SegWit is accurately described by Investopedia as follows:
“the process by which the block size limit on a blockchain is increased by removing signature data from Bitcoin transactions. When certain parts of a transaction are removed, this frees up space or capacity to add more transactions to the chain. Segregate means to separate, and Witnesses are the transaction signatures. Hence, Segregated Witness in short, means to separate transaction signatures.”
This could help reduce Bitcoin’s skyrocketing transaction fees since more transactions might be processed per block. However, a shocking report has come out that the exchange didn’t implement SegWit properly. As a result, users seem to be losing their Bitcoins.
Let’s first go over some basics about SegWit itself, and then look more closely into this disturbing news.
Bitcoin faced a major scaling issue in 2017 that led to a lot of debate and in-house arguments within the Bitcoin community on which scaling method to adopt – Soft fork(Segwit) or Hard fork (2 MB block size increase). Later, everyone came to a conclusion in an agreement famously called the “New York Agreement” (NYA) to do the soft fork in August 2017, followed by a hard fork in November.
Just to be clear, a hard fork occurs when a cryptocurrency is “divided” into two distinct “parts”. This happens when a cryptocurrency platform’s code is altered. Not only is the modified or updated code used in future transactions, but the old version of the code remains as well. A soft fork also results in a cryptocurrency’s code being changed, but only one crypto remains after the fork, and only one corresponding blockchain.
So, backward compatible SegWit was implemented successfully on the Bitcoin blockchain, after miners signaled for Bip91 and eventually locking it. The implementation was successful, but the adoption was a bit slower than expected, due to the efforts required in moving the coins from the legacy address to the SegWit enabled address.
Never Ending Scaling Issues
Bitcoin users continued to face high transaction fees and very slow confirmation times. This was due to the fact that the SegWit adoption was slower than expected, and major exchanges and wallet providers were reluctant to upgrade, citing technical difficulties and lack of expertise in upgrading the infrastructure to accommodate SegWit. Moreover, the SegWit adoption chart showed only 12-15% for majority of the months and the transaction fees sky-rocketed. Due largely to this, users started to lose patience and began to express their distress on social media outlets like Twitter and Reddit.
Pressure on Coinbase
Bitcoin users started to complain that the mempool was full and the transaction fees skyrocketed only because of the reluctance of major exchanges like Coinbase and Bitfinex to upgrade their infrastructure to support SegWit. Numerous tweets and Reddit posts against Coinbase and its CEO Brian Armstrong put a lot of pressure on them to act quickly to retain their customers.
There was also a tweet from Whale Panda mentioning that Armstrong personally holds more ETH than BTC and doesn’t want Bitcoin to scale. Soon, after, Coinbase started losing customers due to these scaling issues and customer complaints. Adding to its headache, new competitors like Robinhood and Squarecash trading apps started attracting millions of users and this made them give in to customers’ demand of adopting SegWit.
Coinbase Announcement on Segwit Implementation
Armstrong announced on Twitter on January 12th that the batching transaction and SegWit implementation were in progress, and that the development team is in the final stages of testing. Similarly, Bitfinex and other wallet providers like Shapeshift also started implementing SegWit. This led to the near-empty mempool and lowest transaction fees in the recent history of crypto, roughly around 1 satoshi/byte.
Also, the SegWwit charts showed the adoption has climbed exponentially to more than 30% and is at 29.21% at the time of writing. This was greatly appreciated by Coinbase and Bitfinex users, and they thanked them for their efforts in reducing the transaction fees. Notably, Coinbase handles huge volumes and that’s primarily the reason that SegWit adoption could have a major impact at the mempool level.
Customers Losing Coins
Furthermore, it was reported that after Coinbase implemented SegWit, some users started to lose Bitcoins. In one Reddit post, it was reported that if you send payment to the merchant using Coinbase’s payment gateway, they will not receive the Bitcoin at the other end, and you will lose your coins due to an issue with their system. The post also explains the reason for this issue, and it is due to the failure on Coinbase’s part to update the BIP70 to use SegWit addresses. Reportedly, coins are now being sent to a Non-SegWit address and are subsequently lost in their tracking system. It also states that you will not be able to contact any form of support, since they don’t have any contact for their merchant services.
The post also has the following warning for its customer:
DO NOT SEND BITCOINS TO ANY MERCHANT THAT IS USING COINBASE TO ACCEPT PAYMENTS.
Anger on Social Media
People started to express their anger on Twitter and Reddit about the incompetence of Coinbase in handling this upgrade. Below are some of the tweets from some frustrated users.
“all the good engineers left, what do u expect”
#eumartinez20 tweeted :
“Why would anyone still use them?”
“I had one issue 4 months ago and they never even responded to a half dozen attempts”
#coinhub_nz tweeted :
“I’m going through this with a hotel payment I made with Expedia using coinbase. mission……..”
We really hope that Coinbase addresses this issue immediately and also helps customers retrieve their lost funds. In addition, they should hire more competent engineers to upgrade their infrastructure to support the growing demand.