TL;DR

Bitcoin Core version 24 was recently released, and includes a new option which (if enabled by enough node operators) changes the behavior of certain unconfirmed on chain bitcoin transactions. If you currently treat unconfirmed on chain bitcoin transactions as settled, these may become less reliable (ie. more likely to become invalid and never confirm). BitGo has always recommended that you wait for transactions to be confirmed on the blockchain. If you follow that recommended practice, nothing is changing.

What does it mean for a transaction to be confirmed?

A confirmed bitcoin transaction is included in a block that is part of the consensus chain. With every block that is added to that chain, the transaction gains a confirmation. Since it is expensive to create a parallel chain that will end up as the consensus chain, each confirmation makes it less likely that a confirmed transaction will revert to an unconfirmed state and/or become invalid.

Traditionally, the recommendation for Bitcoin users was to wait 6 confirmations (about one hour) for a transaction to be considered final. However, there have been no observed Bitcoin chain reorganizations since August of 2019. In practice this means that fewer than 6 confirmations are sufficient for most transactions.

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Unconfirmed Transactions

Before a miner includes a transaction in a block, they typically learn about it from the Bitcoin peer to peer network. The network includes miners as well as corporate node operators like BitGo and individual node operators. While the consensus blockchain is a well-defined and globally agreed upon set of transactions, the set of pending transactions (also called Mempool) is different from node to node.

Typically transactions seen in a node’s Mempool are eventually included in a block. However, there is no guarantee — if there was a guarantee, there would be no need for confirmations or a blockchain.

Some unconfirmed transactions will never be included in the blockchain. For example, if a conflicting transaction (one that uses an input of the original transaction) is confirmed, the original transaction is invalidated.

The default rules of current Bitcoin Core node versions are set to limit the propagation of conflicting transactions in the Mempool via the so-called First Seen Policy. However, relay policy rules are not a guarantee that unconfirmed transactions will confirm. Miners are not obligated to run Bitcoin Core or to only select transactions received over the standard relay protocol for inclusion in their blocks.

Opt-In Replace-By-Fee (Opt-In RBF)

Sometimes, it is in the interest of both sender and receiver to replace an unconfirmed transaction. One such case is replacing a transaction with a low fee-rate with a similar transaction that has a higher fee-rate. In this collaborative case, the sender keeps the external recipient amount unchanged, and only changes the amount going back to their wallet (although an uncooperative sender could change or remove the payment to the external recipient).

This use case was the inspiration for the Opt-In Replace-By-Fee (Opt-In RBF) policy in Bitcoin Core: transactions with a certain flag are explicitly marked as replaceable and therefore not subject to the First Seen Policy limiting the propagation of conflicting transactions.

Full Replace-By-Fee (Full RBF)

The current default replacement policy used by Bitcoin Core has certain downsides, eg. not being compatible with miners’ incentive to maximize fee earnings. Certain node operators already choose to run other bitcoin node software with a more permissive replacement policy.

If the new mempoolfullrbf policy option gains popularity, replacement of unconfirmed transactions that did not signal Opt-In RBF becomes more likely.

The addition of this option sparked controversy in the bitcoin community as some prefer Bitcoin Core not to make it easier for node operators to change this relay policy. Some of the controversy also revolves around proposed future plans to change the default policy, muddying the waters.

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BitGo is the digital asset infrastructure company, delivering custody, wallets, staking, trading, financing, and settlement services from regulated cold storage. Since our founding in 2013, we have been focused on accelerating the transition of the financial system to a digital asset economy. With a global presence and multiple regulated entities, BitGo serves thousands of institutions, including many of the industry's top brands, exchanges, and platforms, and millions of retail investors worldwide. For more information, visit www.bitgo.com.

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