Starting to wrap your head around Bitcoin and blockchain? What's this now? Coinbase just abruptly listed something called Bitcoin Cash that temporarily spiked to over $8,000 before they had to suspend trading due to overactivity. Well what the hell is Bitcoin Cash? Simple: it's a fork of Bitcoin. Proper response: what the fork are you talking about?
Before we get into exactly what a fork is and how it led to Bitcoin Cash, let's have the cryptocurrency equivalent of the "birds and the bees" talk and discuss how new cryptocurrencies are born.
Open Source Code
Ever wonder why there are so many different cryptocurrencies? This is because Bitcoin software is open-sourced. This means that any programmer can download the Bitcoin source code, make some tweaks and then release it on the internet as a completely new cryptocurrency - an "alt-coin." If that programmer can convince enough miners to dedicate computer resources to maintaining the new coin's blockchain, and if they can convince enough people that their Bitcoin offshoot has value, a new alt coin is born.
Altcoins have the same basic architecture as Bitcoin. They have miners that run software that maintains a shared history of the altcoin's transactions on a blockchain. These miners are paid in the altcoin as a reward for helping to maintain the blockchain and these rewards circulate new supply of the coin. From that basic framework, programmers get creative. They make new coins that improve speed (Litecoin), that are more anonymous and harder to track (Monero), that have a niche end user in mind (i.e. PotCoin), or that have functions far beyond just being a digital currency (i.e. Ethereum).
One of the most successful altcoins is Litecoin. An MIT graduate and Google software developer named Charlie Lee took the Bitcoin source-code and tweaked it. He made a more agile version of Bitcoin by making transaction speeds 4 times faster - new blocks of transactions are added to Litecoin's blockchain every 2.5 minutes compared to every 10 minutes with Bitcoin.
Bitcoin Cash however, was not spawned by some enterprising programmer taking the Bitcoin source-code and starting a new coin from scratch. Bitcoin Cash was created by a faction within the Bitcoin community which disagreed with how Bitcoin was evolving. They gained enough support to split the Bitcoin blockchain in two - the split that created Bitcoin Cash is called a hard fork.
The Scaling Debate
When the Bitcoin network is experiencing heavy traffic, transactions take longer to process and transaction fees paid to miners become more expensive. Transactions are processed once they are added into a new block by a miner - the size of a block is 1 megabyte (MB) which can only fit about 2,500 transactions per block. Blocks are added roughly every 10 minutes so when there are more than 2,500 transactions pending, people have to wait their turn. Miners pick which transactions to include in a new block. If someone wants to get their transaction processed quicker, they can elect to pay a higher fee so that a miner is more likely to select it. When the network is busy, the fee needed to get a transaction processed in a timely manner gets bid up higher and higher (if you use an exchange like Coinbase, they automatically suggest a fee that will get the transaction processed quickly - that fee fluctuates based on current demand on the network).
With the popularity of the Bitcoin network at all time highs, so are wait times and transaction fees. Sending $100 USD worth of Bitcoin can cost $30 and take hours to get processed when the network is busy. The development community that collectively updates and improves Bitcoin's open-source code has long known that this would be an issue once a certain level of adoption was reached. The best method for addressing these issues and scaling Bitcoin for a larger user base has been hotly debated for years and ultimately divided the community.
Think of a block in the blockchain as the hottest club in town with limited space (1MB) - transactions are all the people standing in line to get into the club (get processed) and the miner is the bouncer who decides who gets in. Party goers pay a cover charge (transaction fee) to the bouncer to get into the club. The bouncer gives preference to those willing to pay a higher cover charge. When the line to get into the club gets long, people have to pay a higher cover charge to get in. The Bitcoin community came up with two methods to reduce the size of the line and get more people into Club Blockchain at once:
- Make the club bigger - One side wanted to simply make the club bigger. By increasing the size of the club, more people could get in at once.
- Technical terms - increase the block size from 1 MB to 8 MB
- Make the people skinnier: One side wanted to make each individual party goer skinnier. If all the party goers were skinnier, more of them could fit into the same size club.
- Technical terms - SegWit, or segregated witness, is a method for removing some of the data from each transaction, allowing for more transactions to be included in a 1 MB block.
A Community Divided
So that's the debate - increase the blocksize or implement a solution that would get more transactions into a 1MB block (SegWit). Sound pretty technical and boring? Well, within the Bitcoin community, the debate got highly contentious and political.
Opponents to increasing the block size said that an increase would erode Bitcoin's most important feature: decentralization. Increasing the blocksize would greatly increase the computer memory needed, and therefore the cost required to have a computer that validates transactions in the Bitcoin network (a full node). This cost increase would price out most of the smaller operations, leaving the Bitcoin network in the hands of only the most powerful mining pools and companies that could afford it. If control of the Bitcoin network was in the hands of a few, it would be easier for a government or powerful entity to take it over. These opponents favored SegWit as the safest way to scale Bitcoin without compromising decentralization. Many in the SegWit camp were the developers and engineers who prioritized Bitcoin's security and decentralization over the network's ability to process transactions cheaply.
Proponents of increasing the block size argued that Bitcoin was no longer useful in commerce as originally intended in Satoshi Nakamoto's white paper. Since increasing the blocksize would be an immediate remedy to the congestion and high fees, and SegWit would take years to fully cure the issue, they saw a block size increase as the only option. Many in favor of increasing the block size were business owners and entrepreneurs who were transacting in Bitcoin on a regular basis, frustrated by the high fees.
When it became apparent that the majority of the community was in favor of moving foward with SegWit implementation, the wheels of the Bitcoin Cash hard fork were set in motion.
A hard fork is the blockchain equivalent of a software update, reserved for serious changes to the network. The Bitcoin network is maintained by computers all over the world collectively updating the Bitcoin blockchain. They are all running software that enables this collaboration. When a significant change needs to be made to how the network functions (i.e. a change in the blocksize), a software update is written and pushed to the computers in the network - it is up to them to download the updated version.
If everyone in the network is on board with the change and they all implement it, they can all continue collectively maintaining the blockchain with the change in effect. However, if only half update and half do not, the network becomes out of sync. This causes a chain split, or fork - when the computers update, they begin maintaining a different blockchain from the ones that chose not to update.
This is why hard forks are a risky way of introducing changes to a blockchain network. If a change is proposed that not everyone is on board with, the network is at risk of becoming divided.
The Bitcoin Cash Hard Fork
The Bitcoin Cash hard fork was what's called a "contentious hard fork." The contingent in favor of increasing the block size knew that they were not going to get the majority of the network to go along with the upgrade. They just had to secure enough miners in the network to go along with the upgrade for their forked version of Bitcoin to maintain value. If they didn't have enough miner support, there would be no one to maintain the network and the 8MB block size version of Bitcoin would have died a quick death.
On August 1st 2017, the Bitcoin Cash hard fork happened. A software update including the 8MB blocksize was pushed to the network and it garnered enough support from the mining community. Bitcoin users were told that however many Bitcoins they held at the time of the fork, they now had an equal amount of Bitcoin Cash. Why? Well, remember when I said Litecoin is basically a copy of the Bitcoin source code with some tweaks? Bitcoin Cash is also a tweaked version of the Bitcoin code but, unlike Litecoin, Bitcoin Cash also copied the original Bitcoin blockchain.
This means that Bitcoin and Bitcoin Cash have a shared transaction history up to August 1. If the Bitcoin blockchain listed your address as having 1 Bitcoin on August 1, the forked Bitcoin Cash blockchain would indicate the same thing. After August 1, the miners in the network that upgraded to the 8MB began maintaing the Bitcoin Cash blockchain while the miners who did not upgrade continued maintaining the original Bitcoin blockchain - on that date, the Bitcoin blockchain "forked" into two:
After The Fork
At the time of the fork, no one was really sure what was going to happen with Bitcoin Cash. It was dismissed by many as a gimmick that would be worthless in a matter of months. At the same time, since every person holding Bitcoin was gifted an equal amount of Bitcoin Cash, many people had an automatic interest in its value. At the time of the hard fork, the value of Bitcoin Cash set by the free market was around $300 dollars, compared to Bitcoin's $2,700 price tag.
Despite many detractors, there was also a vocal group of Bitcoin Cash supporters who began calling for "The Flippening" - a prediction that Bitcoin Cash would overtake the original Bitcoin in value. They argued that Bitcoin had lost its way and was no longer useable as a currency due to its high fees - they claimed that Bitcoin Cash was the "real Bitcoin" since it was more in line with Satoshi Nakamoto's original vision. People reacted to these projections and, during the month of August Bitcoin Cash's value was bid up 300% to $900. This price hike was short lived and the value soon returned to $300.
Once again, in November 2017, calls for The Flippening grew louder when an initiative to scale Bitcoin (called Segwit2x, not to be confused with SegWit, goddam its all so confusing) was called off due to lack of consensus in the community. Bitcoin Cash supporters cited this initiative's failure as further evidence that Bitcoin would never scale. The movement gained steam when programmer Gavin Andresen - who Satoshi Nakamoto left as Bitcoin's lead developer before he disappeared - stated that Bitcoin Cash more closely resembled the project he began working on in 2010. Bitcoin Cash's value shot up to $1,800 while Bitcoin's fell from $7,500 to $5,800. Bitcoin Cash settled around $1,200 while Bitcoin rebounded and continued its ascent to it's 2017 peak of $20,000.
The latest Bitcoin Cash boom came on December 20th 2017 when Coinbase, one of the most popular cryptocurrency exchanges, made a surprise announcement that it would enable Bitcoin Cash trading. People looking to cash in on the latest coming of "The Flippening" flooded Coinbase with buy orders, bidding the price up as high as $9,000 - this coincided with a 10% dip in Bitcoin as it fell below $12,000. Unable to handle the traffic, Coinbase temporarily halted trading, freezing the price at $8,000. When Coinbase resumed trading, the price fell back below $3,000. Amid heavy criticism, Coinbase had to launch an internal investigation into potential insider trading, since the price in Bitcoin Cash started soaring before it was announced that Coinbase would support Bitcoin Cash trading.
Is Bitcoin Cash Actually Better?
Currently, transacting in Bitcoin Cash is significantly cheaper than Bitcoin, with average transaction fees at $0.32 vs $26.27 at the time of this writing. Since more transactions can be included in a single block, transactions will also get processed quicker. However, the Bitcoin Cash network only handles about 12% of the daily transactions that Bitcoin is saddled with. Its difficult to know how exactly the Bitcoin Cash network would respond if faced with a heavier load. At this point, it is just too early to tell.
What's Bitcoin's Plan?
SegWit has been implemented within the Bitcoin network through what's called a soft fork - contrary to a hard fork, soft fork changes can be rolled out to the network without causing a chain split. However, the potential benefits of Segwit will not be realized until SegWit is activated by those using the Bitcoin network. To go back to our earlier analogy, in order for Segwit to "make the transactions skinnier", the applications that generate Bitcoin transactions need to weave it into their systems. Coinbase, for example, has not yet done this so the thousands of daily transactions they send over the Bitcoin Blockchain are "fat" and do not help alleviate the congestion. For the fruits of SegWit to be realized, it will need heavier levels of adoption amongst Bitcoin exchanges and wallet developers - something the Bitcoin core developers will continue to push for in 2018.
SegWit adoption is phase 1 in Bitcoin's long term plan for scalability. Once SegWit has been adopted, Bitcoin will focus on implementing what's called the Lightning Network. The Lightning Network is a "layer 2" solution that will enable thousands of Bitcoin transactions to take place outside of the Bitcoin blockchain with minimal fees - at regular intervals, the sum of those transactions will settle on the Bitcoin blockchain. A full explanation of how Lightning works merits another post but many in the Bitcoin development community see great promise in it.
It is going to take time to implement these solutions and, given Bitcoin's explosion in popularity, the network will remain congested in the near future. This means fees and wait times will remain high for now. Further adoption of SegWit and a successful roll out of The Lightning Network will be needed to quiet Bitcoin's doubters. In the meantime, Bitcoin more effectively functions as a "store of value" and is better suited for moving large amounts of value and is unsuitable for small transactions.
Who Will Win?
Bitcoin's current issues with speed and transactions fees are a function of its popularity. A common metaphor used to described the current state of Bitcoin is "the restaurant that no one goes to anymore because its too crowded."
Many on the internet are pronouncing Bitcoin dead because of these issues. A look back into Bitcoin's short history are filled with proclamations of its demise; to date, none of those predictions have come true. Bitcoin, at its core is a technology - technologies don't remain as they are so long as there are people dedicated to pushing them forward. Bitcoin has highly talented and dedicated developers around the world committed to improving it - as long as they exist, Bitcoin has a chance.
Enough people have also disagreed with the direction that the Bitcoin developers have taken the project. Those people have put their efforts and support behind Bitcoin Cash. The success of Bitcoin Cash will equally depend on their ability to move the project forward.
So who will win? No one knows and anyone telling you that they do, probably has an agenda. Maybe they coexist, maybe neither exists 10 years from now. The whole point of Bitcoin was to give people the option of a currency that exists outside of governments. Turns out, it also spawned thousands of options outside of Bitcoin itself - Bitcoin Cash is one of many. Freedom to choose will never be a bad thing so its up to people to do their own diligence an support the projects that most closely align with their own beliefs and values. Ultimately, the free market will decide.