The Bitcoin Cash Story
Understanding the Bitcoin spinoff
A Peer-to-Peer Electronic Cash System
October 31, 2008
A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.
Bitcoin Cash was forged in the climactic finale of Bitcoin political drama that unfolded from 2010 to 2017. An economic minority, led by Haipo Yang of ViaBTC created the Bitcoin Cash fork at block height 478559. This created a new chain with a permanent incompatible rule change against the original Bitcoin network. With the creation of the new chain, we have the founding of a new cryptoasset.
A common view among Bitcoin maximalists is that Bitcoin Cash is a cheap ripoff of Bitcoin. This is based on select observations they find offensive. Bitcoin Cash began by “just” changing the block size parameter. Bitcoin Cash declined to include the SegWit softfork. Worst of all, some have been arguing that Bitcoin Cash actually “is Bitcoin.” That Bitcoin Cash perhaps inspired dozens of knockoffs including Bitcoin Gold and Litecoin Cash does not help its reputation.
What makes a cryptocurrency valuable?
Cryptocurrencies are difficult to value. They are not imbued with value through technology alone. Rather, it’s the market of buyers and sellers that determine the value. Today the market contains an abundance of speculators whom create wild oscillations in the values of cryptoassets. In theory, the market will mature and converge on appropriate valuations over time. To get there, the market will need a larger userbase that is not concerned with speculation, but real use.
Many variables factor into which cryptos people value and purchase. Brand, scarcity, and network effect are elements that keep Bitcoin in the lead for the moment. However, it’s possible that more expressive technology from Ethereum or other upstarts will eventually reign supreme. Other differentiators such as scaling could crown the ultimate winners.
What about cost?
A coin or token isn’t a physical good, but a virtual claim. These assets ultimately boil down to the right to use the network. To use the network is to create transactions that are processed by the network. The natural maturation of the market will force us to exit the speculation phase where the primary use case is to purchase crypto and hodl for years. Soon we should expect to enter the utility phase where people are primarily utilizing crypto to complete a transaction.
Different crypto networks may not be perfect substitutes, but the market may settle for adequate substitutes when cost is a factor. In the adoption phase, we must consider cryptocurrencies as products competing in a market. Bitcoin may remain the most immutable and censorship resistant cryptoasset, but we can expect that many users will be judging alternatives based on the cost to complete their transaction and not these ideals.
Bitcoin Cash pitches a parallel universe
Pursuing Bitcoin’s original goal of a transactional currency, Bitcoin Cash is the rejection of the Bitcoin Core philosophy that Bitcoin should be a settlement layer. Bitcoin Core demands that full nodes be within reach of inexpensive hardware and ordinary internet connections. Its stance based on the rationale that as it becomes harder to run a node, the fewer people will run them. This may force mining to further consolidate potentially jeopardizing Bitcoin’s censorship resistance. Ultimately, the current prevailing view is that the Bitcoin blockchain must remain compact and efficiently used for sake of conserving the public good.
The Bitcoin Core developers claim that Satoshi was operating under assumptions that no longer hold true given the consolidation of mining due to ASICs and mining pools. The Bitcoin Cash community believes that a network with more transactional throughput and technological improvements — both hardware and software — will contribute to decentralization by attracting new participants willing to overcome the hurdles of participation.
Bitcoin Cash takes seriously the ambition of Satoshi to create a system that can scale to Visa level transactions without the need for secondary layers. Bitcoin Cash dismisses the notion that average users will want to run a node and believe that it is much more important to have affordable transactions than the ability to easily validate the entire ledger for oneself. Bitcoin Cash is designed to be Simple Payment Verification (SPV) friendly. SPV means that payments can be verified as included in the main chain without validating the entire blockchain on the client’s device.
Just another s***coin?
The above disagreement to Bitcoin’s evolution resolved by splintering the Bitcoin network and community. Interestingly, during the fracture, enough economic value and social energy went towards Bitcoin Cash that it obtained significant market value and actually carbon copied or literally duplicated much of Bitcoin’s infrastructure and ecosystem. Most prominent Bitcoin exchanges also list Bitcoin Cash or BCH. The most tenured Bitcoin wallets have been adapted for Bitcoin Cash. All major hardware wallets support BCH. Bitpay, the largest active crypto merchant processor accepts Bitcoin and Bitcoin Cash.
Many projects originally built for Bitcoin and abandoned as Bitcoin’s transaction fees rose too high have been rebooted for Bitcoin Cash. Several early Bitcoin contributors have since turned their attention and interest towards Bitcoin Cash.
Gavin Andresen famously led the Bitcoin project through its post-Satoshi formative years, so his endorsement is quite meaningful.
Coping with the sheer size of many on-chain transactions
Bitcoin Cash has won a significant amount of market value, infrastructure and community support by providing a compelling vision that resonates with many. The main question now is can the vision succeed without devolving into a dystopia with two or three mega data centers processing all transactions?
The relationship between centralization and blockchain size remains controversial. One of the main variables being studied is block propagation time. The time it takes for a newly found block to reach the rest of the network is critical for a fair playing field for miners. Intuitively, as the size of a block goes up, the longer it may take to reach the rest of the network. This puts pressure on miners to join larger and larger pools so they don’t waste their resources mining without the newest state.
Active research is being done into allowing massively large blocks by decoupling block size from network propagation delay. One promising proposal to deal with propagation delay is to impose canonical ordering on the transactions within a block. Removing the ordering of transactions as a possible variable simplifies the set reconciliation problem. This greatly reduces the amount of information needed to transmit the contents of a block. Assuming network participants have access to the same list of transactions in the memory pool, propagation can approach a constant time.
Constraining the ordering of transactions within a block will allow Bitcoin Cash to eventually adopt the Graphene algorithm for network propagation. This research, led by Gavin Andresen of UMass Amherst, greatly diminishes objections to larger blocks based on mining centralization forces.
There have been a number of improvements made and planned for Bitcoin Cash. The May 2018 hard fork re-enabled many opcodes that were disabled in the early days of Bitcoin for fear of bugs. The Bitcoin Cash scripting language is now more expressive and flexible than Bitcoin’s and better enables tokenized assets and limited smart contract functionality on Bitcoin Cash.
Work is being done to improve the initial sync time for a new node. UTXO commitments can greatly speed up the time it takes for a new node to come online, especially if the chain history is large, if they have a commitment from a reliable source.
Bitcoin Cash recognizes that cryptocurrencies aren’t just software, but are meant for people and should focus on needs of people. On that note, a community fund was set up to further develop Bitcoin Cash’s usability and usage. On the usability front, the recent introduction of a new address format should reduce confusion and user error.
In general, Bitcoin Cash follows the notion that simpler is better and that digital currency’s killer use case is peer-to-peer transactions. The Bitcoin Cash developers are focused on building a rock solid base layer that sufficiently scales without breaking security.
Bitcoin Cash has a robust community of early Bitcoin supporters. Over sixty developers across several teams are contributing to its technology, and its pursuit of truly peer to peer payment network at the base layer. Bitcoin Cash employs a greater emphasis on SPV and an acceptance of specialization of the network. The network topology won’t look like Bitcoin, and it remains to be seen how censorship resistant Bitcoin Cash will be in the long run. Bitcoin Cash may find its competitive niche in use cases where transaction fees and confirmation times are more important than maximal security.
Disclaimer: Jordan Clifford is a Managing Director of Scalar Capital Management, LLC, an investment manager focused on cryptographic and blockchain related assets. Scalar Capital holds and may invest further in BCH, BTC and ETH.