A beginner’s guide to Bitcoin Cash

What is Bitcoin Cash?

According to the Bitcoin Cash website, “Bitcoin Cash is peer-to-peer electronic cash for the Internet. It is fully decentralized, with no central bank and requires no trusted third parties to operate.” This is the exact definition of Bitcoin because Bitcoin Cash is a hard fork of Bitcoin. A fork is a split of a blockchain into 2 different versions. This can happen to any blockchain but specifically this Bitcoin hard fork was caused by groups disagreeing with how the Bitcoin blockchain should evolve over time. This post should help those who are new to Bitcoin Cash to understand how it is different than Bitcoin.

Scaling Issues

Since its creation in 2009 by Satoshi Nakamoto, bitcoin has become increasingly popular to use as digital money. As use of the network has increased, the Bitcoin blockchain has started running into scaling issues due to the limited number of transactions that can fit into each 1 MB Bitcoin block. A block is a group of transactions that are packaged together and validated. A new Bitcoin block is processed around every 10 minutes.

At a 1 MB block size limit, the Bitcoin blockchain can only handle 7 transactions per second compared to a peak of 56,000 transactions per second for Visa. A sustained increase in usage over the years has led to a Bitcoin network where transactions can take significantly longer to find their way into a block unless one sets a high transaction fee. Periods of high activity can lead to network congestion and a spike in transaction fees which make the Bitcoin blockchain impractical for some use cases such as micropayments.

There are varying approaches to increasing the number of transactions Bitcoin can support and each approach brings unique trade offs such as having to balance speed, cost, and security. Since Bitcoin is open and globally accessible, there are numerous groups that use the blockchain for different use cases and economically benefit from the blockchain in different ways. While each of these groups has a vested interest in Bitcoin, none of them have sole decision making power over the upgrade process. As a result, a large majority of these parties must come together and agree upon any changes to Bitcoin for them to be enacted. As a result, the community has been at a standstill for years but recently has agreed upon upgrades to help Bitcoin scale as a payment network.

Segwit2x

The original Bitcoin blockchain plans to move forward with a plan called Segwit2x which involves implementing Segregated Witness (SegWit). SegWit is essentially a change to the transaction data format that counts as less storage space against the block size limit. This upgrade would allow for adding scaling innovations like Lightning Networks where transactions can quickly settle off blockchain meaning not all transactions will have to go through the public ledger. Another cryptocurrency Litecoin was able to successfully implement SegWit and serve as a testing ground for Bitcoin’s potential adoption of it. A few months after SegWit is implemented, block sizes are also planned to increase from 1 MB to 2 MB which would allow more transactions to fit into a block.

Bitcoin Cash

On Aug 1, 2017, a hard fork of Bitcoin created Bitcoin Cash. The history of Bitcoin and Bitcoin Cash were identical up until the fork. If a person controlled the private keys to their bitcoin or had their bitcoin stored on an exchange which supported bitcoin cash, they would automatically own a 1:1 equivalent of bitcoin cash for their bitcoin.

Bitcoin Cash focuses on immediately increasing the block size from 1 MB to 8 MB without implementing SegWit. This allows more transactions to be included in the network and thus leads to lower transaction fees. Bitcoin Cash has received mixed reception within the community and not all exchanges added support for it. Some people believe that Bitcoin Cash will help the technology scale quicker while others believe that a hard fork of Bitcoin creates unnecessary confusion to the public and damages the reputation of Bitcoin as a divided community.

Future

It is unclear which chain will win in the long run or if we will end up having two separate chains of Bitcoin and Bitcoin Cash, or eventually even more than two chains that will evolve differently over time. A potentially exciting part about hard forks is that if a group fundamentally disagrees with the ideologies of the original group, they can split off to start their own version with the same technology but different strategy and governance model. This allows the entire cryptocurrency space to evolve by having some hard forks try out new things. Regardless of the outcome of these two chains, we are experiencing some very exciting times in the cryptocurrency community.

Resources

If you’re interested in learning more about Bitcoin Cash, below are some links that may help you understand it further.

Thanks to Will Warren, David Farmer, Jordan Clifford, Maksim Stepanenko, justinpobrien, and Arya Soltanieh for reviewing this post.

Please note all opinions in this post are my own.