Three days after Bitcoin’s split: analysis and explanation of the fork
On August 1st 2017, Bitcoin Cash was created when a group of miners “forked” from the main bitcoin blockchain. In short, forking means that a group of people who saw a different future for Bitcoin switched to new software that changes the rules by which the Bitcoin network functions, leading to a new cryptocurrency: Bitcoin Cash. If you held X amount of Bitcoin before the fork, you received the same X of Bitcoin Cash for free. Bitcoin Cash could be seen as yet another altcoin, because it has no effect on the “real” Bitcoin network and users sticking to Bitcoin Core and compatible full node software will be entirely unaffected.
To understand why this happened, we should go a bit back in time.
Bitcoin is a decentralized network, meaning that no central party controls the supply, control or ecosystem. The bitcoin ecosystem consists of users who demand features, miners who validate transactions, and developers that implement code changes. All these parties are independent of each other and have their own incentives and priorities. New Bitcoins come into the system by miners mining a block (which shortened means when they proved all the transactions in that block are valid).
Being decentralized, Bitcoin has great potential and during the past two years the technology behind it, blockchain, received a lot of attention. One thing to realize in this, blockchain is designed to prioritize resiliency and access, not speed or cheap transactions. Think about how efficient it is if you send 20 cents to your neighbor and your whole neighborhood would have to approve this transaction. Thus predictably, as bitcoin’s adoption grew, so did the fees and costs to use the network as limited network space was in more demand. With more users, the 1MB blocks could no longer serve its user base, leading to high fees on transactions. Therefore, a scaling solution was needed. Yet change is not easy with a decentralized network. Without a central decision maker, the growing bitcoin community became composed of many opinions, incentives, and interests that did not align. Coming to consensus became more difficult the larger the network grew.
The scaling debate
Called the scaling debate, a discussion about the future of Bitcoin has been running for the past few years. These scaling discussions began to get more intense with the launch of Bitcoin XT (promoting bigger blocks). There were times when the BTC price was high and everyone seemed to have forgotten about the debate and other times were the stakeholders had intense discussions about it. A solution seemed far ahead, till this year in May. The community (the users of Bitcoin) decided to coordinate an activation that only required users to run nodes that supported BIP148 which enables the the activation of “Segregated Witness” (Segwit) on the 1st of August, rather than continue delegation to miners who had been stalling the upgrade constantly.
User Activated Hard Fork (UASF)
The BIP148 proposal received widely support: the first real action towards a scaling solution was reached. However, a week ago, miners decided to stop stalling Segwit. Thus on this contentious day, it went rather anticlimactically. BIP148 was enabled and the big-block community forked their own coin without trouble. Between the 8th and 14th of August Segwit should lock in on Bitcoin (depending how much mining power moves to Bitcoin Cash, making the planned time block 479,808 is supposed to be mined happen later). Ones it locks in, the code will be activated later in August. This will effectively upgrade the main bitcoin blockchain to allow for reduced transaction size and enables secure off-chain transactions through payment hubs: making the first scaling solution a success.
BCH Hard Fork
However, not everyone was happy with this solution: miners make less money when payments move off-chain. So, once the users announced this user activated soft-fork, a group of miners announced that this will lead to a hard fork from their side, taking advantage of the previous talk of an August 1st fork. This fork would lead to an increased block size to 8MB. This event has happened on the 1st of August. Causing some contention, the fork of bitcoin is referred to as “Bitcoin Cash” (BCH) which risks people confusing which “Bitcoin” they should use.
So, essentially Bitcoin knew 2 camps: users pro Segwit and miners pro blocksize increase. The way to fix conflict in a decentralized network is to split and take different routes, exactly as is what happened the 1st of August.
It’s up to the users now
It’s up to the user now to choose which chain to support. Each side accuses the other for centralizing Bitcoin. Segwit supporters accuse Bitcoin Cash for its increased blocksize, meaning less users are able to run the software on their computers. This creates a potential bottleneck that limits access to be a miner, centralizing miners to a small group of giant companies. However, Segwit isn’t perfectly decentralized either. Due to sidechains and Lightning network built on top of the blockchain, it will result in reduction of full validating decentralized nodes.
Closing Remarks: Looking back at the fork
No matter what solution you prefer more or will be used more, scaling Bitcoin automatically means some things have to become more centralized. Why? There is efficiency in centralization, thus choosing how to implement it without risking the resiliency of the network is the trick.
But no matter what camp you’re on: overall Bitcoin is progressing. The 1st of August is an important day in Bitcoin’s history, so let’s celebrate it together. And in the end, let’s not forget we all received an extra ticket to the moon ;)
