On why I believe Bitcoin Cash is a good idea.
On August 1st Bitcoin forked into a majority and minority chain as measured by mining power following each chain. The forking party has called its minority chain Bitcoin Cash. For the purpose of clarity I will call Bitcoin Core the majority chain after the fork and simply Bitcoin the common chain until August 1st or the overall Bitcoin ecosystem.
As of writing Bitcoin Cash has survived the hard fork and is slowly gaining momentum with many exchanges now listing it for trading. It may very well not exist by the end of 2017 but so far I am supporting this initiative mostly because it puts to rest a discussion that has had a toxic influence in the Bitcoin community for at least the last 2 years. Now that the block size cap debate is past us the Bitcoin community as a whole can go back to focus in developing and growing the most exciting experiment in money and finance ever in human history.
Additionally, I believe there are some other good points why this fork was needed.
Markets are efficient decision makers.
I am a trader and I believe in market economies. Because markets bring to life the ‘wisdom of the crowds’ or ‘swarm intelligence’ they can collectively make much better decisions than central planners and bureaucrats alone. This has been shown to be true in history again and again and again. Bitcoin development had reached a point in which after years of discussions it was simply not possible to reach a consensus about how it should scale. I will not get into the merits of each camp as well into the possible hidden agendas at play. There are literally thousand of hours of reading available in twitter, slack, reddit, bitcointalk, etc. on the matter for whoever is interested. The point I’m trying to make here is very simple. If there are two irreconcilable views about how Bitcoin should scale then the best that can be done is split the chain and let both versions compete in a free market because at the end of the day markets will make the best decision. Whichever version best suits the needs of the users will prosper and reach higher levels of adoption. Versions built on false propositions or advancing hidden agendas will not endure the ruthlessness of free markets. This is just how things work in a market economy.
Forking is the de facto governance model in the decentralized cryptocurrency world.
During the time leading to August 1st events many relevant people in the community made the point that forking Bitcoin was a bad move that would hurt its valuation and adoption and consequently it should remain one at any cost. It is still too early to observe the value of Bitcoin Cash in the markets as transfers to and from exchanges are still lengthy or not possible at all, but the overall effect of the fork on aggregate value, if any, has been positive. Furthermore it must be clearly stated that any holder of Bitcoin prior to the fork has now an equivalent amount in Bitcoin Core and Bitcoin Cash.
Also Ethereum underwent a major fork one year ago and both forks have survived and prosper so the question that deserves consideration is if forks are that bad after all? I must admit that I also had this negative view until some time ago but I have now changed my mind. I now see cryptocurrency forks as a governance mechanism in a system in which there is no governance by design. There are some cryptocurrencies like Decred that are trying to build in blockchain governance by token voting systems. Time will tell if this approach will be successful but until then forking will be the de facto governance model.
Another very interesting open question is whether we will ever see a ‘coin merge’ or ‘reverse fork’ in cryptoland. That happens all the time with equities in the world’s legacy financial system but so far has never been observed with blockchain assets.
Segregated Witness does not offer the same security properties as Bitcoin.
Segregated Witness, or Segwit for short, is an approach developed by the Bitcoin Core developers as a scaling mechanism. It also solves other issues with Bitcoin like a nuisance called transaction malleability but I will like to focus only on the scaling predicate to make my point. In very simple terms what Segwit does is it removes the cryptographic signature from an incoming transaction and stores it in a separate database outside of the blockchain. In this manner Segwit is able to pack more transactions in the same amount of blockchain space than non-Segwit transactions. Without getting into the technical details my personal view is that the level of security offered by a Segwit transaction is just not the same as the level of security offered by a non-Segwit transaction with its cryptographic signature stored in the blockchain. I’m not saying Segwit is insecure or implying that Segwit outputs can be claimed by anyone, this is certainly not the case. What I’m stating is that Segwit is less secure relative to a non-Segwit transaction. (For a more technical explanation regarding this point please check the following presentation by Dr. Rizun here.)
If people would like to store their assets in Segwit outputs that’s ok with me, but personally I want for my company’s assets the highest level of security Bitcoin technology can offer. The cryptocurrency domain has already its good amount of threats out there as many people have unfortunately learned. I certainly don’t want weaker security for my assets and Bitcoin Cash simply does not implement Segwit.
One could counter argue that Bitcoin Core supports both Segwit and non-Segwit transaction an this is of course correct. Unfortunately Bitcoin Core also engineered a “Segwit discount” feature that will make a non-Segwit transaction more expensive as 1 MB capped blocks are expected to be mostly full in Bitcoin Core.
There is no valid reason to keep the blocksize capped at 1 megabyte (MB).
Let’s start from the beginning. The reason why there needs to be a cap in the block size is because it protects the network nodes from spam. If there were no limit an attacker could send arbitrarily big malicious blocks causing nodes to crash. This was found by Satoshi Nakamoto himself in the early days of Bitcoin and resulted in an emergency patch being rolled out with a 1 MB cap. There is nothing magic about 1MB. I guess Satoshi saw it as an appropriate ceiling given the small amount of transactions those days which resulted in blocks only some kilobytes big.
Fast forward to the future increasing the block size cap has been a highly contentious debate in the Bitcoin community. Bitcoin Core developers are adamantly opposed to lifting this cap while some even argue that it should be reduced by as much as 70%. They argue that bigger blocks produce higher centralization in mining and validating nodes. On the other hand Bitcoin Cash developers argue that based on current available technology to the average node operator, the block size cap can be increased to 4MB or maybe even 8MB without significantly damaging the network’s decentralization. Furthermore they believe that the expected growth in processor speed and internet bandwith as swell as reductions in cost of data storage devices will enable the block size to continue to grow at a moderate rate again without hurting decentralization. Interestingly both camps agree that Bitcoin will never be able to achieve VISA-like transaction throughputs only via block size increases and that this level of performance can only be achieved via ‘layer 2’ technologies.
My personal view is more in line with the big blockers. I believe that ‘layer 2’ technologies will eventually be necessary to support Bitcoin’s growth but the block size cap can and should be increased in the short term to allow Bitcoin to handle more transactions at a reasonable cost. People that have been watching the rise of Bitcoin since the early days know very well that early adopters have been attracted in part because it enabled fast, cheap, private and uncensored transfers worldwide. Bitcoin can only achieve fast and cheap if there is enough block size space available to accommodate new users.
Disclaimer: I am long both Bitcoin Core and Bitcoin Cash. Don’t take anything I wrote as a recommendation to trade or invest in any asset.
