The Hard Fork That Split Bitcoin in Two

By Erik Paluka

*Caveat: The information presented here is a very simplified version of the actual events and facts to make it more digestible by non-techies. Enjoy!

It’s been a crazy few weeks for Bitcoin. Two weeks ago, the Russian based digital currency exchange BTC-e had their server equipment and web domain seized by U.S. authorities for operating an alleged international money laundering scheme. Apparently, the world is closer to finding out who stole over 600,000 Bitcoins from the Mt. Gox digital currency exchange back in 2014. The 21-count grand jury indictment includes the charge of laundering funds from the hack, which amount to more than $2.5 billion CAD in today’s price ($4,300 CAD per Bitcoin).

That in itself is worthy of a blog post, but this world isn’t normal life. This is the realm of crypto where things happen and move so quickly with surprises around every corner. You see, the Bitcoin community has been attempting to scale its protocol for the past two years, but has not been able to come to an agreement on how to do it. Bitcoin can only support around 6 transactions per second, whereas Visa’s VisaNet payment network can support 56,000 per second. For the masses to truly adopt Bitcoin, the community needs to agree on how to increase its transaction capacity.

On one side (A), people want to use off-chain solutions, notably Lightning Networks, which are complex, multi-party, bi-directional payment channels. This solution allows transactions to occur off of the blockchain and only settle on-chain when needed. The other side (B) wants to increase the block size from its current size of 1 MB. A block is a container of transactions that gets added to the ledger (blockchain) every 10 minutes. Side A does not want this increase in block size as it makes the network less secure, which may make it easier for opponents of Bitcoin to successfully attack the network. If Bitcoin is going to upend the global financial system and bring in a new world order like many of its proponents want, then security is fundamental to its success. On the other end, side B doesn’t want off-chain solutions since the people who support the network with their hardware and electricity (miners) receive less in terms of a monetary reward. These miners receive the fees that users pay to make transactions. If most of these transactions move off of the chain, then miners receive less money.

Two weeks ago, the community came to an agreement and decided to enable off-chain solutions by signalling (voting) to lock-in and activate the associated programming code dubbed Segregated Witness. We all thought a split in the community was averted, until it was announced that side B was going to hard fork the codebase and create its own cryptocurrency just like Bitcoin, but with a larger block size of 8 MB. On August 1, the split officially took place and we now have two similar cryptocurrencies: Bitcoin and Bitcoin Cash. Luckily, almost every holder of Bitcoin got the same amount of Bitcoin Cash, which meant free money! Bitcoin’s codebase has been forked many times before to create new cryptocurrencies (e.g. Litecoin), but this is the first time that such a large amount of Bitcoin miners have moved over to the other coin. Hopefully, both cryptocurrencies will be able to exist side by side and, like they say in the community, go to the moon!

Erik Paluka is a Lead Agile Software Engineer at TribalScale with a strong affinity towards all things related to cryptocurrencies. With a background in computer science research, Erik likes to focus on developing and employing new technologies in the fast moving tech space. An avid investor, he also enjoys balancing his life with his love for fitness and travelling.

Follow Erik on Twitter for more on his thoughts about blockchain, cryptocurrency and tech in general!

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