On August 1st, 2017, a new digital currency called Bitcoin Cash was created. Unlike some other digital currencies that started from the ground up, Bitcoin Cash was created by splitting off, otherwise known as forking, the Bitcoin blockchain. In this post, I will be tackling various topics including Bitcoin’s scalability issue, what a blockchain "fork" is, and what led to Bitcoin Cash being created. Although the intended audience for this post is anybody and everybody who has an interest in digital currencies, if you are not already familiar with blockchain technology, please read this post first and then rejoin us! Now, let’s get this show on the road!
Bitcoin’s Scalability Issue
For most bitcoin owners and supporters, the end goal is global domination… I mean… adoption. Generally speaking, a currency’s value increases as the number of people who accept it as a form of payment increases. Bitcoin is no different. However, Bitcoin is different in the sense that the currency is based on a decentralized blockchain. Every miner on the Bitcoin network needs to be able to keep track of all past, present, and future transactions, and store that data somewhere. Don’t get me wrong, keeping track of this permanent ledger is essentially the true beauty of Bitcoin. On the other hand, it is also the biggest bottleneck in being able to scale the Bitcoin network as adoption increases.
Currently, the Bitcoin network has a block size limit of 1MB (one megabyte). This means that every block that gets added to the blockchain has to be 1MB or less, or else the network will reject it. A block is produced roughly every 10 minutes and it holds the transactions being made on the network. So the block size limit can be translated into “there is a maximum of 1MB of transactions per 10 minutes on the Bitcoin network.” Now, that translation can be further translated into “the Bitcoin network can handle roughly 3-7 transactions per second.” Initially, this size was perfect! There weren't many users of Bitcoin so having the blocks restricted to 1MB didn’t pose an issue. The network looked a little something like this (the cars representing transactions and the road representing the Bitcoin network)…
Currently, the Bitcoin network has a block size limit of 1MB (one megabyte). This means that every block that gets added to the blockchain has to be 1MB or less, or else the network will reject it. A block is produced roughly every 10 minutes and it holds the transactions being made on the network. So the block size limit can be translated into “there is a maximum of 1MB of transactions per 10 minutes on the Bitcoin network.” Now, that translation can be further translated into “the Bitcoin network can handle roughly 3-7 transactions per second.” Initially, this size was perfect! There weren't many users of Bitcoin so having the blocks restricted to 1MB didn’t pose an issue. The network looked a little something like this (the cars representing transactions and the road representing the Bitcoin network)…
As time progressed, more and more people started to use Bitcoin and we approached the 1MB block size limit. That looked something like this…
Finally, we’ve reached today’s Bitcoin network with millions of people owning and using the digital currency. As a result, we ended up here…
“Ok… we get it… Bitcoin is like rush hour traffic… but what does it all mean?”
I’m glad you asked (and hope you liked the traffic analogy)! Along with the decentralized nature of Bitcoin, Bitcoin has 2 measurable benefits that fundamentally make it better than our current financial payment system. Bitcoin is fast and cheap. Or… at least it was…
Fast: Instead of waiting 2 business days to clear the birthday check from your grandparents, if they sent you bitcoin, you would be able to start using it within minutes! Moreover, you can send bitcoin internationally within minutes and save the 3 business days a traditional international wire transfer takes to complete. Both of these statements hold true if the network isn’t clogged with transactions. However, remember that there is a 1MB limit on each block. With today’s adoption of the digital currency, there are times when the Bitcoin network can’t fit every transaction within the past 10 minutes in a single block. As a result, some transactions may get left out of a block… and left out of the next… and the next… Whenever I think about these neglected transactions, I recall the times in elementary school when there was only one spot left for the 5-v-5 basketball game and I was the lesser of the two players still waiting to get picked… dark times…
Ok, enough of that, back to Bitcoin! While sending bitcoins to a wallet of mine, I have experienced a delay of a couple hours before it finally reached my other wallet. For my specific situation, it didn’t really bother me because I wasn’t planning on using the bitcoins right away. However, think about a merchant who accepts bitcoins as a valid method of payment. As a merchant, I don’t want to have to wait an hour to know for certain if I got paid or not. If that wasn’t bad enough, there have been cases where a transaction on the Bitcoin network has taken days to confirm. So much for being fast…
Ok, enough of that, back to Bitcoin! While sending bitcoins to a wallet of mine, I have experienced a delay of a couple hours before it finally reached my other wallet. For my specific situation, it didn’t really bother me because I wasn’t planning on using the bitcoins right away. However, think about a merchant who accepts bitcoins as a valid method of payment. As a merchant, I don’t want to have to wait an hour to know for certain if I got paid or not. If that wasn’t bad enough, there have been cases where a transaction on the Bitcoin network has taken days to confirm. So much for being fast…
Cheap: Once upon a time in Bitcoin history, sending a transaction was dirt cheap! I’m talking one one-hundredth of a penny dirt cheap. Oh, how far we’ve come since then! Naturally, as time progressed, and the value of Bitcoin increased, so did the average transaction fees. However, unlike traditional payment companies which increase fees based on inflation and other (hopefully) well thought out criteria, Bitcoin’s fees increase based on a competitive market. A fun fact about Bitcoin and its transaction fees is that the sender chooses how much, or how little, to spend on transaction fees. In other words, if you really want to, you can send all your bitcoin transactions for free and not pay a dime to the miners. Unfortunately, as the saying goes, nothing good is free in life.
As I’ve mentioned before, there are more transactions waiting to be put on the blockchain in 10 minutes than there is room in a single block. With that said, miners get paid in two ways on the Bitcoin network. If a miner successfully adds a block to the blockchain, they get paid by collecting the static mining reward (currently set at 12.5 bitcoins). In addition, the miner also collects all the transaction fees associated with the transactions included in the block. Therefore, miners are incentivized to fill their 1MB blocks with the transactions that include the most transaction fees for them. So yes… theoretically, you can send bitcoins without paying any fees… but you’ll have a hard time finding miners who willingly add it to their block.
Now, this brings us back to that competitive market idea. If a sender wants to make sure their bitcoin transaction gets added to the blockchain quickly, they must pay a pretty penny. For a majority of Bitcoin’s life, transaction fees have been minuscule… typically under 10 cents. Then, during 2016, we started to see a noticeable increase in transaction fees. Nonetheless, we were still averaging under 50 cents throughout the year. Then comes 2017… and well… the network got absolutely swamped! People everywhere started to fight for space in the next block and average transaction fees surged to a peak of a little under 6 dollars! Imagine trying to pay your friend back for that delicious dinner at Olive Garden and having to hand over 6 additional dollars if you want the bitcoin to actually get in his wallet in a reasonable amount of time… I mean… it wasn’t that delicious!
Now, this brings us back to that competitive market idea. If a sender wants to make sure their bitcoin transaction gets added to the blockchain quickly, they must pay a pretty penny. For a majority of Bitcoin’s life, transaction fees have been minuscule… typically under 10 cents. Then, during 2016, we started to see a noticeable increase in transaction fees. Nonetheless, we were still averaging under 50 cents throughout the year. Then comes 2017… and well… the network got absolutely swamped! People everywhere started to fight for space in the next block and average transaction fees surged to a peak of a little under 6 dollars! Imagine trying to pay your friend back for that delicious dinner at Olive Garden and having to hand over 6 additional dollars if you want the bitcoin to actually get in his wallet in a reasonable amount of time… I mean… it wasn’t that delicious!
“Uhh… Can I interrupt?”
Well… yes… you sort of already did.
“Well, it’s just that I think I know the solution… just increase the block size limit. That way more transactions can fit in a block and the network can be both fast and cheap again!”
Interesting that you brought up! That directly relates to Bitcoin Cash and I’ll tackle that topic shortly. But before we talk about that, let’s briefly discuss what a “fork” is within the world of blockchain.
Forks
No, no. Not that type of fork… who picked that image! Anyways, at the most basic level, a “fork” is a change to the code of a digital currency network, like Bitcoin. Bitcoin is an open-source project. Being an open-source project means that anybody and everybody can both access and alter the code. Furthermore, Bitcoin is decentralized and no one can force you to use a certain version of the Bitcoin software. If you don’t agree with an upgrade to the network, you can refuse to update and continue to use the old version you currently agree with. Likewise, if you don’t like how the current version is running, you can alter the code and create your own version. However, unlike other open-source projects, Bitcoin is a tad different since it is dependent on users being able to interact with the rest of the network and agreeing upon a shared history (the blockchain). This difference is most important for the miners who keep the network running at all times. This leads us to the two different types of forks possible: a Soft Fork and a Hard Fork.
Soft Fork: A Soft Fork is a change to the code that is backward compatible with previous versions of the software. In other words, a Soft Fork doesn’t split the blockchain. Miners who upgrade will still be able to interact with miners who don’t, thus maintaining a single blockchain/network. Soft Forks are very common in Bitcoin because as time progresses, improvements must be made to the software and most of these can be done through a Soft Fork.
Hard Fork: Unlike a Soft Fork, a Hard Fork is a change to the code that is not backward compatible with previous versions of the software. Due to this incompatibility, a Hard Fork splits the blockchain into two different chains that go their separate ways. Those who upgrade and those who don’t. Think Paul Walker and Vin Diesel at the end of Furious 7.
Bitcoin Cash
Last, but certainly not least, let’s see how all of this relates back to Bitcoin Cash. Bitcoin Cash is a digital currency that was created by hard forking the Bitcoin network on August 1st, 2017. Leading up to this historical event, there had been a civil war going on in the Bitcoin community about how to address the scalability issue. In the end, a majority of the network decided to upgrade using Segwit2x. Segwit2x (which stands for Segregated Witness 2x) is an upgrade that changes how data is structured in each transaction, allowing for more transactions per block, on the Bitcoin network (this is the Segregated Witness part). In addition, roughly 3 months after the Segregated Witness part is activated, the block size limit will increase to 2MB (this is the 2x part). Another major advantage of Segwit2x compared to the previous version of Bitcoin is that it allows for many third-parties to interact with the Bitcoin network.
Unlike the majority of the network, there was a group of people who did not support upgrading using Segwit2x. They think that Segwit2x will not adequately solve the scalability issue and that by allowing many third-parties to interact with the Bitcoin network, it can lead to centralization. Instead, their solution was to increase the block size limit to 8MB and add a few other additional features. This upgrade would not be backward compatible and thus required a Hard Fork from the Bitcoin network, resulting in the creation of a new digital currency, Bitcoin Cash. Since Bitcoin Cash was created by forking the Bitcoin network, both digital currencies shared the same history at the time of creation. This means that if you owned 1 bitcoin before the fork, after the fork, you still have 1 bitcoin on the original blockchain, but you now also have 1 bitcoin cash on the new blockchain!
Since a fork of this scale has never happened on the biggest digital currency network in the world before, all eyes were glued on the prices of Bitcoin and Bitcoin Cash to see who would come out victorious. The moment Bitcoin Cash was released on certain exchanges, the price was in the $400s. It soon surged upwards the following day, briefly peaking around $1200-$1300 on some exchanges. Following that, it has come down to $200-$300 as of now (8/7/2017). Back on the original blockchain, Bitcoin’s price went from the $2700s the day before the fork, to $3200-$3300 as of now (8/7/2017). Many, including myself, think the price decline of bitcoin cash, and the subsequent increase in price of bitcoins, has shown which out of the two currencies will reign supreme moving forward (the original Bitcoin).
As you can see, making changes to a digital currency can get pretty complex! Even that simple fix you suggested earlier of just increasing the block size limit ended up making a totally different digital currency. In my opinion, even though this process of forking often causes large debates and takes a considerable amount of time, it’s the best aspect of a decentralized digital currency. It puts the power back into the people’s control and allows the majority to decide on the best system for them.
As always, I hope you enjoyed reading this post! Please feel free to reach out with any questions, concerns, and comments!
- Jeremy Liu
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