Contrary to popular belief, cryptocurrency wallets don't store currency like traditional pocket wallets. Cryptocurrencies don't get stored in any single location or exist in physical form. Instead, these wallets keep the private and public keys required to interact with various blockchains. They generate information, in the form of public and private keys, to send and receive crypto via blockchain transactions.
The information on the wallets also includes an address (an alphanumeric identifier) that is generated based on the public and private keys. The address is essentially a location on the blockchain where other users can send coins to. Therefore, if a user wants to receive funds, they share this identifier with the recipient. In the event that the user loses that address, they lose control over their digital assets and digital money.
A person can also only execute transactions that transfer their digital assets or change them in some way through these keys. A user accesses their cryptocurrency through their private keys. This is regardless of whatever wallet they use, as long as they have the corresponding private key, which is why it's important never to disclose your private key to anyone.
Types of Wallets
Dependent on its working mechanism, there are two main types of crypto wallets; hardware and software (also known as hot and cold wallets respectively). Users rely on either for the ideal security of the funds in your wallets and transactions.
A hot wallet is any wallet that is accessible via the internet. They are a riskier environment to keep cryptocurrency compared to an offline wallet. This is because a connection to the internet makes the user vulnerable to hacking and malware. They are recommended for storing a small amount of cryptocurrency for daily transactions. Their ease of use makes them convenient for traders and frequent users.
These wallets come in many different forms with most being connected to the internet. However, due to hacking and malware threats, your software wallet is only as safe as your phone or computer is. The most common types of software wallets are desktop, mobile, and online wallets.
Online wallets allow a user to access blockchain through a browser website. The wallets run on a cloud, and the user can access them from any device that has an internet connection. These websites are managed by a third party that can hold and manage private keys on your behalf.
Admittedly cheap and easy to use in terms of access, they are less secure because of susceptibility to hacking. They are more appealing to inexperienced users who are still learning how to handle their assets.
These are software you download and execute locally on a PC or laptop. They give a user full access over their keys and funds. They also offer one of the highest levels of software security because the wallets are only accessible from a single device. The software is encrypted with a password that gives you access to your funds. However, desktops are still susceptible to viruses and malware, so as a user, you should ensure your device is clean before wallet installation.
They function similarly to desktop wallets but are designed as smartphone applications. They are convenient and enable the user to perform daily transactions and payments. They can even send and receive cryptocurrency through reading QR codes. However, they can still get malware infection or get lost, so the user is advised to encrypt the wallet with a password.
Cold wallets store cryptocurrency offline and have no active internet connection. They use a physical medium to store keys offline, making them less vulnerable to hacking. They are often used for long-term storage, making them ideal for storing more significant amounts of cryptocurrency. They are a safer alternative to storing user assets compared to hot wallets.
These are stand-alone, offline devices which use a random number generator (RNG) to generate public and private keys and store them. These wallets are downloaded and reside in hardware like a USB or smartphone. A user can purchase the hardware with the software already installed in them. It's safe from malware, and hacking attempts as the private keys never leave the device. However, it's important to purchase the hardware from a trusted source as some hackers sell wallets that are already corrupted.
It is essential to store it safely as hardware can get stolen or lost. They are less user friendly as funds take time to access compared to software wallets.
With this wallet, all you have to do is print or write out your private keys on paper. By definition, this is now a cryptocurrency wallet, and a user shouldn't make it susceptible to lose or ruin. It is safe from hacking, malware, or loss if stored securely like in a safe.
If you do not intend to send or receive bitcoin regularly, and you are merely holding your funds long-term, paper wallets are perfect for you. It is cheap, safe, and secure.
Tips on Picking the Right Wallet
If conducting numerous transactions, choose a wallet that enables fast transactions. The wallet you pick depends on the length of time you wish to store your assets and how much you are storing. Now, hardware wallets are highly recommended for handling significant sums. On the other hand, mobile wallets are more suitable for daily operations. For the latter, hot wallets are recommended due to easy access.
Safety and Security
It is essential to keep critical information personal. To ensure optimal security of your funds, for large sums, cold or deep cold storage are suitable and come highly recommended. They are less exposed to hacking and malware as opposed to the hot wallets that are always online. Pick a wallet that allows you to encrypt and set a password for added security.
Consider a cold storage wallet for your cryptocurrency. As opposed to hot wallets that are always online, cold wallets are more secure and ensure the safety of your private keys. You can easily access, transact, and unplug your hardware device.
Number of assets/funds
If you would like to deal with multiple assets or cryptocurrencies, you might want to consider multi-asset wallets. For example, a wallet with an inbuilt shapeshift means you can easily exchange different types of currencies while trading and transacting.
Consider getting a wallet whose pertinent information and details are not privy to a third-party. Some exchange wallets are controlled by the wallet web owner leaving the users exposed to hacking and, at worst, losing thousands worth of cryptocurrency. The wallets that require a third party like online wallets are a bit of a security risk as they give someone else access to your keys.
Whether you want to simply create a wallet for daily transactions or one to store the majority of the portion of your digital assets, remember these tips. Create a wallet with top-notch security that will spare you the loss or ruin that comes with possible malware or hacking. Enjoy trading and transacting by choosing the most suitable wallet.
Bitcoin is the first established cryptocurrency in the world. It was launched in January 2009 by a pseudonymous developer, Satoshi Nakamoto, whose true identity has yet to be verified. Everyone rumoured to be the real identity of BTC's creator publicly denied being Nakamoto. It was introduced with the promise of lower transaction fees than traditional online payment mechanisms, and unlike government-issued currencies, it is operated by a decentralized authority.
What makes Bitcoin advantageous to a lot of people is that no authority can interfere with Bitcoin transactions, take people's money away, or impose transaction fees. It has full independence from world governments, banks, and corporations.
Besides, every Bitcoin transaction gets stored in a massively distributed ledger called the blockchain, which makes the BTC movement extremely transparent. It means that if someone attempts to fraud in a block – a combined digital record of the transaction - it can be easily spotted and corrected by anyone. Also, Bitcoin gives its users total control over their finances since it is not controlled as a network.
How Are Bitcoins Created?
In the traditional financial system, fiat money is usually created by having central banks print out the money. Since bitcoin is not controlled by any central authority and is not a physical money, it cannot be created through printing.
New bitcoins are created through a process called mining. The process involves solving complex mathematical computations using cryptography. Miners, also called nodes, use up a lot of electricity and computational power to create new bitcoins. As such, mining bitcoin isn't easy, and it takes an average of ten minutes to have one coin created.
Once a miner has solved the puzzle, they put up the solution in the network. Other miners have to be in consensus that the puzzle is solved, after which the miner adds a new block to the blockchain and they get a block reward. Currently, miners get 6.25 BTC for every block mined. This amount is usually reduced by half, after every halving event, which occurs after every four years.
Bitcoin Fun Fact: Satoshi left Bitcoin in the hands of a few prominent members of the BTC community around mid-2010 and named Gavin Anderson as a lead developer.
Acquiring and Storing Bitcoins
Seeing as bitcoin mining is a tedious process that needs a lot of computational power, not many people can mine bitcoins. So, how do you go about obtaining some bitcoins?
Your best bet would be to buy the coins in a cryptocurrency exchange. These are online platforms that allow users to exchange fiat money for bitcoin and other cryptocurrencies. There are several crypto exchanges that you can use. But, it would be best if you were careful to get one that is legitimate and won't end in you losing your money.
Coinbase, Etoro, and Bitfinex are some of the notable exchanges you can use to buy bitcoins. When choosing an exchange, be sure to do some diligent research since these platforms differ. They come with different features, have different requirements, and offer different trading opportunities.
When it comes to storing your bitcoins, you will need a digital wallet. The wallet contains a combination of addresses and keys to help secure the coins inside. It works similarly to a bank account, only that in this case, you are solely responsible for the safety of your funds.
Like exchanges, there are different types of digital wallets. When choosing one, bear in mind the different levels of security that each wallet provides. You can either have a web, paper, mobile, or hardware wallet. Of these options, the hardware wallet is the most secure one and is ideal if you are going to be storing large amounts of bitcoins.
Advantages of Bitcoin
Bitcoin gives everyone freedom from any intermediaries being in charge of your money. Cryptocurrencies are as legitimate as fiat currencies when it comes to buying things. With the existence of numerous deep-web markets that only accept Bitcoins in mind, you may be able to purchase some things more comfortable with BTC than with any other currency.
- Safety and Control
Bitcoin gives its users full control of their transactions. No one can steal your payment information from merchants or withdraw money from your account without you knowing and agreeing to it. Also, BTC allows its users to protect their money with backup copies and encryption.
- Can't be counterfeited
An excellent example of counterfeiting in the digital world is using the same money twice – also called a 'double spend' - interpreting both transactions fraudulent. Bitcoin counters this by using blockchain technology as well as the various consensus mechanisms built into all BTC algorithms.
Drawbacks of Bitcoin
- Legalization and level of recognition
The use and trade of Bitcoins is encouraged in some countries and banned and outlawed in others. The legal variation from country to country makes it hard for the mass adoption of Bitcoins.
Although a lot of countries have recognized and legalized Bitcoin, those countries that have not, have the majority of their businesses, whether big or small, utterly oblivious to it.
The cryptocurrency market is highly volatile, with its prices scurrying up and down, going through various bubbles and busts. Bitcoin's price is unpredictable, like, throughout its history, it has been conquering new heights, only to sustain a massive drop straight after. The rapid and drastic changes can cause significant financial damage to an imprudent investor.
Bitcoin has appeared as one of the most innovative technologies in modern times since it began in 2009. Although several other cryptocurrencies have emerged since then, Bitcoin remains to be the most popular one by market capitalization. If you are looking to delve into the world of cryptocurrencies, getting acquainted with Bitcoins would be the ideal place to get started.
Blockchain technology has risen in popularity in recent times and is getting more common by the day. While it may sound a little complicated depending on interest, blockchain technology is rather simple to understand and quite fascinating in how it works.
Simply put, blockchain is a decentralized, shared ledger, a digital database of financial transactions, saved on a cluster of computers in different places and is not owned by any single person or entity. The ledger is continuously growing as more transactions are carried out, each forming a block adding to the database, which creates a continuous chain of data containing records accessible to the public.
Pillars of Blockchain Technology
There are three main pillars of blockchain technology - decentralization, immutability, and transparency.
Decentralization is the one defining factor of blockchain technology. It refers to the fact that the financial transactions are stored in multiple locations and multiple computers. Therefore, no single entity has complete control over the data stored in the ledger. In the traditional financial system, everything is centralized, and the information is only in the hands of your bank – which is easy for unauthorized users to access.
Blockchain technology removes this risk through decentralization, where everyone has access to the data but cannot tamper with it. Using a decentralized system ensures that you do not have to go through a third party to interact with someone else. A centralized system will require that you go through an intermediary, like a bank, to complete a transaction. If something were to happen to a centralized system, services would grind to a halt, and the information would be corrupted. A decentralized system, on the other hand, ensures information is available in multiples rather than at a single source, which plays a crucial role in data security.
Once data has been entered into the digital database, it cannot be corrupted or tampered with, thanks to immutability. Cryptographic hashes, a technology that takes transactions as inputs, runs them through a hashing algorithm, and then produces an output of a fixed size and length, makes immutability possible.
Immutability secures the transactions and makes it impossible for anyone to get creative with the records in the ledger. Blockchain technology would, therefore, be ideal for preventing such things as embezzlement and other financial crimes.
A rather intriguing aspect of blockchain technology is its transparency while guaranteeing privacy to its users at the same time. The identity of any user is protected by complex cryptography protocols and are represented just by a public address that does not reflect their identity.
At the same time, every transaction made by a person, though their identity is secure. Transactions are recorded in the public ledger and displayed to the public for everyone to see. You can use the public address of a person, company, or organization to know every transaction they have made. This transparency forces companies to be honest in their spending, thus ensuring a high level of accountability which has not been seen before in other conventional methods.
How Does Blockchain Work?
To understand how blockchain technology works, we will use an example of two entities trying to complete a financial transaction. Take, for instance, two people A and B, with A wanting to send money to person B.
In blockchain technology, this transaction appears as a block which is then distributed across a network in various servers as opposed to a single one. Person A initiates a deal, and a network of computers works to prove that the owner and the transaction are authentic.
As soon as the transaction has been verified as valid, the block is then added to the digital ledger. This information is reconciled and updated across the servers and becomes a permanent record. The record of ownership for person A is now transferred on to person B, and the money becomes theirs.
The block must be given a hash after verification, a unique identifier for that particular transaction. This entire process is made to eliminate the middleman while ensuring that it is secure, private, and transparent.
Blockchain and Bitcoin
Tracing back to 2008, Bitcoin was created by a person or group of persons under the pseudonym Satoshi Nakamoto. It is a decentralized currency that is not issued or controlled by any central authority as opposed to money issued by a central bank. A network of computers called nodes or miners manages the blockchain behind bitcoin. These are computers built to run complex mathematical problems to allow a transaction to go through.
A person making a bitcoin transaction will do so from their digital currency wallet, which has a ‘private key’. This key is that specific person’s digital signature. It is mathematical proof that this particular transaction is coming from that person’s digital wallet. If multiple people are doing these transactions at the same time, they all get organized together into a block which is then sent out to the Blockchain network. Once the transactions have been verified, they are added onto former blocks creating a blockchain.
Uses of Blockchain in the Technology World
Blockchain technology has been fundamental in revolutionizing the financial scene. Thanks to the technology, we have seen several cryptocurrencies come up. However, blockchain’s unique features, such as decentralization provide leverage for the technology to disrupt several industries. Here are some of the uses of blockchain in the tech world.
- Smart Contracts
Blockchain can be used to facilitate, negotiate, and verify contract agreements under a specific set of conditions agreed to by the parties. Once everything is agreed to, the terms of said agreements are automatically executed.
With smart contracts, parties can get into agreements without intermediaries and have the transactions recorded in a public ledger. These contracts will help provide transparent transactions and minimize cases on involved parties going back on their word.
- Protection of Intellectual Property
Blockchain technology can be used to ensure that proprietary digital data is certified. The technology creates an indisputable record of ownership which can be used as proof of existence. Additionally, it helps avoid falsification of documents and counterfeiting of data such as certificates and copyrights.
- Payment Processing
Blockchain technology has been most influential in the financial system. Thanks to this technology, you can process payments from one party to another without an intermediary. By removing intermediaries such as banks, blockchain technology has helped to reduce transaction fees and minimize the time taken to complete transactions.
- Digital IDS
With blockchain technology, we can get rid of physical IDs and replace them with digital ones. Thanks to the multi-step and multi-factor identity verification process, blockchain technology ensures that digital IDs offer better security. Besides, third parties will not access your data, as is the case with the internet today, which results in too many adverts, especially in email inboxes.
Other sectors where blockchain technology could come in handy include governance, especially when trying to ensure full transparency in activities such as voting, supply chain management, healthcare systems, and so much more.
Blockchain technology is taking the world by storm since its creation several years ago. Its fundamental use-case is revolutionizing the financial world with the use of digital currency. But, blockchain technology can disrupt various sectors, thanks to its three pillars. Key players in the tech field are continually looking for ways through which the technology can help solve some of the global problems. While it is still not integrated into significant systems, it provides excellent opportunities for companies to conduct business, protect their data, and do so much more.
When Bitcoin Cash (BCH) hard forked away from Bitcoin in 2017, not many people were optimistic about its success. Fast forward three years to present-day, and we are looking at one of the highest-trading assets in the cryptocurrency market.
A lot of traders use BCH in their daily dealings, but few remember where the digital cash started, why it chose to break away from the omnipotent Bitcoin, and the rocky road that it traveled to get to its current status.
Today, we take a closer look at Bitcoin Cash and its remarkable evolution full of dramatic highs, lows, and karma-biting hard forks.
What is Bitcoin Cash?
Bitcoin Cash (BCH) is a peer-to-peer cryptocurrency that resulted from a hard fork in the Bitcoin community on August 1, 2017.
Similar to Bitcoin (BTC), Bitcoin Cash (BCH) is also a digital asset that anyone can transact directly anywhere in the world without the approval of a third-party intermediary or a central authority.
While it faced plenty of adversity in its early beginnings, Bitcoin Cash increased in popularity, and today it proudly ranks as the 6th-largest crypto by market capitalization.
Today, there are two big differences between Bitcoin Cash and Bitcoin:
- Bitcoin Cash transactions involve lower fees and faster transfers due to its larger block size
- Bitcoin is at least 35 times more valuable than Bitcoin Cash
There are many more differences between Bitcoin and Bitcoin Cash than these two ones. However, to better understand why a section of the Bitcoin community decided to fork away from the main protocol, we will have to recap the string of events leading to the 2017 schism. In this process, we will go over some of the well-known concepts related to Bitcoin and its evolution.
The Buildup to Bitcoin Cash
A little over three years have passed since the release of Bitcoin Cash. Today, the crypto is well-established, and few are those that still look behind in time to its conception.
However, if you are new to Bitcoin Cash, you should take a few minutes to explore the events that led to its birth. This brief introduction into Bitcoin Cash history will help you understand better the reasons why today we have more than one Bitcoin on the market.
The “apples of discord” that led to the creation of Bitcoin Cash
- Discontent over scalability issues
- Mining fees and waiting times
- The “Replace-by-Fee” system
- The 1 MB vs. 2 MB debate
- The Segwit proposal
- The BIP 148 plan
- The Bitcoin ABC Project
Discontent over scalability issues
Shortly after Bitcoin’s release in 2009, some of the developers in the newly-formed crypto community signaled the scalability problems that the digital asset presented. These voices grew louder with every passing year, and their concern was mainly with the size of the blocks on the blockchain, and which was limited to 1 MB.
The mutineers decided to fork their way out of the original Bitcoin and create a similar cryptocurrency, but with an upper limit of 8 MB. They intended to provide a system where larger blocks enable more transactions to take place at a faster speed.
That hard fork was the birth of Bitcoin Cash, which took place at block height 478559 in August 2017. However, before we get to that point, it is worthwhile revising some of the other Bitcoin features that set the stage for the breakup in the BTC community.
Mining fees and waiting times
Bitcoin provides a peer-to-peer decentralized, digital currency platform where users can transfer digital assets quickly, and without the necessary supervision of an all-powerful authority. However, the work that keeps this system up and running is done by a group of people called miners.
The miners are the backbone of the Bitcoin ledger, and while it seems valiant of them to do the dirty work for the rest of us, they don’t do it for free. They get their rewards in fees by mining for blocks or adding transactions to the blocks. Here’s how that works:
Mining for blocks
According to the proof-of-work (PoW) protocol, miners use high-performance computers to look for blocks that they can add to the blockchain. Once they discover them and solve the puzzle, they get a reward, which at the moment has a value of 6.25 BTC.
Adding transactions to the blocks
Every Bitcoin transaction between two users involves the addition of a new block to the blockchain. The miner that finds the block gets a reward. However, he will also ask for an extra fee to add it to the ledger.
At this point, the block enters a “waiting line,” and the more the users are willing to pay the miner, the faster the block will reach the blockchain, and the quicker the transaction will take place.
Since the Bitcoin block size limit is of only 1 MB, the waiting time increases considerably when there are numerous transactions in line. This Bitcoin feature wasn’t a problem in the early days of the crypto industry. However, as soon as it became globally famous, the waiting times have increased considerably, and so did the miners’ fees.
The “Replace-by-Fee” System
The 1 MB block size limit wasn’t a problem from the start. Bitcoin’s developers imposed it as a defensive system against spam transactions that could clog up the network. For many years, it was a celebrated protection measure.
Unfortunately, when Bitcoin became popular, the number of transactions skyrocketed. As a result, the blocks started filling up at an alarming rate, and many users had to wait for new blocks to be created before their transactions would go through.
For most traders, waiting was not an option. They started paying huge fees to miners to prioritize their transactions. This behavior led to the unofficial introduction of the "Replace-by-Fee" system, which made matters even worse for those users who would eventually fork their way out of the system.
The "Replace-by-Fee" system works when a user has a transaction waiting in line. At this point, the transaction cannot be deleted or returned, but it can be duplicated. So, the user pays miners a high fee to add the duplicate transaction to the block and thus overwriting (replacing) the initial one in the process.
The miners love the replace-by-fee system because it increases their rewards significantly. However, the users end up paying a lot of BTC in fees, and the network becomes overcrowded anyway.
The 1 MB vs. 2 MB debate
Before the hard fork that led to the creation of Bitcoin Cash took place, there was a fierce debate in the Bitcoin community regarding the block size limit. On one side, a group of users wants it to increase to 2 MB. However, they were facing stiff opposition from those who were fine with the original 1 MB size.
Each side had their arguments:
Pro 1 MB
- If the block size limit would increase, the miners’ fee would decrease, which would potentially discourage many of them from continuing their work.
- The change would rupture the Bitcoin community and weaken its stability.
- Bitcoin would get closer to becoming an everyday currency, which is something that many of the original users want to avoid.
- A change in block size limit would spell the end for small mining pools, which wouldn't have the necessary processing power to function. As a result, the larger mining pools would gain more control over the network and cause the platform to lose its initial decentralized feature.
Pro 2 MB
- By increasing the block size limit, miners would get better rewards from mining than from adding transactions to the block in return for high fees.
- Bitcoin has the purpose to offer people an alternative to the traditional banking system. If the block size doesn’t increase the fees paid to miners would become too high for most people interested in using BTC.
- An increase in block size limit would trigger several changes for Bitcoin. However, these changes would not be instant, but gradual over an extended period. So, users should not fear an instant transformation.
The debate raged on, and when a compromise was in sight, a new dilemma rose to the surface: if there were to make any changes to the blockchain, how would they be implemented?
The answer was: through a fork, which is an event that marks a divergence in the evolution of a blockchain. This condition is a fundamental change that divides the existing network into two parallel-evolving systems. A fork in a blockchain can take two forms - soft or hard.
What is a soft fork?
A soft fork enables the implementation of one or more changes to an existing system without making it incompatible with previous versions.
For example, if you have Microsoft Office (MSO) Word 2007 on your computer, you can open MSO Word 2013 files, because the program is backward compatible. You would not benefit from all the upgrades that took place between 2007 and 2013, but you could still view or edit the file according to its 2007 features.
When a soft fork appears in a blockchain, the two resulting systems are still partially compatible. The system that opted for upgrades maintains a small window of return in case of failure. Think of it as an update on your phone that can be annulled through the “reset to factory settings” option.
What is a hard fork?
A hard fork creates two different systems, and neither of them can benefit from the other one’s upgrades.
One real-life example of a hard fork is the development of gaming consoles. You cannot play a PS3 game on the PS4 console, and vice-versa. The release of PS4 does not make the previous version obsolete, but the two consoles' evolutionary features make the games unplayable on both machines.
After a hard fork in a blockchain, the two resulting systems are no longer compatible. They evolve in parallel ways, and there is no going back.
The Segwit Proposal
Whether it would be a soft one or a hard one, a fork was the appropriate solution for the scalability issue that had divided the Bitcoin community before 2017.
However, let’s not forget that the Bitcoin blockchain is a consensus-based mechanism. For major changes to take place, the miners and the users had to agree to them. In a centralized economy, the process would not be a problem since it would be organized and completed by a central authority, which on the BTC ledger does not exist.
Many of the Bitcoin Core developers came with solutions for the problem. The one that caught the most attention came from Dr. Pieter Wuille, who is one of the most active developers and responsible for some of Bitcoin's more significant upgrades.
Dr. Wuille’s solution is called SegWit, and to get a better understanding of what it is and what it does, first we need to revise the anatomy of a block and its contents.
Every block on the blockchain is made of:
- A block header
- A block body
The block header contains 6 elements:
- Previous block hash
- Transaction roots
- Epoch timestamp
- Difficulty target
The block body contains the details of the transaction, which in turn consist of 3 elements each:
- The input, which represents the sender’s details
- The output, which represents the receiver’s details
- The digital signature
Out of all the transaction elements, the signature is the most important one. This unique, digital imprint is proof that the sender possesses the necessary funds to make the transaction.
The problem appears when the body of the block has to contain multiple transactions, which in turn have to include more than a digital signature. Since the block size is limited to 1 MB, and the signature accounts for nearly 65% of this space, the existence of several blocks becomes crucial. As a result, the transaction time increases, and the network clogging exacerbates.
So, Dr. Wuille came with an interesting proposal called “the Segregated Witness.” Also known as SegWit, this solution would create an additional block, called “Extended Block,” which would hold all the digital signatures while the main block would keep the details of the sender and the receiver.
When activated, the SegWit would enhance the space in the blocks for more transactions. The immediate benefits of this solution would include:
- A larger amount of transactions that a block can take
- A decrease in transaction fees
- A size reduction for each transaction
- Faster confirmation of each transaction
- Alleviation of the Bitcoin scalability issue
Additionally, the miners would get more fees, in the long run, thanks to the increase in block capacity for transactions. However, not everyone was pleased with the SegWit proposal, and some pointed out the downsides of this solution, such as:
- Miners would get fewer transaction fees for each transaction
- All of the digital wallets would have to implement SegWit in their collection of features, which could take a lot of time
- Due to the increase in block capacity, bandwidth use would also increase, which would weigh heavily on the system’s resources and overall speed
The SegWit solution was praised by users and businesses trading on the Bitcoin blockchain. Unfortunately, they saw its implementation blocked by a part of the miners, who did not want to get fewer fees on the individual transactions.
The developers conditioned the SegWit implementation by the approval from at least 95% of the miners. So, the adoption of Segwit as a viable alternative to the hard fork that eventually led to the creation of Bitcoin Cash (BCH) did not go through.
The SegWit activation eventually happened on 24 August 2017, a little over three weeks after Bitcoin Cash was launched.
The BIP 148 Plan
Because the miners were stalling the SegWit integration, the developers came up with the plan of enforcing SegWit through a User Activated Soft Fork (UASF) called BIP 148.
Bitcoin Improvement Proposal (BIP) is a design document that implements a wide range of improvements to the Bitcoin network. There are three types of BIPs:
The Standards Track BIP
It makes changes to standard elements of the network, such as the protocol, transactions, and blocks.
The Informational BIP
It repairs design issues and improves general guidelines.
The Process BIP
It makes changes to the process.
The BIP 148 is a User Activated Soft Fork (UASF), which means that users implement it without the involvement of the miners. Through it, the developers aimed to impose that all the full nodes in the Bitcoin network would reject any block that is being created without SegWit ingrained in it.
The plan was to incentivize the miners to activate SegWit in the blocks that they mine. The chances of convincing at least 95% of the miners to adopt SegWit through BIP 148 were slim. But, that mattered very little since the only downside would be that less than 51% would agree to it. In this negative scenario, the blockchain would experience a chain split, and the hash rate would drop significantly.
E The possibility of a chain split, as small as it was, instilled fear in a part of the community. One of the mining companies, Bitmain, expressed its disagreement with BIP 148 and proposed a User Activated Hard Fork (UAHF) instead.
The Bitcoin ABC Project
As soon as Bitmain made their UAHF proposal public, the idea gained substantial support in the community. Through a hard fork, the nodes that would accept the increase of the block size limit would automatically follow the newly-formed blockchain without depending on the support of the previous one. Also, the UAHF would not require the majority of hash power to be enforced.
Those opposing the UAHF were in favor of the BIP 148 and did not want the signatures to remain separate from the rest of the transaction data, which in their opinion, made the process easier to hack.
The breakthrough came at the Future of Bitcoin Conference in 2017 when a developer named Amaury Séchet revealed the Bitcoin ABC (Adjustable Blocksize Cap) project and announced the upcoming hardfork. Shortly after, on August 1st, 2017, the project Bitcoin Cash was launched through the long-debated UAHF.
Differences between Bitcoin and Bitcoin Cash
From Day 1, Bitcoin Cash (BCH) showed why the community behind it chose to move away from the original Bitcoin blockchain. Because it is the result of a hard fork, all the BTC owners received an equivalent number of BCH tokens to their previous holdings on the old chain.
Some of the main differences between BTC and BCH include:
- BCH has a block size of 8 MB
- BCH does not have SegWit
- BCH does not use the “Replace-by-Fee” system
- BCH has enhanced protection against replay attacks and wipeouts
- BCH aims to adjust mining difficulty quicker than BTC
These are just a few of the features that convinced many members of the Bitcoin community to follow the Bitcoin Cash Project after the hard fork. Let’s break down and discuss the most important ones!
How Bitcoin Cash deals with replay attacks
Every cryptocurrency that results from a hard fork has to deal with the threat of replay attacks.
A replay attack occurs when a malicious intervention leads to the repetition or delay of a transaction on two separate blockchains, which are in the post-fork period. During the attack, a user may transfer 10 BTC to another user and inadvertently transfer 10 BCH as well.
One of the best features of Bitcoin Cash is how it circumnavigates one of the biggest problems that any cryptocurrency can face post-forking, the replay attack.
To prevent replay attacks, Bitcoin Cash uses a protection system in the form of a redefined sighash algorithm. This algorithm comes into effect only when the sighash flag has a bit 6 set. Thanks to it, the transactions become invalid on the previous, non-UAHF chain.
How Bitcoin Cash incentivizes miners
If you remember well, it was the Bitcoin users that were pushing for the hard fork more than the miners. So, when Bitcoin Cash finally released, it was no surprise that very few miners chose to fork away on the new chain. As a result, the difficulty in the BCH blockchain reduced significantly. Almost immediately, a large horde of BTC miners switched to mining BCH, which led to the hashing power of BTC halving.
However, Bitcoin Cash uses a different method to attract and incentivize miners in the long run. Their system is based on a Median Time Past formula.
The Median Time Past (MTP) is the median of the last 11 blocks that have been mined in a blockchain. If you were to line up the last 11 blocks, you could identify the median time as the time at which the middle block was mined. Next, you can use that figure to determine the time at which future blocks can be mined as well.
The formula for adjusting the mining difficulty on Bitcoin Cash goes like this:
If the Median Time Past of the current block and the Median Time Past of 6 blocks before is greater than 12 hours then the difficulty reduces by 20%.
Additionally, the difficulty adjusts according to the number of miners in the system. If there are fewer miners, then the difficulty rate goes down because the overall hashing power of the system goes down.
The Hash War of 2018
In November 2018, the Bitcoin Cash community was split in half by a conflict known as the “Hash War,” which led to irreversible splits and changes in the chain as well. The two factions that carried out the hostilities were:
- Bitcoin ABC, also known as Bitcoin Adjustable Blocksize Cap was the side led by Roger Ver and Bitmain CEO Jihan Wu.
- Bitcoin SV or Bitcoin Satoshi's Vision was the side led by Craig Wright (who often claimed to be Satoshi Nakamoto) and billionaire Calvin Ayre, the owner of the largest BCH pool, CoinGeek.
The reasons behind the Bitcoin Cash “civil war” included:
Bitcoin ABC wanted to increase the block size limit to 32 MB, while Bitcoin SV wanted it to reach as high as 128 MB.
Changes to the Script
Ever since their inception, Bitcoin transactions have been coded with a simple language referred to as the “Script.” This code is not as versatile as the one used to create smart contracts, and many developers consider it to be obsolete.
In August 2018, Bitcoin ABC introduced two new opcodes in the Bitcoin Cash script, with the use of a hard fork:
Through these changes, the Bitcoin Cash chain allowed for a trusted external source to check and validate signatures. They were inspired by smart contract functionalities that the Bitcoin idealists in the young BCH community did not like at all.
They wanted a Bitcoin Cash version that was as close to Satoshi Nakamoto’s original vision as possible. So, they disbanded into another faction, Bitcoin SV.
Plenty of threats, but no “bloodshed”
The “war” did not last as long as many expected it. In November 2018, Bitcoin Cash went through a hard-fork and split into Bitcoin Cash ABC and Bitcoin Cash SV.
Both chains were left utilizing their hash power to mine the longest chain. Whichever project had the longest and more efficient chain became the dominant Bitcoin Cash chain. At this point, the guns were locked and loaded.
The conflict took the moniker of "hash war" after Bitcoin SV threatened that miners would 51% attack a potential Bitcoin Cash ABC chain out of existence.
In response, Bitcoin Cash ABC brought in additional hash power to secure their chain and implemented checkpoints to minimize the chances of a 51% attack.
The two factions entered in a sort of “cold war,” threatening to attack each other as soon as a large group of miners would leave any of the chains.
However, as time passed by, it became more obvious that a full-on attack from any of the parts was highly unlikely to take place. About 10 days after the split, CoinGeek published a press release announcing support for a permanent split. As the publication is owned by online gambling tycoon and major Bitcoin SV miner Calvin Ayre, this declaration was considered an “official” end to the hash war.
Since then, the two coins have competed on the cryptocurrency market, experiencing slumps and surges just like any other crypto project in the industry.
At the time of this writing, Bitcoin Cash is the 6th-largest crypto by market cap, while Bitcoin SV is nipping at its heels in the 7th position.
Bitcoin Cash Today and Tomorrow
Nowadays, Bitcoin Cash is straying even further from the purpose of its parent blockchain, Bitcoin. Traders use it for many more actions than simply carrying BCH transactions.
Thanks to its large block size, users can run smart contract-type programs on the BCH blockchain. The process is not as simple as it is on blockchains like Ethereum, which were specifically designed for smart contracts, but the functionality remains.
Bitcoin Cash is a completely independent cryptocurrency, so its value does not depend on that of the original Bitcoin. However, since Bitcoin is still the world’s powerhouse cryptocurrency, the BCH price should fluctuate according to the BTC trend, just like the majority of the cryptocurrencies do. All in all, the industry expects Bitcoin Cash to grow exponentially in the long run. The upcoming Avalanche update should help it stabilize above $300, and even aim for a four-digit value next year.