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 […]
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.