What is Bitcoin Cash

What is Bitcoin Cash?

Bitcoin Cash is a cryptocurrency that is an off-shoot of the original Bitcoin blockchain and is designed to be an effective form of peer-to-peer electronic money. Like all cryptocurrencies, Bitcoin Cash is decentralised and does not require a central bank or other controlling third parties.

Bitcoin Cash was created in August 2017, as a ‘hard fork’ from the main Bitcoin blockchain. A ‘fork’ is a way of updating the software that runs a blockchain. A ‘soft’ fork creates a new blockchain that is still compatible with the old one. A ‘hard’ fork, in contrast, creates a new blockchain that is not backwards compatible.

The reason for the hard fork was that a section of the Bitcoin community felt that the cryptocurrency was no longer effective as a currency. Instead, it was becoming more and more a digital asset.

Reasons for the hard fork
There were two main reasons for that. First, the size of blocks on the Bitcoin blockchain was one megabyte. Each block is a collection of transactions that are verified by the miners on the network. Mining is the process by which computers, or networks of computers, verify transactions, demonstrating their ‘proof of work’ by submitting answers to a mathematical problem.

However, there are only so many miners on the network, and the size of the block limits the number of transactions that can be processed at a time. In fact, at the one megabyte block size, Bitcoin handled 4.4 transactions per second. As Bitcoin grew in popularity, the speed of transactions was slowing, as blocks waited to be added to the blockchain.

Second, the price of transactions was considered prohibitive for those who wanted to use Bitcoin as a replacement for cash. Paying higher fees would allow users to jump the queue and move their transaction into a block that was closer to being verified. However, this was next to useless for small transactions, where the increased fees could often be more than the price of the items being purchased.

Worse, the fees required to jump the queue could keep increasing, as people pay more and more and get ahead of all the others who want to jump the queue. The overall effect of this fee inflation would be to price-out ordinary users.

Even without paying for a transaction to be verified more quickly, Bitcoin’s fees were still high for those who wanted to use electronic currency as their default method of payment. The fees played into the hands of those in the Bitcoin community who wanted the cryptocurrency to develop into more of an asset.

And the speed and fees problems were connected. As some people paid to jump the queue, those who paid the minimum fees saw their wait time for a transaction to be verified increase to almost 15 minutes. Obviously, if you wanted to use Bitcoin to buy a cup of coffee, waiting around for that long for the transaction to be confirmed would be frustrating and impractical.

The birth of Bitcoin Cash
Two solutions were proposed. One, called ‘Bitcoin Unlimited’, would remove the limit on block sizes entirely. This would allow miners to make more money because more transactions would mean higher fees. However, it would favour large miners and mining syndicates, who would have the computing power to process large blocks. Smaller miners were at risk, which in turn would concentrate mining power in fewer hands, causing exactly the kind of centralisation that cryptocurrencies are designed to avoid.

The second option was something called a ‘segregated witness’ or SegWit, which would store some information outside the blockchain, freeing up space in the blocks, thus allowing more transactions to be processed within each block.

A compromise, called SegWit2x, was proposed. It combined parts of both solutions; increasing the block size to two megabytes and storing some information outside the blockchain. However, this was criticised for simply postponing the problem. Inevitably, if the network continued to increase in popularity then the same issue would arise once again.

At the Future of Bitcoin conference in June 2017, developer Amaury Sechet announced a new protocol called ‘Bitcoin Cash’, scheduled to split from Bitcoin in a hard fork on August 1, 2017. The new cryptocurrency would come with a block size of eight megabytes, massively increasing the speed of processing transactions.

The protocol also brought in measures to make it attractive to miners. The difficulty of verifying transactions drops both when there is a large gap between the verification of blocks and when there are fewer miners on the network.

Bitcoin Cash achieved a strong position very quickly, becoming the third largest cryptocurrency by market capitalisation, behind Bitcoin and Ethereum. It can process 61 transactions per second – a huge improvement over Bitcoin but still way behind established payment processors such as Visa, which can handle 24,000 transactions per second.

In May 2018, Bitcoin Cash went through another hard fork, increasing the block size to 32 megabytes and adding or reactivating op codes to allow the use of smart contracts on the network. The hard fork also upgraded Bitcoin ABC, the software that runs the nodes in the network.

However, critics point out that the average block size for Bitcoin Cash remains below 50 kilobytes – well below the original eight megabyte maximum and nowhere near the current 32 megabytes. Bitcoin Cash’s champions will likely argue that they are preparing for inevitable growth, but the cryptocurrency still has some work to do if it really is to be a widely used digital currency.

However, the block sizes can also be seen as differences in policy for how the two networks plan to scale. By allowing for bigger blocks, which put the burden for managing the expansion on miners, Bitcoin Cash is leaning towards scaling on its blockchain. Blockchain, with SegWit and smaller block sizes, puts the burden of scaling onto the users who will pay fees, and leans towards scaling off-chain. It will take some time before we can see which policy is most successful.

This post is provided for informational purposes only. None of the information presented here should be considered investment advice. Everyone should always do their own research and due diligence before sending funds to any third party.

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