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Bitcoin Or Bitcoin Cash: Is There Room For Both?

Summary

Both Bitcoin and Bitcoin Cash have gained popularity lately. But can they exist side by side, or will one of them disappear in the future?

This article explores the main differences between the two cryptocurrencies.

Bitcoin or Bitcoin Cash: is there room for both?

Everybody knows about Bitcoin by now. It was created in the aftermath of the 2008 financial crisis with the goal to challenge the current financial system, which it has been doing fairly successfully. This year, Bitcoin got a little “cryptobrother” called Bitcoin Cash that is built based on the original Bitcoin blockchain with a few added features.

In order to understand the difference between the two cryptocurrencies, and how they are different, we need to look at a long-standing debate going on in the Bitcoin community. 

In 2015, two issues were raised in the Bitcoin community: scalability and transaction malleability.

The block size has been the biggest reason behind the scalability concerns. The block size remained unchanged ever since Satoshi Nakamoto locked it to be 1MB, and that limited how many transactions could fit into each block.

As the number of transactions started to rise as more and more people adopted Bitcoin, the backlog of transactions was increasing. The concern in the community was that, as Bitcoin becomes a bigger part of the everyday life, the blockchain won’t be able to handle all the transactions. The time people will have to wait in order for their transactions to get processed will continue climbing, thus defeating Bitcoin’s original purpose of offering a better alternative to the existing payment system. It was clear that something had to be done about the block size.´

Average confirmation time for a transaction from May 2016 to Nov 2017. The highest spike on the graph is right before SegWit implementation. Source: blockchain.info

In order to understand this issue better, one needs to understand how the blockchain works. It helps to think of a blockchain as a notebook and a block as a page in that notebook. If you have space for only 100 transactions on one page, and a total of 1000 transactions to put in the notebook, 900 transactions will have to wait to be recorded. The last 100 of the 1000 transactions will have to wait the most. If you got a bigger notebook, you could record all 1000 transactions faster.

Transaction malleability became a problem when it was noticed that if a signature on the transaction is changed after it was created but before it was confirmed by the Bitcoin network, the whole transaction could be altered to make it look like it never happened in the first place. In simple terms, this change made it possible for someone to pretend that they didn’t receive the bitcoins they were supposed to, while in reality they did.

In order to fix both problems, two small change in the protocol of the Bitcoin blockchain called Segregated Witness 2x (SegWit2x) was proposed where the vulnerable signature data would be moved onto a sidechain, making it less accessible and freeing up space in each block. In addition, the size of the blocks would be increased from 1MB to 2MB.

The proposal of SegWit2x created a lot of debates in the Bitcoin community for two reasons. Primarily, the community through the SegWit2X efforts were not enough to scale the Bitcoin blockchain in the future. Second of all, the community questioned the motives behind it. As explained above, the protocol separated the signatures needed to verify a transaction on a sidechain. Since a lot of developers working with SegWit2x are employed by Blockstream, whose primary product is sidechain solutions, it was claimed that there was a conflict of interest in this situation.

In the end, only the first part of the SegWit2x protocol was implemented, where signatures were moved onto a sidechain. The increase in the block size from 1MB to 2MB was abandoned due to lack of support in the community, but before that, it still split the community in two. Those who wanted to avoid implementing SegWit2x in late August performed a hard fork, splitting the blockchain in two and creating Bitcoin Cash.

What is a fork and why it’s important

There can be two kinds of forks: soft and hard. The purpose of a fork is to change the protocol the blockchain is following. Some rules require a hard fork, while others can be solved with a soft fork. In general, hard forks loosen or eliminate existing rules, while soft forks tighten or add new rules. Unlike hard fork, soft forks have backward compatibility, meaning nodes with previous versions or the protocol will still be recognized by the blockchain. SegWit was a soft fork, which means that a split in the blockchain was not necessary.

https://lh5.googleusercontent.com/G4zB7XWCx0tbYJWK0Y75dQg27hajtAyYjBsJBw0ucbI9dIzXbvSlmG30_Li_rCxuNd4gnmhFb-TcpG2Y_JQZjWESRaHu2Jl8AWgwCtZhflKuX-yStApO98k22_ayadhcbJjGaMrh

A hard fork. Source: cryptona.co

Bitcoin Cash was born out of a hard fork, which was designed to loosen the rules about network capacity by offering a blockchain with a larger block size of 8MB without the need to implement SegWit. In an event of a hard fork where the blockchain is split in two, one of the blockchains eventually dies off due to lack of support.

With this in mind, only one of the cryptocurrencies should survive. But with the evidence we are seeing in both communities, there might be room for both.

Bitcoin and Bitcoin Cash - there is room for both

With the cancellation of block size increase, Bitcoin scalability problem was still fully not addressed, which caused Bitcoin Cash to gain popularity with investors and miners alike. Many are of the opinion that only one cryptocurrency should survive, but there might be room for both.

It is difficult to say clearly if one cryptocurrency will replace the other because both blockchains promote the same two goals. Both communities want to keep the blockchain decentralized, and offer fast, cheap payments in the process. The difference is how those two goals are prioritized. 

Bitcoin main focus is to stay true to the original purpose of blockchain: offer a decentralized, public, permissionless network for payments. Bitcoin Cash, on the other hand, is mainly focusing on bigger blocks in order to drive the transaction fees down, and thereby enable fast and cheap payments.

  Priorities of Bitcoin and Bitcoin Cash communities.  Source: Forbes.com

The problem with the focus of Bitcoin Cash is that it may lead to a more centralized network. The reason lies in the way a blockchain is operated. Bitcoin network stays decentralized and public because there are a lot of parties running nodes and processing transactions. There is an actual cost that occurs because the nodes are using their computing power, which uses electricity and space. If the transaction fee becomes too low, many parties will stop processing transaction because it won’t be profitable for them anymore. Only a few mega-nodes that have optimized their costs will be able to still stay profitable while processing transaction. This will leave the control of what transactions get processed or not in their hands, and inevitably the blockchain will become more centralized with only a few big players. 

On the other hand, the existence of Bitcoin Cash brings a healthy competition to the world of blockchain. Bitcoin Cash was the result of the first major fork in the history of Bitcoin, and the team behind it showed that a blockchain can be split successfully. This opens doors for other developers to experiment with the code, and possibly bring some valuable features to the blockchain. After all, the problem of scaling is still on the table for Bitcoin, and according to the majority of the community, it needs to be solved. 

If Bitcoin Cash (or any other developer teams) manage to solve the problem of bigger blocks without compromising the transaction fee and thereby the decentralization of the blockchain, it will most likely be adopted by Bitcoin, and any other blockchains in the future. In total, it would be a major technological gain for the blockchain community.

Key takeaways

Both Bitcoin and Bitcoin Cash has something to offer to the cryptocurrency world, which may ensure that they can exist side by side.

Bitcoin is the largest digital currency by market capitalization. It has a strong name recognition and a large network of support among developers, users and miners. Bitcoin Cash, on the other hand, brings competition to the table, which can further push the community to solve the existing problems in a more creative way.  

In the end, both cryptocurrencies have the same goals but different priorities attached to them. The Bitcoin network is concerned with keeping the blockchain as a public, permissionless network, while Bitcoin Cash primarily focuses on faster and cheaper transactions by enabling bigger blocks.

Resources

  1. What the 'Bitcoin Bug' Means: A Guide to Transaction Malleability
  2. Why SegWit2x? (or why not?) - Eric Lombrozo - Medium
  3. Forks, Signaling, and Activation - Eric Lombrozo - Medium
  4. All You Need to Know About This Whole SegWit vs. SegWit2x Thing, Explained
  5. Bitcoin Vs. Bitcoin Cash: A Story Of Prioritization & Healthy Competition In Money
  6. What is Bitcoin Cash, Why They Splitting And Why Are They Against Segwit?
  7. Breaking News: Segwit2x Fork Cancelled
  8. Explainer: What Is SegWit2x and What Does It Mean for Bitcoin? - CoinDesk
  9. Bitcoin Cash: Why It's Forking the Blockchain And What That Means - CoinDesk
  10. https://blockchain.info/charts/avg-confirmation-time?timespan=1year