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Understanding Bitcoin Cash

Bitcoin‘s (BTC) capacity to scale effectively has been questioned numerous times since its inception in 2009. 

Quick recap:

Cryptocurrencies like Bitcoin runs on a decentralized digital ledger known as blockchain, where transactions are processed, verified and stored securely.

The History

BTC was first invented to function like another currency for daily transactions but on a peer-to-peer network. However, the novel idea of a digital currency sparked overwhelming attention and rendered it an investment vehicle instead with its soaring prices and limited supply. This is when blockchain faced scalability issues due to its limitation in a maximum block size of 1MB that also incurs high transaction fees.

Back in the day, blockchain was prone to attacks as it consisted of mainly cheap transactions when the size of a block on BTC’s blockchain was less than 100KB and transaction fees costed only a few cents. One of the bane of BTC’s blockchain is that processing a transaction can take forever, as compared to a traditional credit card transaction. BCH was then created by bitcoin miners and developers with features to counter the pain points of BTC. BCH’s name came about as a result of the original Bitcoin Cash client it uses.

Resolving slow and costly transactions

BCH remedies the problem of slow and costly transactions by increasing the size of its blocks. Blocks in a BCH go up to 32MB, enabling more transactions to be processed each time. To prove this point, the average number of BTC transactions per block is between 1000 – 1500, while the average number of BCH transactions per block can go up to 25000, according to a stress test done in 2018 – They meant it when they said an increase in block size. The increase in block size also meant competition with major credit card companies such as Visa, which charges high transaction fees across borders.

Same but different

Like BTC, BCH used Emergency Difficulty Adjustment (EDA) as its difficulty algorithm that adjusted difficulty every two weeks. Because both BTC and BCH used EDA, miners were able to alternate their mining activities between the two currencies, detrimenting the supply of BCH. This caused BCH to amend its algorithm for miners to generate BCH easier.

Unlike BTC, BCH does not incorporate Segregated Witness (SegWit). In this process, a block’s size is increased by removing BTC transactions’ signature data as SegWit exclusively retains transaction related information per block. However, both BTC and BCH circulates a supply capped at 21 million and uses Proof-of-Work (POW), an algorithm used to verify transanctions and produce new blocks on a blockchain, as well as Bitmain, world’s lardest cryptocurrency miner that ensured coin supply for trading activities on exchanges when BCH first launched. At its peak, the price of BCH went up to $4091 in December 2017. 

BCH Experienced its Own Hard Fork

Debates on scalability and efficiency of blocks went on beyond BCH, that have resulted in Bitcoin SV (Satoshi Vision) after BCH experienced its own hard fork in November 2018.

Hard fork – As defined by blockchain.news, a hard fork is a rule change in the validation process that makes the blocks validated according to the new rules incompatible and invalid. All nodes will need to upgrade their software to work with the new rules.

Bitcoin SV is led by Craig Wright, an Australian computer scientist who claims to be Satoshi Nakamoto, the inventor of Bitcoin. Its creation was to stay true to the vision of BTC. Scalability and transaction processes were, however, modified for Bitcoin SV to enhance working efficiencies like speed.

Comparing BTC & BCH

  • The slow processing time of BTC resulted in inefficiencies within the bitcoin mining and development communities
  • BTC miners and developers created BCH to enhance BTC’s ability to scale effectively
  • BTC blocks are limited to only 1 MB, while BCH blocks go up to 32MB

Even though BCH has faster processing time than BTC, its security may be compromised given its bigger block size. By far, BTC remains the most popular crypto globally and largest by market cap, a cause for concern on BCH’s liquidity and its real-life adoption. Recently, BTC is setting record highs in the current bullish market, as reported by Cointelegraph. Despite BTC’s potential to grow 20X in the next five years, cryptocurrencies’ future remains an ongoing debate.

For related articles, read DigiFinex Academy.

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