Bitcoin (BTC) and Bitcoin Cash (BCH) share similarities beyond their names. Bitcoin, the first cryptocurrency ever created, is often referred to as “gold 2.0” or digital gold. It is used as an inflation hedge and a store of value.
Bitcoin Cash is a cryptocurrency that can be used as digital cash. Its supporters want it to be cheap and easy to use. BCH was created by what’s known as a hard fork of BTC. This means that both assets share a history of transactions, a common code base, and other details.
A hard fork is an upgrade to the open source software that powers the blockchain of cryptocurrencies such as Bitcoin. This happens when there is a permanent divergence between the latest version of a blockchain and certain computers on the network are not meeting consensus. This causes a fork in the blockchain where one side continues to follow the old rules while the other side follows a different set of rules.
This is what happened with the Bitcoin blockchain in August 2017. It’s worth looking at Bitcoin’s scaling debate to understand why some members of the community chose to change the blockchain in this way.
Bitcoin Scaling Debate
There have been many questions about Bitcoin’s potential to grow and be widely accepted worldwide since its inception. The cryptocurrency’s use of blockchain technology allows it to be decentralized and censorship-resistant. The Bitcoin blockchain’s ability to process large volumes of transactions per second is a major drawback. Its transaction throughput is the tradeoff.
For example, Visa, a payment provider, processes an average of 1,700 transactions each second. This is compared to 150 million transactions per day for Visa. According to the company, its capabilities would allow it to process 24,000 transactions per minute.
In its current state, the Bitcoin blockchain can handle approximately seven transactions per second. This is a remarkable difference that was made apparent by the increase in users of the network, as each transaction essentially consists of data.
This data is kept on the blockchain. It can be viewed as a chain of blocks. Each block of the Bitcoin network can only contain 1 MB of data. As the demand for Bitcoin increases, so does the backlog of unconfirmed transactions that are looking to be added to blocks.
At one point, there were over 100,000 transactions still to be confirmed. Each transaction is charged a fee that determines whether it goes through. The transaction will be processed faster if the fee is higher than the others.
Transaction fees rise when the network becomes clogged and there is more competition for limited space. Some users are priced out of the network by the fact that a single transaction can cost as high as $58
The community is divided into two main solutions to solve Bitcoin’s scaling issues. One was to increase the block size to allow more transactions to fit in each block. The other was to keep a 1MB block size and scale through layer-two solutions.
Both solutions come with trade-offs. As each side began to accuse the other of manipulating the situation, the division in the community grew. The hard fork was the result of the debate.
The Bitcoin Cash Hard Fork
A meeting was held behind closed doors on May 23rd, 2017 between Bitcoin miners and business owners. They represented over 85% of the computing resources that secure the network. The SegWit2x update was the result.
SegWit2x was created to increase Bitcoin’s scale. It implements Segregated Witness (SegWit), which is an upgrade that “segregates”, some data and adjusts block sizes to 2MB. This would be done through a hard fork. This proposal met resistance from the community because the main codebase for Bitcoin was not represented. It was also seen as a centralizing force.
In the scaling debate, the advocates of small blocks were opposed to a block size rise, as it would increase blockchain size. This would make it more difficult to host a full network node, which could lead to the cryptocurrency becoming more centralized and vulnerable. However, supporters of larger blocks advocated for a quicker solution because they fear that rising transaction fees will slow down the cryptocurrency’s growth.
The debate ended in a hard fork. On August 1, 2017, those who supported larger blocks of Bitcoin decided to fork it. Bitcoin Cash was created by the fork. It is a cryptocurrency that supporters saw as a continuation of Satoshi Nakamoto’s original vision.
What Bitcoin Cash is Different from Bitcoin
As developers worked on different networks, the differences between Bitcoin Cash and Bitcoin Cash grew over time. They are now considered completely separate assets by the community because of the differences between them.
Difficulty of Adjustment
Bitcoin Cash and Bitcoin Cash have different difficulty adjustment algorithms. Bitcoin Cash can be used by miners to move to Bitcoin Cash if it is more profitable to mine on the network.
The market fluctuations can cause the computing power of the network to fluctuate greatly. The difficulty adjustment algorithm ensures that blocks can be generated at a steady rate every 10 minutes. It cuts difficulty in half if they fall behind schedule or doubles it if they advance on schedule.
Block Size Differences
The block size of each network is the main difference. Bitcoin’s block size of 1MB is still valid, but Bitcoin Cash has a block size of 32MB. Transactions on BCH are now cheaper than a penny and can process up to 200 transactions per second.
The blockchain’s size has not grown exponentially as predicted, because Bitcoin Cash has not been processing enough transactions to fill its extra block space. Bitcoin SV ( BSV), a cryptocurrency that was created by a fork in Bitcoin Cash, is seeking to increase its block size to 1TB. The size of its blockchain is much larger than Bitcoin’s.
Smart Contracts and Decentralized Financing
Although Bitcoin doesn’t support smart contracts (although work is underway to build Decentralized Finance (DeFi), services are on top of it as Square CEO Jack Dorsey disclosed. Bitcoin Cash is now using smart contract languages such as Cashscript to allow for more complex functions.
Cashscript is aiming to bring DeFi into Bitcoin Cash to make it more competitive with Ethereum (/ETH) and Bitcoin. CashSuffle, CashFusion, and other tools have been developed to increase privacy on the network.
Token Issuance
To issue tokens on the Bitcoin blockchain, projects must use the Omni layer. This is a platform “for creating custom digital assets and currencies” that allows them to trade and create new ones. However, the adoption of Omni transactions has been mainly focused on stablecoins.
Bitcoin Cash, however, has created the Simple Ledger Protocol. This protocol allows developers to issue tokens over BCH in the same way that tokens are issued over the Ethereum blockchain.
Some assets were issued both on the Omni layer as well as SLP tokens. Users can choose which blockchain they prefer by having assets on both the Omni layer and SLP tokens. However, both solutions have not been widely adopted.
Nonfungible tokens (NFTs) are also supported by the SLP protocol. They can be distinguished from one another. Their use on BCH is limited in comparison to Ethereum and other blockchains.
Replace-by-fee
The Bitcoin network’s replace-by-fee feature allows you to have a transaction “stuck” but not processed. It will then be replaced with a new version with a higher transaction cost.
RBF is useful for transactions that need to be processed quickly, but critics argue it could make it easier to use the same funds twice by malicious actors. An attacker could send a transaction for a small fee to pay for a service or good using RBF. If the recipient doesn’t wait for confirmations from the network, they may send the same transaction to a wallet they control with a higher fee.
The network would verify the second transaction and then drop the transaction, paying the merchant for the goods or services. To prevent this, most versions of RBF require that all transactions include the same outputs. RBF is also impossible if the recipient does not wait for confirmations from the network.
Bitcoin Cash has however removed this feature, rendering unconfirmed transactions on its network irreversible. Double spending with RBF is possible, but it would be much more difficult due to its faster transaction throughput.
Different Views, the same Monetary Policy
Bitcoin Cash was initially created with a block size of 8MB at the time. It has quadrupled in size since then. Openly accepting new hard forks, the network is open to innovation to improve its usability and use it as cash.
Bitcoin, on the other hand, is slower to release upgrades and is considered more of an inflation hedge and value store. Its scaling plans include the implementation of SegWit as well as the creation of Lightning Network.
The Lightning Network is essentially an additional layer to the cryptocurrency’s blockchain that allows for fast transactions and low fees. This layer is made up of user-generated payment channels. Although it can handle approximately 15 million transactions per second according to estimates, its adoption has been slow.
Bitcoin also aims to protect users’ pseudonymity by offering upgrades such as Taproot. This allows complex transactions, including multisignature and timelock releases, to be treated as simple transactions. Taproot makes it possible to distinguish between transactions that create a Lightning Network channel and simple transactions.
Bitcoin supporters value decentralization and censorship resistance more than they value a higher transaction throughput. Bitcoin’s ability to stop attacks by any entity is key to its role as a store of value.
Bitcoin Cash’s potential as peer-to-peer electronic money rests on its ability to pay lower transaction fees and speed up transactions. BCH is not compatible with some projects that are built on top of it, such as social media platforms, where every post is published to the blockchain.
Coin mixing is a method that preserves privacy on Bitcoin Cash. Coin mixing is where multiple transactions from BCH users are bundled together to hide the origin of their coins. This controversial practice is believed to be used by cybercriminals to hide their tracks.
Both networks have the same monetary policy. Each blockchain will never produce 21 million coins. The issuance of new coins is limited to approximately every four years or halving every 210,000 blocks. In 2140, the last BTC/BCH will be mined.
Both cryptocurrencies are designed to protect against monetary confiscation and censorship, as well as devaluation due to higher-than-expected inflation. Both blockchains can be accessed publicly and are transparent.
