Understanding Bitcoin Forks

What’s with BTC, BCH, and BSV?

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With the latest drama surrounding BSV, we found that it might be useful for the community to really learn and understand what happens behind the scenes when Bitcoin fork happens, its implications, and the arguments provided by both sides of the spectrum.

Introduction

Bitcoin was originally created by an individual or an entity with the pseudonym of Satoshi Nakamoto, as stated on the Bitcoin whitepaper written back on October 31, 2008. Since the beginning, Satoshi aims for Bitcoin to be “A purely peer-to-peer version of electronic cash [that] would allow online payments to be sent directly from one party to another without going through a financial institution”. Motivated by the 2008 _nancial crisis, Satoshi realized that there’s a need for a better form of payment that is purely trustless and based on cryptographic proof, essentially allowing 2 parties to transact with one another without the need of an authority figure or a 3rd party intermediary. Ever since then, Bitcoin has garnered mainstream popularity primarily because of the 2017 bull run. Thus, multiple criticisms regarding its scalability problem have also emerged that eventually led to the community debate on how to improve Bitcoin’s transactions per second and its overall scalability, in order to be fully functional as a day-to-day payment system.

Understanding How Bitcoin Transactions Work

Blockchain, the fundamental technology behind Bitcoin, works by tying together blocks of encrypted data/information that is traceable, immutable, and fully decentralized in order to remove the need for an intermediary. Simply put, a trustless ecosystem without authority _gures will require all participants to achieve consensus prior to executing any actions. The consensus mechanism behind the Bitcoin blockchain is an algorithm called Proof-of-Work; which notion is to present a dificult (yet feasible) problem whose answer is easily veri_able by everyone. This whole activity of solving problems for compensations is called mining and the individuals that are responsible for it are called “miners”. Bitcoin miners “mine” for new Bitcoins by running a computer program which collects the unconfirmed transactions on the Bitcoin network. These unconfirmed transactions are the activities of sending and receiving Bitcoins from one wallet address to another that have not been verified yet by the network; meaning that they have not been included in a block — which is a structure that contains and records all the transactions pertaining to the Bitcoin network. After the collection process is finished, miners append the latest block to the existing chain of blocks to finalize the transactions.

Block Size

As previously stated, miners need to append the latest block containing transactions to the existing chain of blocks in order for the transactions to be final. Unfortunately, each block has a size limit of 1mb, meaning that there are a limited number of transactions that miners can include in each block. Alas, this is the primary metric that decides how many transactions that the Bitcoin network can process at a given time.

Increasing the block size will increase the number of transactions per second that the Bitcoin network can handle. However, there are also implications that come with bigger block size. One of the most notable examples includes higher overhead costs to run full nodes which means that larger mining pools will lead the mining process, shifting the network to a more centralized structure. Moreover, solving the scalability/TPS problem is not as simple as increasing the block size/creation rate because this solution sacrifices security. Larger block size/creation rate decreases communication speed between blocks as more bandwidth is required. Making it slower to propagate new blocks across the network, meaning that the longest chain grows at a slower pace, increasing its vulnerability to a double-spend attack.

What Happens When Bitcoin Forks?

By definition, a “fork” in the blockchain space is a byproduct of the distributed consensus nature. In the Bitcoin blockchain, it happens when 2 miners solve the answer to the Proof-of-Work problem, essentially finding the next block at nearly the same time. When a fork happens, the network is temporarily more vulnerable against malicious actors as it wastes computational power on unnecessary blocks. Simply put, a fork is resolved when one of the blocks gets appended to the network, making it the longest chain while the other block is abandoned. However, it is also possible to introduce a fork willingly when the community wants to change some of the rules within the network. This implementation can be classified into a soft and hard fork.

A soft fork is backwards compatible and it does not split the existing cryptocurrency into 2 different ones. It requires the majority of hash power in the network to be supportive and is often utilized for simple upgrades within the Bitcoin code such as altering BTC’s address format. A hard fork, on the other hand, implements upgrades that are not compatible with the older software because it changes fundamental consensus rules within the network, such as block size and mining algorithm. When an update that requires a hard fork happens and there is a significant portion of the community that doesn’t want to participate and insists on sticking to the old rules, a new cryptocurrency will be created. Bitcoin Cash is a prime example of such a scenario.

The Bitcoin Cash (BCH) Hard Fork

The primary cause of Bitcoin hard fork that led to the creation of Bitcoin Cash was the block size debate, a long-time argument on whether the Bitcoin blockchain should increase its block size or not. The proponent of BCH supports the block size increase and argues that the Bitcoin blockchain is currently unscalable with approximately 7 transactions per second. Whereas supporters of BTC argue that BTC was never intended to be used for daily cup-of-coffee transactions, but as a digital gold instead. Since the community was not able to reach a conclusion, Bitcoin Cash was created as a result of the hard fork. Although these 2 notions are the fundamental reasoning behind each side of the arguments, there are obviously other complicated technical factors that also contribute to the debate, including miners compensation and network security. Overall, a hard fork that creates a new currency weakens the original currency as its underlying value is now separated into different blockchains.

The Bitcoin Cash Hashwar

In 2018, there was another hash war within the Bitcoin Cash ecosystem that eventually splits the network into Bitcoin ABC (BCH) and Bitcoin SV (BSV). The underlying argument behind this war is once again, block size. Led by Roger Ver and Jihan Wu (Bitmain’s CEO), Bitcoin ABC wanted to increase the block size to 32mb and implements some changes to the Bitcoin’s script that will check and validate signatures on an external message, adding functionality that is similar to a smart contract to the network. Whereas Bitcoin SV led by Craig Wright and Calvin Ayre wanted to increase the block size to 128mb and did not agree to the script changes as they argue that it was never Satoshi’s vision to add such functionalities to the cryptocurrency. As previously mentioned, larger block size increases TPS but it also has some drawbacks such as centralized mining and a less secure network.

The Pros-Cons of BTC, BCH, and BSV

Overall, there are pros and cons to the mechanism designs of each coin. However, as one can see from the table provided below, the common notion is that these improvements are brought upon by sacrificing the decentralized aspect of Bitcoin; which makes it unique in the first place. Thus, explains why the original BTC still thrive today as the metrics shown below.

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