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The Issue of Scalability and Bitcoin Cash

One of the biggest issues that the Bitcoin network has been dealing with in the past several years has been the issue of scalability. Satoshi Nakamoto has built the network in such a way that it creates a new block of the bitcoin blockchain every 10 minutes. He has also built in a block size restriction of 1 megabyte, which means that the number of transactions that the bitcoin network can process per second is very limited. This number is equal to between 4 and 7 transactions per second, which is not even comparable to the number of transactions that a system like Visa can process (Visa can process more than 40,000 transactions per second).

One of the most obvious solutions to the transactional capacity issue of the bitcoin network is to increase the size of a block of the bitcoin blockchain. However, this idea has met a lot of resistance in the bitcoin community.

 

Arguments against the increase of a block size: hard forks and centralization of power

Some people point out that an increase in the block size would require a hard fork. A hard fork is an upgrade of a blockchain system in such a way that the blockchain splits into two versions that are not compatible with each other. Because people have to upgrade their systems in order to stay on the blockchain, a lot of things can go wrong and a lot of technical glitches and problems can occur when a hard fork happens.

Another argument against block size increase in that such an increase will make the network less accessible to miners with less computational power and will lead to the centralization of power on the bitcoin network, which contradicts to the principle of decentralization that is one of the foundational principles behind Bitcoin.

Fundamentally, the issue of scalability boils down to the choice between decentralization and accessibility. The most efficient way to scale the Bitcoin network would be to remove decentralized mining, which would mean that Bitcoin would become yet just another payment system, such as Visa or Paypal. These systems are very efficient. The problem with them is that they are not decentralized and have an authority that can reverse transactions and make decisions about the network single-handedly.

This is the reason why some of the supporters of keeping the block size limited to one megabyte say that increasing the block size would strip Bitcoin of autonomy that it brings to users and autonomy is more important than large fees that Bitcoin network users have to pay when the number of transactions is significantly larger than the capacity of the network. According to people that support this argument, one of the main problems with conventional currencies is that they require trust in a small number of players to make them work. Points of trust that inevitably arise in such a system become a target for abuse and it is only a matter of time when abuse is going to happen. The trade-offs are that if a decentralized network such as Bitcoin becomes too costly, then many of the users would choose to trust a third party if it means significantly lower fees. The proponents of keeping the block size at 1 megabyte for these reasons often say that the solution lies in Bitcoin working with other technology and additional layers on top of the Bitcoin network, such as the Lightning network.

 

Bitcoin Cash

Debates related to the issues described above have led to a hard fork of the Bitcoin blockchain that has occurred on August 1, 2017. During the split, one of the chains kept everything intact and the other chain increased the block size from one megabyte to eight megabytes. The chain that kept the block size intact became Bitcoin Core. Some people keep calling it simply Bitcoin. The other chain became known as Bitcoin Cash.

As of the writing of this article, Bitcoin Cash works exactly like Bitcoin Core does. It has its own blockchain that is decentralized and transparent and miners compiling transactions into the blocks and adding blocks to the blockchain of Bitcoin Cash. Block 478558 was the last block of the Bitcoin blockchain to be the same for both Bitcoin Core and Bitcoin Cash. This means that the first unique Bitcoin Cash block was block 478559. The network also uses addresses that look exactly like Bitcoin Core addresses. Also just like Bitcoin Core addresses, Bitcoin Cash addresses can be used more than once but it is not recommended to do so for privacy reasons.

According to the official website of Bitcoin Cash, its developers identified a list of features that they plan to add to the Bitcoin Cash network. Obviously, the first feature that makes Bitcoin Cash different from Bitcoin is its scalability. The developers also underline the importance of new signature algorithms and implementations that make transactions more secure, new algorithms for adjusting the difficulty of the network and commitment to decentralized development of the network. New transaction signatures provide improved security of Bitcoin Cash wallets and eliminate quadratic hashing issue.

As of the writing of this article, many popular exchanges, including Coinbase, Kraken and Bitfinex have introduced Bitcoin Cash to their platforms. The trading symbol for Bitcoin Cash is BCH.  The trading symbol for Bitcoin Core is BTC.

 

Does a hard fork mean that users double their money?

One of the interesting questions has to do with what happens when a hard fork occurs to users that hold coins on the blockchain that is going through a fork. While it is true that such users will get coins on both parts of the fork, they won’t necessarily be able to exchange their coins on two forks for more money.

When a fork occurs, the value of the currency typically goes down. This happens because the value of a digital currency depends on many factors, including an existing base of organizations that accept the currency and users who transact in the currency. When a fork occurs, users and organizations have to choose one currency, which means that the original blockchain loses certain users. Because of this, its price may go down. However, after a fork, both parts of the fork can create more value, attract more users and have their price increase, which is exactly what happened to both Bitcoin Core and Bitcoin Cash.