Software Engineer Intern (Blockchain)
If you haven’t heard already, a cryptocurrency called Bitcoin Cash (BCH) has shot up like crazy. It’s nearly quadrupled in value over the weekend to reach its peak of about $2400 about 24 hours back. It’s currently stabilizing around the $1200 mark. If you haven’t heard about this, it’s time for you to listen closely.
So what’s Bitcoin Cash?
It’s a spinoff cryptocurrency that was created on August 1st by splitting off from the Bitcoin (BTC) that we all know, due to some ideological differences of the stakeholders. This was done through a term called a ‘Hard Fork’. Until now Bitcoin Cash was languishing at around the $300 to $500 mark and was considered as small fish, as most people saw Bitcoin (BTC) as the true Bitcoin.
However, over the past few days there have been some very interesting developments in the Bitcoin community causing some serious stir in the markets of both Bitcoin (BTC) and Bitcoin Cash (BCH).
To describe what just happened and why it happened, I’ll have to go a bit into the history of politics of Bitcoin and even touch a bit on a few technical aspects.
Who are the main players in the Bitcoin ecosystem?
There are mainly 4 stakeholders in the Bitcoin Community: The core developers who maintain the Bitcoin Core Code, the Miners who secure the transactions, the Venture-backed Startup businesses and the Users. Each stakeholder has their own agenda.
Now, Bitcoin was intended to be a peer-to-peer payment system as designed by the pseudonymous founder and genius Satoshi Nakamoto.
The Bitcoin Core Development team believe in continuing his vision of maintaining and extending the decentralized payment system.
The Miners’ (Eg: Mining Pools such as Antpool, ViaBTC, BTC.com) main agenda is to make as much profit as possible. They are rewarded by the protocol for securing and validating the transactions in the system. They also earn money through transaction fees. Hence more transactions, means they earn more money (Keep this in mind!).
The Venture-backed Startup businesses’ (Eg: Coinbase, Xapo, Shapeshift) main agenda is to make money as well through their businesses. They also make money if there are more transactions. Not through transactions fees in their case, but through other revenue models. But the more transactions there are, the more money they make (Keep this also in mind!).
Note that scaling up the number of transactions will be beneficial to both the Miners and the Startup businesses.
The Users, are people who use the system just like you and me to make payments and store bitcoins.
Now, you might be able to see that the major stakeholders are the Bitcoin Core development team, the Miners and the Startup businesses. Users don’t have much say.
Now where’s the politics you ask?
When Satoshi Nakamoto designed the system, he made the block size of each block in the bitcoin blockchain to be 1MB. There was a very technical reason for why he did this (I’m not going into the details, but it’s to maintain a decentralized control of the system at a high level).
The problem is that the threshold of 1MB of transactions per block has already been reached and the Bitcoin system is not able to keep up with the number of transactions that are being pushed into the network.
Why is this bad? With the amount of people buying and trading bitcoin at the moment, the system can’t cope up with the number of transactions and there is a huge backlog. There are only so many transactions that one block can hold. Remember me mentioning here that a block is only created once every 10 minutes in Bitcoin? This causes your transactions to be in limbo for a long time unless you pay up huge transaction fees to have your transaction verified earlier by the miners and put into a block. Hence block space is becoming prime real estate.
Already the average transaction fees are around $4 for any transaction in the Bitcoin System. This is reaching close to PayPal’s fees for International payments which is around 3.9%. It might actually be cheaper to use PayPal if your transaction amount is less than $100. Due to this, no longer are the envisioned micro transactions possible due to this price point.
And further, the miners will make it into a bidding war to get your transactions into the earliest block. The higher you pay up, the earlier you get your transaction validated.
So, you can clearly see that there is an issue with the block size and the number of transactions in the system. The political divide that has been created in the Bitcoin community is due to the different approaches that each stakeholder has proposed to solve the issue.
I’m not going into the technical details, but the three proposed solutions to solve this issue of scaling transactions were:
1) Lightning Network (Off chain transactions)
3) Increased Block Size
Lightning Network (Off chain transactions) is still under research and development.
Out of all 3, the most polarizing solution in the community was the third one, i.e., to increase the Block Size.
The issue is that if you increase the block size, something called centralization of power happens. The Bitcoin Core Development team believes that this is against the initial vision of a decentralized system that Satoshi Nakamoto built. Whereas, the Miners and the Startup Businesses want the Block size to be increased to scale up the number of transactions, so that they can make more money. They also claim that doing this will make Bitcoin into the true payment system that it was intended to be, competing along with other fiat currencies, VISA and PayPal.
Hence you can see that the fight is between the Core Development Team vs the Major Miners & Startup Companies. And this fight has been going on since 2015, when the proposal to increment block size was suggested.
Tired of the never-ending debate, in August 2017, a couple of the major miners hard forked the Bitcoin Blockchain and created Bitcoin Cash (BCH) with 8MB blocks. This allowed more transactions to be entertained in the system.
However, many people still believed Bitcoin (BTC) was the true original one and believed it will eventually improve in the future. Hence, Bitcoin Cash (BCH) didn’t gain much traction in the initial days.
Now according to the New York Agreement, Bitcoin was supposed to implement something called ‘SegWit2x’ on November 15th, 2017. It was supposed to have block sizes of 2MB as a compromise between the stakeholders. This was a decision that the community had taken after two years of fighting and discussing. However, they called it off last week after fears that there was not enough consensus among the stakeholders and that the community would split and create another ‘hardfork’ which could badly affect Bitcoin and its ecosystem.
Now many Miners had stuck with the original Bitcoin with the belief that SegWit2x would be implemented. This move to call off the improvement, pissed off a few of the major Miners.
What did this all mean?
Now this is where things started getting really interesting over the weekend.
As payback and to stick to their vision, major Miners such as Antpool, ViaBTC, etc. shifted all their mining hardware and their resources from Bitcoin (BTC) to Bitcoin Cash (BCH) as that was the next closest alternative to their vision. Their aim was to short Bitcoin (BTC).
This move had some crazy ramifications. The sudden support caused Bitcoin Cash (BCH) to soar over the weekend. Now due to the higher worth of Bitcoin Cash (BCH) compared to earlier, mining became more profitable on Bitcoin Cash (BCH). Hence, even a lot of the smaller miners started shifting their resources to Bitcoin Cash (BCH) from Bitcoin (BTC) to make money. This resulted in Bitcoin Cash (BCH) having more hashpower than Bitcoin (BTC) at a certain point of time in the weekend. They’ll continue making money until the Bitcoin Cash Protocol resets its difficulty to compensate for this.
What does this mean? It’ll take much longer for Bitcoin (BTC) transactions to be verified in the short term and there will be a huge backlog of transactions. And this will go on till the difficulty resets eventually to recalibrate. This is what caused Bitcoin to have a sudden crash in price as well.
The result of all this is that there will be an interesting dynamic in the shift of mining power between both the systems causing the crypto markets to be stirred for the next few weeks. Bitcoin Cash (BCH) is starting to look like the David to Bitcoin’s (BTC) Goliath and is being perceived as a considerable challenger with the new support it’s getting. Heck! Even Vitalik Buterin of Ethereum congratulated them.
Have a great day folks and watch out for the rising juggernaut!
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