The Bitcoin Cash Panic

bitcoin cash

Bitcoin has dropped significantly in the past few hours after the announcement of the release of Bitcoin Cash on August 1st which was supposed to be a contingency release, as announced by Bitmain, in case the UASF went into effect on August 1st. Many people are scared and confused thinking that the scaling debate was put behind following the BIP 91 lock in. Although most people nowadays are aware of Bitcoin few are aware of the several Bitcoin forks in existence (i.e. Bitcoin XT, Bitcoin Classic). The scaling debate of the Bitcoin network is not a new issue. It’s been a contentious issue as far back as 2013. In order to solve those issues several Bitcoin hard forks have been attempted ever since. However, none of these bitcoin forks gained enough traction to rival the main network in terms of hashing power. This is not surprising since a hard fork of Bitcoin is essentially an altcoin. As an altcoin what significant features would it offer to users that other altcoins like Ethereum or Ripple do not offer? The answer is not much. Since they fail to garner user interest, they also fail to garner miner interest, since miners live of fees generated by users, and hence they never gain traction beyond being interesting ¬†experiments for what features could be adopted in the main Bitcoin protocol.

Bitcoin Cash vs UASF

Although the current news outlets are comparing the Bitcoin Cash release as a fork to the UASF issue. The two events are not comparable. First of all there are already a few popular bitcoin forks out there (i.e. Bitcoin Unlimited, Bitcoin Classic) and more will come out over the years. They just don’t draw enough hash power at launch to become significant threat to the stability of the network. The recent UASF scare was because segwit only had 40% support of the miners, support level for segwit had been in the 30% to 40% range for months, and it was mid July already with the deadline being August 1st due to the UASF. Therefore the hashing power could have been split in half on August 1st had BIP 91 not locked in. The problem with the hashing power being split in half all of the sudden is the instability that it would create within the Bitcoin network. In order to find a new block a puzzle has to be solved, there is a difficulty level for this puzzle that is set approximately every two weeks that depends on the amount of hashing power within the network. If that hashing power all of the sudden drops to half, the difficulty level may still be too high for transactions to validate on time. Leading to long delays in block confirmations that could severely impact the user experience. Sudden drops in hash rate while the difficulty level was too high was a common cause of death of many new altcoins launched in early 2014. Now long delays would not be the only problem. An additional problem is the emergence of two blockchains with approximately equal amounts of hashing power. Most miners and users would have a hard time figuring out which blockchain is the right blockchain that users should be following and miners should be validating. This could lead to loss of funds if users are using the wrong blockchain, since the two blockchains will have different histories starting at the point in time of the fork. Although I have trust that the problems could have been solved in the event this worst case scenario happened, the bad user experience could have scared away new and potential users of Bitcoin and damaged Bitcoin’s reputation as the most stable network among cryptocurrencies.

On the other hand the release of Bitcoin Cash does not pose an immediate threat to the stability of the main Bitcoin network upon release. There are several miners supporting Bitcoin Cash but they are not the majority and although the user base would be an exact copy of the current user base of Bitcoin, the bitcoin cash client has not yet been released and therefore almost no one will be using Bitcoin Cash upon release. Since almost no one will be using Bitcoin Cash upon release, miners who decide to validate Bitcoin Cash transactions will not be receiving much in fees, but mostly units of a new coin with an uncertain future. It will be an opportunity cost to them that once they start they cannot abandon for causing a sudden drop in hashing power in the Bitcoin Cash network. Therefore, those miners that are claiming they will mine in the Bitcoin Cash network, if they do, they will most likely be diverting an insignificant percentage of their hashing power to the Bitcoin Cash network, thus leaving the main network essentially unscathed.

What is Bitcoin Cash?

The main feature of Bitcoin Cash is the much larger block size of 8 megabytes as opposed to Bitcoin’s 1 megabyte. The reason for increasing the block size to 8 megabytes is to solve the scalability issue that has plagued Bitcoin for years. Every transaction is stored in a block, given that the block size of Bitcoin Cash is eight times the size of Bitcoin’s, it can hold eight times the number of transactions as Bitcoin. At plain sight this seems like a more sensible solution than the harder to understand segwit solution, however, like every other solution it has its drawbacks, which had been considered in the past too significant to ignore. Mainly, the fact that the block size is bigger also means that more information can be put inside each transaction, leading to further uses of transactions within the Bitcoin network. One of these uses was the colored coins concept, which was implemented by MasterCoin and Counterparty within the Bitcoin network. Both projects attempt the creation of smart contracts with more functionality than what the basic Bitcoin protocol provides but at the expense of larger transactions and larger fees. Bitcoin core developers were opposed to these types of implementations because they clogged the network with transactions which Bitcoin was not intended for. Counterparty developers had long pushed for increasing the Bitcoin block size since the seemingly arbitrary 1 megabyte limit also limited the possibilities of their platform. Projects like Ethereum were created as a result of these limitations within the Bitcoin protocol.¬†However, the invention of segwit along with concepts like state channels and side chains address the issue of limited functionality of the Bitcoin protocol by creating a separate layer between users and the blockchain where more powerful smart contracts can be created in addition to greatly increasing transaction throughput by relying on this layer between users and the main network to aggregate transactions before publishing to the main network. Users therefore would cease to interact directly with the main network and instead interact with these other networks that pass the final result of users’ actions to the main network.

Who is Bitcoin Cash For?

Since Bitcoin was born on ideological grounds the idea of being dependent on a third party or intermediary to interact with the main network does not sit well with many Bitcoin users, hence the opposition to segwit and solutions like the lightening network and support for solutions like Bitcoin Cash which simply increase the block size. This opposition still exists despite the fact that the intermediary between the main network and bitcoin users in most cases will still be some type of trustless blockchain that just runs as a side chain to Bitcoin. From the perspective of miners increasing the block size is a preferred solution due to the greater number of transactions they can validate in each block, and therefore larger number of fees they can charge, however, this view is myopic. Although it is true that the implementation of something like the lightening network would lower the number of fees miners can charge validating the main bitcoin network since most transactions hitting the main network would just be aggregated transactions, new opportunities would open up in validating transactions in the layer between users and the main bitcoin network which would come from added services to the Bitcoin protocol built on top of this new infrastructure, services that have not yet been imagined.

Outlook

Most of the price action over the last two weeks seems to have been driven by news events shaking new investors and speculators off their seats. However, most of these news events are exaggerations of what’s to come in the short term. Although my general outlook on the entire cryptocurrency market is that the bubble will keep deflating until it reaches near parity with the rate of growth of its user base and network activity, the hypes and panics created by the news events are opportunities to enter or exit the market in the short term. Bitmain was playing a game of chicken with UASF, they were not going to fork the network and lose money. It was in their best interest to comply with BIP 91. BIP 91 does not fully solve the scalability issue. The debate whether to increase the block size has still not been solved and will be revisited in three months after Segwit activation since Bitmain along with a significant percentage of the network are supporting Segwit2x, which increases the block size to 2 megabytes, not Segwit, which is the preferred upgrade by the Bitcoin core developers. Bitcoin Cash will not bring down the Bitcoin network. Bitcoin Cash is not the first fork to increase the block size to 8 megabytes. That title goes to Bitcoin XT. The ideologically biased community that supports Bitcoin Cash was a significant percentage back in the early 2010s, nowadays that community is small compared the rest of the cryptocurrency community. Bitcoin Cash like Bitcoin XT and other Bitcoin forks, will simply be another altcoin copy of Bitcoin like the many forks that already exist.

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