What was the Bitcoin fork and what is Bitcoin Cash?
On 1st August at approximately 12:20 UTC, the cryptocurrency known as Bitcoin formally began a process to fork – or split into two- creating Bitcoin Cash, a new currency.
It is unclear exactly what the implications of this will be in the long term but here’s a summary of what we know so far:
The fork in the roadBitcoin “forked” on 1st August, dividing the Bitcoin blockchain into two and creating Bitcoin Cash (BCC or BCH). The split came about due to a divide within the Bitcoin community, known as the “scaling debate” --which began in early 2015-- over the size of the blocks that would be processed by the Bitcoin network and how a future increase in the demand and use of Bitcoin would be handled. Previously, the Bitcoin blockchain had a limit of 1MB of data per ten minute block as a precaution to defend against potential attacks on the nascent cryptocurrency. This limited the processing speed on the network to approximately 7 transactions per second.
Increasing the volumeAs the number of users, and the number of transactions processed by the Bitcoin network increased, a group of users and developers began exploring potential ways to handle increased volumes on the network. The suggested approaches were:
- Increase, or remove the 1MB limit on the size of the blocks.
- New techniques, known as Segregated Witness, or “Segwit” which effectively reduces the amount of data that would be counted towards this 1MB limit.
- Scaling up the network through what is known as “second layer solutions”, which allows for transactions to be pre-processed before being confirmed by the main network.
The User Activated Hard Fork (UAHF)The Segwit proposal gained the backing of the group known as the “Bitcoin Core Developers” who maintain the most widely used software on which Bitcoin operates. In order to be fully functional on the Bitcoin network, the introduction of Segwit must undergo a process of agreement and simultaneous adoption by a majority of the Bitcoin ecosystem. In response to this, a segment of the Bitcoin community, which still preferred to increase the size of the blocks, made the decision to divide up the Bitcoin blockchain through a User Activated Hard Fork (UAHF). The result of this was that the original Bitcoin blockchain remains, but a second one -which took a snapshot of the Bitcoin network at the time of the fork-- has been created and seeks to create a competing network that can process larger blocks and more transactions per second directly on the new network’s blockchain. It also created the secondary cryptocurrency Bitcoin Cash.
Two new networksAs Chris Burniske said on Blockchain Insider, the split has now created two different networks, with two different ideologies on how to perform their services, even though their original roots are joined. He says that in this particular case, the “sum of the two parts (Bitcoin and Bitcoin Cash) is greater than the whole that pre-existed the fork”. He goes on to compare it to eBay and PayPal the two services now they’ve split perform their services in slightly different ways and can expand in different directions, and each remain successful and profitable in their own right, even though originally they were joined. The same can be said for Bitcoin and Bitcoin Cash.
Bitcoin Cash - free money?In dividing the blockchain and the currency this has essentially duplicated the currency Bitcoin holders have. For example, If you had 10 Bitcoin before the split, you now have 10 Bitcoin and also 10 Bitcoin Cash. This can also be hugely valuable to holders of both currencies. The price of Bitcoin was largely unaffected by the split, fluctuating around $3000 (at the time of the fork), and has continued to grow to record breaking levels since. Equally, the value of Bitcoin Cash rose sharply after it was first created to around $400 per coin, making it approximately the 5th most valuable cryptocurrency, or about a fifth of the price of Bitcoin. NB: this was the price at the time of creation, prices fluctuate all the time, for the most recent prices, please check an exchange.
To BCC or not to BCC?This is a highly simplified version of events however, as whether or not you got Bitcoin Cash as a result of the fork depended on whether you manage your Bitcoin yourself or it is managed for you via an exchange. If you manage your cryptocurrency yourself, you were free to choose whether or not you claimed Bitcoin Cash. If your assets were managed externally, it was up to the particular exchange whether or not to claim the Bitcoin Cash on your behalf. Coinbase, one of the biggest cryptocurrency exchanges in the space, refused to grant users their Bitcoin Cash immediately after the split, due to concerns over security, to general outcry. Coinbase has since relented and revealed it will let its users have their Bitcoin Cash as of 1st January 2018. Other exchanges such as Kraken adapted to the changes much faster and allowed Bitcoin Cash straight away. As of the time of writing many exchanges have such controls over Bitcoin Cash and concerns over its security.
What is the impact?
- Education for Bitcoin users - the fallout from the split gives users a better understanding of currency custody within currency exchanges and raises awareness that users do not necessarily have autonomy over their assets
- Move Bitcoin Cash into a new wallet with new private keys before trading for security.
- This is advice for users, as Bitcoin Cash now exists on the same public and private key pairs as before the split. Users are advised to move their Bitcoin Cash onto a new private key before engaging in trading for their own security, particularly after fear and doubt in the industry following the DAO hack and the Ethereum hard fork.
- The new (Bitcoin Cash) network is nascent and could be more susceptible to attack than the original Bitcoin network.
- Going forward, other forks of currencies could be more common, as the history of cryptocurrencies is open and freely available. Chris Burniske had a fantastic allegory for how this could work: “Can you imagine if someone didn't like Facebook and just said I'm going to copy all that code and launch another Facebook with all the same users and accounts and data, but something slightly different in the user interface”.