Bitcoin, the most valuable and widely-used cryptocurrency, has catalyzed an explosion of innovation, disrupting a broad spectrum of markets across hundreds of different industries around the world. The king of crypto, however is not without flaws — issues that many alternative cryptocurrencies attempt to address, the most visible of which is Bitcoin Cash.
What is the difference between Bitcoin and Bitcoin Cash, though, and why does it matter?
In this post, We’ll break down the fundamental differences between BTC and BCH.
How Bitcoin Works
In order to understand the difference between Bitcoin and Bitcoin Cash, it’s necessary to first develop an understanding of Bitcoin and how it works.
The release of the Bitcoin white paper on 31 October 2008 by Satoshi Nakamoto was a game-changer for the world of digital currency. The idea of digital currencies can be traced back to as early as David Chaum’s ideation of “eCash” in 1983, which was first implemented in 1995 as “Digicash.” Several other digital currencies were launched before the release of Nakamoto’s white paper, but all of them suffered from the same problem — double spending.
The Double Spend Problem
The “double spend problem” relates to the digital nature of digital currencies — at a fundamental level, these currencies are just digital files. In order to ensure a digital currency has value, the system upon which it operates must ensure that the files that the currencies consist of cannot be copied in the same way a regular file on any given computer can be copied.
The solution to the double spend problem was first published by Nakamoto in the “Bitcoin: A Peer-to-Peer Electronic Cash System” white paper. The Bitcoin system uses a distributed encrypted ledger spread across all network participants, leveraging a Proof of Work system first ideated in 1999 by Markus Jakobsson and Ari Juels.
Nakamoto’s’ solution to the double spend problem draws from previous digital currency research much in the same way that Albert Einstein drew upon the works of Lorentz and Poincaré in the composition of his theories of special relativity and general relativity, but is the first solution to wholly solve the double spend problem.
The Importance of Blocks
A key feature of Satoshi Nakamoto’s Bitcoin solution is the implementation of the blockchain — the Bitcoin network uses Proof of Work to keep network participants honest, and writes transactions to an ongoing chain of encrypted blocks. These blocks ensure that the ledger which keeps track of all balances cannot be changed retroactively — transactions from a given period are encoded into an immutable block, with the encryption process incorporating the output of the previous block in order to make retroactive artificial block creation functionally impossible.
This architecture solves the double spending problem, but presents an important question, one that catalyzed the creation of Bitcoin Cash — how big should blocks be?
The Block Size Debate
Each transaction that occurs on the Bitcoin network takes up a specific amount of size. Depending on the complexity of the transaction, the size of an individual Bitcoin transaction can typically range between 250 and 600 bytes of data.
In the early days before the launch of the Bitcoin network, there was no limit to the size of a block. In 2010, however, Nakamoto — who was still actively interacting with the Bitcoin community and publicly contributing to Bitcoin code — implemented a 1 MB block size restriction, hardcoding it into the architecture of the Bitcoin network.
This hardcoded limit was implemented for a number of reasons. Early Bitcoin developers cited the unforeseen development of pool mining, the creation of dedicated mining hardware, and an evolving fee market as reasons for the implementation. Satoshi, apparently realizing that there would need to be a maximum block size in order to prevent the creation of blocks larger than miners would accept, implemented the 1 MB Bitcoin block size limit in late 2010.
The Impact of Block Size Limits
The Bitcoin network collects transactions into batches that are encrypted into blocks every ten minutes. Limiting block size therefore limits the total amount of transactions that can be processed in that time period — at an average of roughly 500 bytes per transaction, the Bitcoin network can process a little over 2,000 transactions per block.
This restriction limits the Bitcoin network to a transaction throughput speed of around 7 transactions per second, which is not sufficient for large scale payment networks — the VISA network, for example, is capable of processing 24,000 transactions per second.
With Bitcoin increasing in popularity and value, the impact of block size restrictions on transaction throughput sparked a debate in the cryptocurrency community, with many community members calling for an increase in block size limits in order to expand the transaction throughput capacity of the network.
The core problem with block size expansion highlighted by opponents of the size increase is the inflation of block size — the larger the block, the more complex the process of encryption is, eliminating smaller network participants with access to fewer resources from participation. A Bitcoin network with a larger block size could potentially lead to the centralization of computing power directed at maintaining the Bitcoin network, which is antithetical to the core decentralization ethos of the Bitcoin project.
The Origin of Bitcoin Cash
Bitcoin Cash was created as a direct solution to the issues created by block size restrictions. Removing the block size limit, however, required a “fork” in the Bitcoin blockchain — creating a new, altered implementation of the Bitcoin code that would create a new blockchain.
On August 1st, 2017, block size increase proponents forked the Bitcoin blockchain to create Bitcoin Cash, a new implementation of Bitcoin code that increased the block size limit to 8 MB. This new block size allowed for far more efficient transaction throughput, and created a new chain that provided everybody with Bitcoin in their Bitcoin wallets at block 478558 with an equivalent amount of Bitcoin Cash on the new Bitcoin Cash blockchain — free money!
Bitcoin & Bitcoin Cash Compared
Bitcoin and Bitcoin Cash have divided the cryptocurrency community, with proponents of each arguing for the supremacy of their chosen side. Here are the basic differences between the two:
Bitcoin: As of Q3 2018, the speed at which the Bitcoin network is able to process transactions ranges between 10 and 20 minutes, with occasional spikes in network traffic causing transaction confirmation times to surge beyond one hour.
While second-layer scaling solutions such as the Lightning Network promise to reduce transaction confirmation times to less than one minute, Bitcoin transactions are still not fast enough to facilitate instant purchases.
Bitcoin Cash: The relatively small load on the Bitcoin Cash network compared to the Bitcoin Network, roughly 10% in size, currently allows the Bitcoin Cash network to confirm transactions at a far higher rate. Bitcoin Cash transactions are typically confirmed within ten minutes, but are often almost instantaneous.
Centralization is a key issue in the BTC vs BCH debate. The development of dedicated mining hardware and the forming of mining pools, in which miners rent hardware located on massive server farms, has led to the centralization of both Bitcoin and Bitcoin cash.
Bitcoin: Mining pool juggernaut Bitmain currently operates a large portion of the hardware dedicated toward Bitcoin hash power. Data from Blockchain.com demonstrates that BTC.com and Antpool, both operated by Bitmain, contribute roughly 32% of all Bitcoin hashpower.
Bitcoin Cash: Data published in July 2018 demonstrates that almost 50% of all Bitcoin Cash hashpower is located on server farms operated by Alibaba and Amazon. More recent data shows a split between CoinGeek at 25%, BTC.top at 14%, and BMG Pool at 14% as the largest players in the Bitcoin Cash mining industry.
While both networks are actively mined by different mining pools, the hardware that is performing the mining is largely centralized in server farms, presenting centralization concerns for both Bitcoin Cash and Bitcoin.
Bitcoin Vs Bitcoin Cash
Bitcoin Cash and Bitcoin are fundamentally similar, with the only difference consisting of block size. While the Bitcoin Cash block size increase does solve the transaction throughput issue for the short and medium term, it’s entirely possible that block size would need to be increased again, further reinforcing network centralization.
Bitcoin’s centralization solutions such as the Lightning Network, however, have also demonstrated their own centralization concerns.
Ultimately, there is plenty of room for both cryptocurrencies, and both have something unique to bring to the cryptocurrency ecosystem.
About the Author
This is a guest post submission written by Kieran Smith. Kieran Smith provides content strategy and copywriting services for cryptocurrency companies at Bitcopy.