Bitcoin (BTC) and Bitcoin Cash (BCH) share similarities that go beyond their names. Bitcoin is the first cryptocurrency to have ever been created and is often seen as digital gold, or “gold 2.0.” The cryptocurrency is treated as a store of value and inflation hedge.
Bitcoin Cash, on the other hand, is a cryptocurrency meant to serve as digital cash, with its supporters trying to ensure that it’s cheap and easy to use. BCH was created through what’s called a hard fork of BTC, which means both assets share a transaction history, common code base and more.
A hard fork is a radical upgrade to the open-source software behind the blockchain of cryptocurrencies like Bitcoin. It occurs when a permanent divergence from a blockchain’s latest version is created and some of the computers running the network no longer meet consensus. This creates a fork on the blockchain, where one side keeps following the old rules and the second side follows a new set of rules.
This is what happened to the Bitcoin blockchain in August 2017. To understand why a portion of the community decided to alter the blockchain in such a way, it’s worth taking a step back and look at Bitcoin’s scaling debate.
The Bitcoin scaling debate
Since its inception, questions surrounding Bitcoin’s ability to scale effectively and become a widespread global currency have been floating around. The cryptocurrency’s use of blockchain technology allows it to be decentralized and censorship-resistant. Still, the novel technology has a significant tradeoff: the volume of transactions that the Bitcoin blockchain can process per second — its transaction throughput.
Payments provider Visa, for example, currently processes 150 million transactions per day, which leads to an average of 1,700 transactions per second. The company says its capability would even allow it to go as far as 24,000 transactions per second.
The Bitcoin blockchain, in its current state, manages to handle around seven transactions per second. The difference is staggering and was understood as the number of users on the network grew since each transaction essentially consists of data.
That data is stored on the blockchain, which can be seen as a chain of blocks of data. Each block on the Bitcoin network is limited to 1 MB of data. As demand on the network grows, a backlog of unconfirmed transactions looking to be included in blocks starts forming.
This backlog had at some points over 100,000 transactions waiting to be confirmed. The way the network determines which transactions go through and which don’t is based on the fee attached to each transaction. The higher the fee, the faster the transaction is processed.
When the network is clogged and competition for the limited space grows, transaction fees surged to the point that one transaction could set a user back as much as $58, pricing some users out of the network.
To solve Bitcoin’s scalability issues, the community split into two major solutions: One was to increase the block size to allow more transactions to fit into each block, while the other was to maintain a 1 MB block size and scale via layer-two solutions.
Both solutions have trade-offs, and the division their proposals created in the community only grew over time as each side started accusing the other of some form of manipulation. The debate ultimately led to the hard fork.
The Bitcoin Cash hard fork
On May 23, 2017, a number of Bitcoin business owners and miners representing over 85% of the computing power securing the network held a meeting behind closed doors to decide the future of BTC. What came out was what’s known as the SegWit2x upgrade.
SegWit2x was designed to help Bitcoin scale by implementing Segregated Witness (SegWit), an upgrade that “segregates” some data outside of the limited block space and adjusts the block sizes to 2 MB, which would be implemented through a hard fork. The proposal was met with opposition from the community as the main codebase of Bitcoin wasn’t represented and it was seen as a centralizing force.
In the scaling debate, those who defended small blocks were against a block size increase, as it would increase the size of the blockchain. They believe this would make it harder to host a full node, potentially centralizing the cryptocurrency and making it more vulnerable. On the other hand, those who supported larger blocks argued for a faster solution, fearing BTC’s rising transaction fees would harm the cryptocurrency’s growth.
The debate ultimately led to a hard fork, as those supporting bigger blocks decided to fork the Bitcoin blockchain on August 1, 2017. The fork created Bitcoin Cash, a cryptocurrency whose supporters saw it as a continuation of Satoshi Nakamoto’s original vision.
How Bitcoin Cash differs from Bitcoin
Over time, the number of differences between Bitcoin and Bitcoin Cash kept growing as developers working on each network had different goals in mind. The difference between both cryptocurrencies became so big they are now seen as completely different assets in the community.
Difficulty adjustment
One of the main differences between Bitcoin and Bitcoin Cash is the difficulty adjustment algorithm added to BCH. Because both networks use the same SHA-256 hashing scheme, Bitcoin miners can move to the Bitcoin Cash network when it becomes more profitable for them to mine on it.
This means that, given the fluctuations in the market, the computing power behind the network can vary wildly. The difficulty adjustment algorithm ensures that blocks are generated at a stable rate every 10 minutes, by either cutting difficulty in half if they are behind schedule, or doubling it if they are ahead of schedule.
Block size differences
The main difference is related to the block size of each network. While Bitcoin maintains its 1 MB block size, with Bitcoin Cash, block sizes have grown to 32 MB. This means that transactions on BCH now cost less than a penny and it can process as many as 200 transactions per second.
Since Bitcoin Cash hasn’t been processing enough transactions to fill up its extra block space, the size of the blockchain hasn’t grown exponentially, as was predicted. Bitcoin SV (BSV) — a cryptocurrency created through a fork of Bitcoin Cash — is looking to raise its block size to 1 TB and the size of its blockchain is now much larger than Bitcoin’s.
Smart contracts and decentralized finance
Bitcoin does not support smart contracts, although work is being done to help build decentralized finance (DeFi) services on top of it, as Square CEO Jack Dorsey revealed. Meanwhile, Bitcoin Cash has started using smart contract languages like Cashscript to enable more complex functions on it.
Cashscript aims to bring DeFi to Bitcoin Cash to help it compete with Bitcoin and Ethereum (ETH). Some of the tools already developed include CashSuffle and CashFusion, meant to improve privacy on the network.
Token issuance
To issue tokens on top of the Bitcoin blockchain, projects have to use the Omni layer, a platform “for creating and trading custom digital assets and currencies.” Omni transactions are Bitcoin transactions with “next-generation features,” but the layer’s adoption has mostly centered around stablecoins.
Bitcoin Cash has, on the other hand, created the Simple Ledger Protocol (SLP). The protocol allows developers to issue tokens on top of BCH, similar to the way tokens are issued on top of the Ethereum blockchain.
Some assets have been issued on both the Omni layer and as SLP tokens. Existing on different blockchains makes it easier for users to choose the network they prefer. The adoption of both solutions has been somewhat lackluster, however.
The SLP protocol also supports nonfungible tokens (NFTs), which are distinguishable from each other. However, their use on BCH has been limited compared to their use on Ethereum or other blockchains.
Replace-by-fee
Replace-by-fee (RBF) is a feature on the Bitcoin network that allows someone to get a transaction that is “stuck” without being processed, replacing that unconfirmed transaction with a different version of it with a higher transaction fee attached.
RBF can be used when transactions need to be processed as fast as possible, but its critics claim it may make it easier for malicious actors to spend the same funds twice. They argue that an attacker can send a transaction with a very small fee as a payment for a good or service using RBF. If the recipient does not wait for enough confirmations on the network, they can then send that same transaction with a higher fee to a wallet that they control.
The network would confirm this second transaction first and drop the transaction paying the merchant for their goods or service. Most versions of RBF require that the transaction include all of the same outputs to prevent this. Moreover, if the recipient waits for a few network confirmations, RBF becomes impossible because the transaction has been confirmed.
Bitcoin Cash has nevertheless dropped this feature, making unconfirmed transactions irreversible on its network. Given its higher transaction throughput, double spending with RBF would nonetheless become a lot harder because transactions are confirmed faster.
Different visions, same monetary policy
Bitcoin Cash was created with an 8 MB block size at the time of the hard fork and has since quadrupled it. The network openly embraces new hard forks and takes steps to innovate as much as possible to increase its usability and be used as cash.
On the other hand, Bitcoin is more careful in pushing out upgrades and is seen more as an inflation hedge and store of value. Its scaling plans have seen the implementation of SegWit and the creation of the Lightning Network.
The Lightning Network essentially creates an extra layer on top of the cryptocurrency’s blockchain where transactions are fast and fees are minuscule. That layer consists of user-generated payment channels. It’s estimated to be able to handle up to 15 million transactions per second, but its adoption has been relatively slow.
Bitcoin has also sought to preserve users’ pseudonymity through upgrades like Taproot, which allows complex transactions including timelock releases or multi-signature components to be seen as simple transactions. With Taproot, a transaction creating a Lightning Network channel or a simple transaction is indistinguishable from one another.
Bitcoin supporters value decentralization and censorship-resistance more than they value a higher transaction throughput. Bitcoin’s role as a store of value is dependent on its ability to thwart attacks from any entity imaginable.
Bitcoin Cash’s vision as peer-to-peer electronic cash depends on its low transaction fees and faster speeds. Some projects built on top of BCH, which include social media platforms where every post is published on the blockchain, would be unfeasible on Bitcoin.
Privacy on Bitcoin Cash is preserved through a different method: coin mixing. Coin mixing sees numerous BCH users’ transactions get bundled together to obscure the origin of users’ coins. This is a controversial practice believed to help cybercriminals hide their tracks.
The monetary policy of both networks remains the same. Only 21 million coins will ever be created on each blockchain, and the issuance of new coins is halved every 210,000 blocks or roughly every four years. The last BTC and BCH are projected to be mined in 2140.
Both cryptocurrencies were designed to protect against monetary confiscation, censorship and devaluation through higher-than-expected inflation. Both blockchains are transparent and publicly accessible and cannot be altered by a single entity.