For most people who are new to the crypto market it can be confusing to see why there are two versions of Bitcoin. This becomes even more complicated when they try to figure out the differences between them.
Here we have what was once a community of one Bitcoin split into two coins. Which of the two should you choose to invest in? What is the difference between Bitcoin Cash versus Bitcoin? When did the most contentious and controversial debate within the Bitcoin ecosystem began? What’s their feud about? There are many questions surrounding this topic and this article will try to answer them all.
These days everyone has heard of Bitcoin (CRYPTO:BTC) and Bitcoin Cash (CRYPTO:BCH). Bitcoin, thanks to its irreplaceable anti-inflation and decentralization features is seen as the digital gold of the future. And Bitcoin Cash, in a world where fiat money is gradually taking a back seat, is trying to become the currency of the internet.
Both of these blockchain projects are nearly identical in their working. In fact, they both are based on the same source code, use a peer-to-peer payments system and are operated by a decentralized authority. They also run a Proof of Work (PoW) based consensus algorithm and they both have a 21-million-coin limit, which means the cryptocurrency can not be devalued in the same way a conventional currency can.
Additionally, the expected mining block time is 10 minutes on both blockchains, which needless to say, is hardly the standard for scalability. Another crucial similarity is that both networks share the same white paper but with different interpretations. The Bitcoin camp believes in a permission-less and fully decentralized network, while the Bitcoin Cash camp prioritizes Bitcoin’s mass adoption over decentralization.
So, structurally speaking both digital assets are nearly identical but with a key difference: they have opposing views to the network’s scalability problems. Whatsmore, these views, which have been at the heart of some of the more argumentative debates within the Bitcoin community, are rooted in the fundamentals of blockchain technology. In fact, disagreements over how to fix Bitcoin’s scaling problem have even resulted in the split of the blockchain.
Obviously, it’s important to know the differences that exist between these two blockchain projects since only by knowing the facts you’ll be able to make a decision in terms of which crypto to invest in, or whether you’d like to invest in both.
Now let’s take a look at Bitcoin’s scalability isues.
Since the publication of Bitcoin’s white paper on October 31, 2008, titled “Bitcoin: A Peer-To-Peer Electronic Cash System” and the crypto’s subsequent launch in Jan. 2009 by a person or a group going by the pseudonym Satoshi Nakamoto, Bitcoin’s block size has been limited to 1 megabyte (MB), giving the network the capacity to handle up to 7 transactions per second (Tx/s). For context, global credit card issuer Visa (NYSE:V) averages more than 1,600 Tx/s.
Also, when compared to the average transaction speeds of 10 largest cryptocurrencies out there, Bitcoin takes the longest time for processing. In fact, the Ripple (CRYPTO:XRP) blockchain processes around 1,500 transactions per second, and the settlement time per transaction takes 3 to 5 seconds. By comparison, and as already mentioned, Bitcoin’s expected block time is 10 minutes. These are certainly very slow speeds for a network that isn’t just a currency but also a payment method.
Objectively speaking, one of the reasons transaction speeds were kept so low and each Bitcoin block size was limited to containing just 1MB of data was to keep the network as democratically organized as possible. And it seemed the approach worked for a while as things in the Mempool queue kept running normally. In fact, Bitcoin’s block size didn’t become a public issue until March 2013. But as Bitcoin started to gain mainstream popularity it was faced with two problems. The first was price volatility. The cryptocurrency would experience extreme price run-ups and significant draw-downs. On June 2011, Bitcoin’s price hit $22. By mid October Bitcoin was trading just under $3, a nosedive of more than 630%. In 2014, Bitcoin saw its price plunge again. This time by more than 52%, from $881 in the beginning of January to $421 in April.
Fiscal 2018 was another volatile year for the world’s largest crypto as its price dipped below $3,200, a drop of more than $10K from where it ended the previous year. Earlier this year the same pattern emerged. Bitcoin’s price spiked at almost $65K to only plummet below $30K within a couple of months. It currently trades below $61,000 after it blasted past the $66K mark on Oct. 20.
It’s fair to say that crazy price swings have always been the norm for Bitcoin. That said however, this kind of price volatility shouldn’t be perceived as a flaw of BTC. The oscillations are simply an accurate representation of a cryptocurrency with a finite supply that’s currently in high demand.
But to get back to our original point, the second problem Bitcoin was facing was scalibility, an unavoidable challenge of growing a system.
Scaling is a network’s ability to cope with the influx of a large number of transactions during peak times. For example, Bitcoin operates normally at 7 transactions per second, but if there is a higher number or a large influx of transactions, the system may not be able to cope with traffic.
In fact, this was the exact scenario the Bitcoin network was faced with. As the number of users grew, competition for the same limited transaction space in those 1 MB blocks gradually led to higher transaction fees, prolonged settlement times, and lower throughput. This in turn created a backlog of transactions prompting the Bitcoin network to start showing signs of latency and congestion. And when there is system congestion, miner fees go up. As a result, an increasing number of users started to pay record fees to have their transactions go through. There were reports in 2017 of Bitcoin transacting fees averaging more than the transaction. For a $10 Bitcoin transaction, you had to pay a $20 fee. Under these conditions BTC’s utility as a medium of exchange for small-value purchases was seriously put into question.
On the other hand, it is also important to note that when it comes to rising transaction costs, Bitcoin always had a potential solution on its hands. For instance, they could have raised the block size and squeeze more transactions in each 10-minute window. In fact, a good number of miners, investors, and developers in the Bitcoin community wanted to take this on-chain approach when fees started skyrocketing in 2013. They even proposed a block size increase from 1MB to 8MB. But those opposed to the idea — mostly developers in charge of the original codebase for Bitcoin — argued that increasing the block size could not be sustained technically nor economically as Bitcoin’s adoption rate grew. They also believed a block size increase would result in the centralization of Bitcoin. Another argument was that a bigger block wouldn’t necessarily make BTC work effectively at very large scale.
So, 2013 is the year when Bitcoin’s scaling debate between the “big blockers” and those against really took off. Also, during that time the network’s ability to scale its technology was also put into question.
At that point, it was clear that participants in the Bitcoin ecosystem had strong fundamental disagreements on methods for scaling the cryptocurrency. So the two groups, after seeing they couldn’t reach a consensus, decided to part ways and split the blockchain in two via a software change called a “hard fork”.
On Aug. 1, 2017, the hard fork created a new and separate Bitcoin protocol-based cryptocurrency called Bitcoin Cash. The newly named currency offered a bigger block size, first 8MB, and later, in 2018, 32MB. All of this led to Bitcoin Cash becoming a faster asset to use for transacting on the blockchain. In fact, Bitcoin Cash has a processing capacity of up to 200 transactions per second versus Bitcoin’s 3-7 transactions per second. The block size increase also reduced the cost per transaction. Bitcoin Cash transactions typically cost less than a penny, while the average on-chain Bitcoin fee per transaction has been in the range of $1-15 since 2020.
Needless to say, increasing the block size helped Bitcoin Cash to establish its position as a medium of exchange for small-value purchases where fees and settlement time are important. However, when it comes to the effectiveness of bigger blocks addressing the network’s scaling issues, the debate remains.
The reality is that block size increases are seen as only temporary solutions to a blockchain’s scaling challenges. A higher block size, be it 8MB or 32MB, will also see eventual saturation and thus does not ensure a sustainable and greater carrying capacity of the network during peak times. Furthermore, the solution compromises the “scalability trilemma” in the blockchain ecosystem. The trilemma, a concept coined by Ethereum’s Vitalik Buterin, claims that it’s almost impossible to develop scalability solutions without sacrificing attributes like security and decentralization. And speaking of decentralization, larger blocks can also make full nodes more expensive and harder to operate, which means a distributed network of full nodes that controls too much of the hash rate can easily gain more power over the network.
It’s worth pointing out that the scaling problem, which is a major metric required for any currency system to succeed as a medium of exchange, isn’t just an issue that’s exclusive to Bitcoin or Bitcoin Cash. Many other cryptocurrencies have had and will have their fair share of scalability concerns. And as mentioned, these are the challenges of growing a network under a disruptive technology like blockchain.
Meanwhile, people who were on the side of the Bitcoin were looking for alternative solutions to solving the network’s never-ending scalability issues. SegWit, short for “segregated witness”, a Bitcoin protocol-update designed to fix issues of transaction malleability and reduce the size of each transaction’s data, was proposed as a soft fork solution by the Bitcoin community which also saw SegWit’s implementation as a way to help scale the network without the need for a hard fork.
Now, before we move any further, let’s just briefly talk about the difference between a hard fork and a soft fork.
Contrary to a hard fork, a soft fork doesn’t create a new blockchain system. Instead, the old blockchain, in this case Bitcoin, can accept blocks from the new protocol rule changes. In other words, the soft fork, which is basically an update in Bitcoin’s code, will only correct the shortcomings in the blockchain system all while still keeping its structure unchanged.
SegWit went live on the Bitcoin network on August 23rd, 2017 with the implementation resulting in improvements in transaction speeds as well as lower transaction costs. SegWit also managed to increase block size capacity from 1MB to an overall limit of around 2 MB and a theoretical maximum of 4MB. More importantly, SegWit brought the second-layer protocol solution to Bitcoin, creating the foundation of the Lightning Network (LN).
What’s the Lightning Network you’d ask. Well, theoretically, Lightning Network is an innovative layer 2 scaling solution added to Bitcoin’s blockchain to enable the off-chain transacting between two users. The transactions are done via a bi-directional micropayment channel, which means both transacting parties can send and receive payments across the channel using their multi-signature wallets at little to no cost. By allowing the transactions to be processed on Lightning’s off-chain layer and not recorded on the blockchain thus requiring no mining, the processing time and the number of transactions done via the on-chain network would be significantly improved.
Another interesting LN feature is that of non-broadcasting, which refers to the fact that when two parties are finished transacting, they can close their Lightning channel without having to broadcast all the intermediate transactions. And this is regardless of hundreds or even thousands of transactions that have taken place. All they have to do is broadcast only the opening and final state of their balances. In other words, each Lightning channel only requires 2 transactions to be stated on the Bitcoin blockchain – opening and closing the channel.
Having sad that, it should be noted that while the Lightning Network is an exciting technology for the mainstream adoption of Bitcoin, there are also some limitations as well as downsides that should be taken under consideration. For one, the system is not designed to deal with large payments as it can only handle small to medium-sized transactions. Additionally, Lightning’s payment channels are hot wallets, which means your wallet’s private keys and funds are stored online. In other words, custodial solutions totally sacrifice attributes like transparency, trustlessness, and decentralization.
Another important issue is centralization. Having thousands or possibly millions of transactions processed and not tracked through the main chain means creating an entirely new technology that is anything but blockchain. Some crypto experts even believe that LN might actually encourage more centralization in enterprise finance architecture.
While the Lightning Network is an important active development for Bitcoin’s future evolution, the technology has yet to prove its effectiveness towards Bitcoin becoming an even more popular cryptocurrency.
Obviously. Lightning should be recognized as an off-chain scaling implementation-concept that helps Bitcoin alleviate some of its scalability issues. However, practically speaking, the network might not be the answer to all of the scaling challenges facing the world’s largest cryptocurrency.
Bitcoin, as the original cryptocurrency and as a long-term store of value and a medium of exchange, has the highest rate of adoption in the cryptosphere. However, there is something to be said for Bitcoin Cash and its transacting practicality as a faster and cheaper asset to use on the blockchain.
Ideally, the best option would be to have a coin that can effectively function as an optimal store of value and a transactional unit, no matter how busy the blockchain becomes. Unfortunately, Bitcoin and Bitcoin Cash have different network scaling ideas. Bitcoin has chosen Lightning Network’s off-chain second-layer solution while Bitcoin Cash has chosen a block size increase.
Time will tell which camp is right as the benefits and drawbacks of each platform vary. In the meantime, one thing is certain. If these networks are to become viable payment instruments for everyday transactions and compete with other mainstream payment processors, they have to make sure they have the speed and capacity to support world scale usage.
Having said that, if you are thinking about investing in either of these cryptocurrencies, consider this: Bitcoin is now a household name and an investable asset class. If it gains scale and captures only a fraction of the global currency market, the sky is the limit. Long-term the price for both blockchains (BTC:$60.853, BCH:$584.23 at press time), if they execute well, could double if not triple from current levels.
Disclaimer: Not financial advise