The origins of bitcoin cash and how it competes against bitcoin

By Naveen Joshi – Founder and CEO of Allerin

Works in Big Data, IoT, and Artificial Intelligence

Ever since its inception a decade ago, Bitcoin has grown from strength to strength and is getting closer to being considered as a globally accepted form of exchange. However, its intrinsic limitations have hindered its worldwide acceptance and have given rise to numerous alternate forms of currency, the most recent one being bitcoin cash.

Considering how it dictates the way we live our lives, it won’t be too outrageous to claim that the world revolves around money. It has become such an integral part of our lives that we can’t even imagine a world without it. However, if you’re like most people, you’ve probably at least once in your life wondered how and when the concept of money came about and what the world without it would be like. When you look into the origins and evolution of money all the way back from barter to bitcoin, and now bitcoin cash, the journey is quite a fascinating one, one that stretches back across millennia.

Money, which is meant to be a standard medium of exchange for accessing goods and services, didn’t exist in ancient civilizations as we know it today. Before the concept of money was born, people exchanged goods in a practice called bartering – exchanging one commodity for another by negotiating their relative values. The evidence of this practice has been found in Egypt where people traded grains, cattle, precious stones, and fabrics with each other. This practice, although definitely not always a smooth affair, subsisted for a few thousand years. As more and more goods and services began to be traded in the markets, the barter system began losing its efficacy, leading to the need for a standard way of measuring value.

Eventually, the first coins were minted around the seventh century BC and began to be used as currency. Coins made of gold, silver or a mixture of these had a fixed value against which every other commodity was evaluated. Paper currency first came into circulation in China in the 11th century AD, and later spread to Europe by the 13th century and became a standard practice only after the 17th century. By this time, banknotes and currency were recognized as something having no intrinsic value, but only given a value that everyone agrees to confer upon it.

Credit cards, debit cards, and ATMs were invented in the 20th century, by the end of which Internet banking began. Rapid digitization in the early twenty-first century led to the birth of digital payment platforms like Paypal, and eventually, the concept of money is set to be redefined after the creation of cryptocurrencies. The adoption of Bitcoin, which overcomes the limitations of centralized forms of currencies, has risen as major organizations such as Microsoft, Expedia, and Subway have begun accepting payments in cryptocurrency. Despite the growing popularity of cryptocurrencies and the increasing worldwide acceptance of Blockchain as something synonymous with privacy and security, Bitcoin still has a few limitations that must be overcome before using it to underpin the global economy. The biggest issues among these are scalability and malleability.

Bitcoin and the scalability conundrum

Although Bitcoin offers the much-needed decentralization and transparency in transactions, it is incapable of being used on as large a scale as the existing transactional systems. The reason for Bitcoin’s inability to scale is the limitation on the number of transactions a Blockchain can handle per second. The existing Blockchain can only handle three-seven transactions every second or can generate and store only one 1 MB (which is the size of a ‘block’) worth of transactions every ten minutes. On the other hand, existing transactional platforms, such as those used by companies like Visa and Mastercard process over 5000 transactions a second, have a maximum capacity to process multiple times that number. Hence, it is clear to see why Bitcoin, or any other cryptocurrency for that matter, cannot replace the existing transactional models.

The reason for a small block size used in the Blockchain is to prevent the overloading of the storage devices on the computers that make up the Blockchain network. Since every block comprising every transaction is stored on every device on the network, there is a high likelihood that the memory of all participating nodes in the public Blockchain will be full, leaving no room for future transactions. Although many possible solutions are being considered to solve the scalability conundrum of Blockchain, none have been found to be practical enough.

Segregated Witness and other possible solutions

An obvious solution to improved Blockchain scalability is to increase the block capacity from its existing 1 MB size, or at least enable the storage of more transactions on every block. A greater number of transactions added to every block will mean more transactions every minute ( although nowhere near what the electronic card companies can achieve). To achieve this increase in block capacity, developers came up with a minor change in the block-creation process, which led to a new model called Segregated Witness (SegWit).

SegWit is a soft fork (a soft fork is a change made in the Blockchain code that doesn’t affect the compatibility of newer transactions with the older, pre-change ones; as compared to a hard fork which makes newer transactions invalid if processed by the old code, requiring an entirely new Blockchain) that increases block capacity by removing signature data from individual transactions. Signature data, which is used to ascertain the ownership of Bitcoins, make up a majority of the data (about 65%) stored on the Blockchain. Removing this from the block can thus enable more transactions to be stored on blocks. However, the removal of signature data can possibly lead to a shift of Blockchain away from its foundational principles of total transparency and verifiability, making this more of a compromise than a solution.

Another option to boost Bitcoin scalability is to increase the block size from 1 MB to 2 MB and eventually more. Recently, Bitcoin developers have generated a 1 GB block, which could be the scale at which future blocks could be created.

Bitcoin cash and how it’s different

To ensure that Bitcoin, and cryptocurrency in general, continued on its path towards global adoption, a number of Bitcoin loyalists created Bitcoin cash, a new currency, as a result of a hard fork. A major upgrade in Bitcoin cash is the increase in block size from one megabyte to eight megabytes, to speed up the verification and transaction processes. Bitcoin cash also comes at a substantially lower cost when compared to Bitcoin, which means the miners and participants have to pay lower transaction fees. These advantages, along with the assurance of transparency as intended by the original creator(s) of Bitcoin Satoshi Nakamoto, saw Bitcoin cash rise in terms of market capitalization in the crypto market.

Bitcoin cash is already the fourth highest on the cryptocurrency chart in terms of market cap value, despite its relative novelty. Even though it hasn’t yet been adopted by many merchants, even those who accept the original Bitcoin, its growing popularity and increasing feasibility mean it may eventually find worldwide acceptance. However, despite its advantages over the traditional Bitcoin, it still isn’t good enough to compete with the existing electronic transaction management systems, who far outperform cryptocurrencies in meeting global demand. Thus, scalability still remains an issue for cryptocurrencies, one that must be overcome for them to see any kind of practical utility.