Bitcoin has officially forked for the first time ever, after the cryptocurrency’s core developers were unable to reach an agreement with miners over the proper way to solve the substantial transaction backlogs that delay receipt of Bitcoins. These delays have made merchants more wary of supporting the standard, given that it can take a non-trivial amount of time for transactions to clear.
There is no central authority that makes decisions about what happens to Bitcoin. But there are a group of so-called core developers that have aligned against miners and investors who are seeking changes that would make Bitcoin transactions easier and faster to process, but could also make the currency more vulnerable to hacking. At present, Bitcoin uses 1MB blocks in the underlying blockchain, the distributed ledger that records transactions, but this has proven to be insufficient as trading and usage volumes have exploded. What makes this situation rather odd is that as recently as last week, investors and miners thought they had reached an agreement to deploy a new approach, known as Segwit2x.
After years of squabbling, the BTC community had agreed to what was known as BIP 91 (Bitcoin Improvement Plan). BIP 91 implemented a system called segregated witness (segwit for short), which removed (segregated) signature data from blockchain transactions, making them smaller and faster to process. Transaction signatures would still be created; they just wouldn’t be part of the 1MB blocks that are used for transaction storage. Block sizes would also be doubled up to 2MB, hence the name: Segwit2x.
With over 90 percent of the community voting in favor of SegWit2x, it looked as if the hard fork would be averted. Instead, roughly 15 percent of the BTC mining community has launched their own alternative to Bitcoin, Bitcoin Cash. Bitcoin Cash supports block sizes of up to 8MB, but otherwise the two currencies are virtually identical. Bitcoin Cash has matched funds with Bitcoin, meaning if you had one Bitcoin, you now also have one BitCoin Cash. Given that BTCC is only worth a fraction of what Bitcoin commands, however, the giveaway isn’t really as valuable as it might sound.
What Happens Next?
It’s not clear what the long-term impact of this fork will be. Best-case, Bitcoin Cash solves the transaction delay issues that plagued Bitcoin and becomes a valid competitor in its own right. Worst-case, the security issues that kept the core developer team from endorsing larger block sizes will lead to major problems for the fledgling currency. And security issues aren’t the only concern. Most Bitcoin exchanges have said they won’t support Bitcoin Cash, which limits how many people can buy into or effectively use the new cryptocurrency.
Coinbase, for example, is facing threats of legal action after announcing it would not accept Bitcoin Cash. Tim Wu, a legal scholar who writes about BTC, has opined that refusing to give Bitcoin owners the full value of Bitcoin Cash to which they are entitled could expose the company to legal action.
Still, it’s difficult to predict what the long-term ramifications of this change will be. Given that Bitcoin retains the support of the majority of the mining community, Bitcoin Cash may wind up starved of the resources it needs to compete effectively — or, as an early rally is indicating, it could flourish. A third possibility: it could end up being one of the many alternatives to BTC that haven’t enjoyed the same level of success but continue to persist.
Now read: What is the blockchain, and is it really about to change the world?