PYMNTS Blockchain Series: What Is Bitcoin Cash? The No. 2 Payments-Focused Crypto Goes Its Own Way –


Throughout this series of articles, we’re looking at the top blockchains in crypto to help you make sense of the alphabet soup of so-called “altcoins” that exists beyond that of bitcoin’s BTC and Ethereum’s ETH.

We will look at what they are, how they work, what they do, and their pros and cons.

You’ll come out of this series not only with a better sense of what cryptocurrency is all about, but you’ll also understand why the way a token works — the way its blockchain processes transactions — is key to its success or failure as a digital asset.

See: PYMNTS Blockchain Series: What Is BNB Chain and Why Isn’t It Binance Anymore?

So, what is Bitcoin Cash?

It is a true cash-replacement cryptocurrency, designed to be what bitcoin was supposed to be before it became an investment.

If you’re looking for a payments processor who can handle cryptocurrencies or a business that accepts them, chances are pretty good that you can use Bitcoin Cash there.

It’s one of just four that PayPal users can buy and spend at its 32-million-member Merchant Network. Really, any payments processors that supports at least a half dozen digital assets almost certainly handles Bitcoin Cash, also known as BCH.

The glaring exception is Block’s CashApp, which follows Jack Dorsey’s Bitcoin Maximalist tendencies, which holds that bitcoin is the only cryptocurrency both investors and spenders will need and will eventually use.

While the advent of decentralized finance, or DeFi, has pushed BCH a fair way down the list of top cryptocurrencies by market capitalization — currently about $6 billion, putting it in 28th place — it remains among the top cryptocurrencies designed specifically for payments, alongside bitcoin (BTC) itself and litecoin (LTC). What stablecoins and central bank digital currencies will do to this remains to be seen, however.

The Big Fork

It’s common enough knowledge that bitcoin, despite having been designed as a peer-to-peer digital currency, is having problems fulfilling that role. Notably because its transaction speed (seven or eight transactions per second, or TSP) is way too slow, its transaction fees are way too high (currently around $1.50 to $3) its settlement finalization time way, way too slow (10 minutes to an hour), and vastly too volatile thanks to its status as the leading crypto investment coin.

The thing is, bitcoin’s problems in that regard are a slow motion wreck that was easy to see coming five years ago. Bitcoin Cash created in August 2017, was the first really successful attempt to fix bitcoin rather than replace it with something better — like Litecoin, developed in 2011.

Bitcoin Cash was a hard fork of the bitcoin blockchain, meaning it was a deliberate attempt to create a new blockchain by splitting off from Bitcoin. There’s more detail on the how of this in the link below, but suffice it to say that they share more than 475,000 blocks before Bitcoin Cash branched off.

See also: PYMNTS Crypto Basics Series: What’s a Consensus Mechanism and Why Is It Destroying the Planet?

Which means it works exactly like bitcoin proper except for a few key differences, all relating to scalability. However, it uses the same environmentally unfriendly proof-of-work consensus mechanism to verify and add transactions to its blockchain, has a maximum possible supply of 21 million to prevent inflation, and it has a block time of 10 minutes, meaning new transactions are only processed that often.

Bitcoin Cash proponents said the best way to deal with this was to increase Bitcoin’s 1MB block size, which at the time allowed between 1,500 and 2,000 transactions per block. Which is to say, every 10 minutes.

So that’s what they did, changing the code to create an 8MB block size, upgraded to 32MB in late 2021. Which lets BCH’s blockchain handle about 300 TPS. In a 2018 stress test, BCH was able to handle 25,000 transactions per block. And its transaction fees average $0.005 —substantially more useful for buying a cup of coffee than the several dollars bitcoin charges.

If all you want to know is how Bitcoin Cash works, you can stop right here. But what it is, and how it came to be is one of the simplest and most straightforward ways to learn — without any technical details — how the human side of how big public blockchains are developed works, and how it affects the way payments-focused cryptocurrencies are governed.

And that is relevant if you’re planning to use a public cryptocurrency for payments, in much that same way that a basic understanding of how the Federal Reserve works is relevant to cash.

The Fight

Back in 2017, a disagreement arose over how to fix those scalability problems, as it was perfectly clear that bitcoin could never take on credit cards at seven TPS.

Two camps arose, one called for an increased block size and the other called Segregated Witness (for reasons you will never care about), generally abbreviated to SegWit. Essentially, SegWit amounted to storing less transaction data, and improved security.

SegWit passed and was incorporated into the Bitcoin blockchain as a soft fork — meaning a change to the code that does not cause a separate chain to branch off, generally as a lot of the node operators who keep full copies of the blockchain agree to it and implement the software update. Nodes are where decentralization comes from, anyone can establish a node, and each node must agree with all others or they form their own blockchain via hard fork.

However, it wasn’t enough, and SegWit2x was born, which would add a smaller block size upgrade to 2MB (which did not happen). The original block size increase faction wasn’t on board, having refused to incorporate SegWit, and saw 2MB as too small.

In some ways, this was for ideological reasons — they felt only a bigger block would be able to support Satoshi Nakamoto’s vision of a “purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”

As their faction was smaller, the SegWit crowd retained the name bitcoin, and Bitcoin Cash was born. Of course, a year later, a BCH faction wanted another increase to 128MB, which led to another hard fork, this one creating Bitcoin SV — which stands for Satoshi Vision, meaning it was the only way to be true to bitcoin’s creator’s goals. And that battle, between factions led by Bitcoin Cash booster Roger Ver and Bitcoin SV founder Craig Wright, was a truly epic battle of personalities, bad feelings, us versus them mentality and, eventually, more than a little litigation.

You May Also Like

About the Author: Kate