If you’ve been in the cryptocurrency space for some time, you may have wondered at some point why there are several similar-sounding Bitcoin cryptocurrencies that are not Bitcoin. Cryptocurrencies like Bitcoin Cash, Bitcoin SV (with SV standing for “Satoshi’s Vision”), Bitcoin Gold and Bitcoin Diamond. Well, the first thing you should know about these other “variants” is that they are forks in the Bitcoin blockchain. But, what is a fork? And, what gave rise to each one of them?
In demystifying what all of these means, we’ll begin with something called the scalability debate.
The Scalability Debate
Imagine you were a music artist, and you had to sing a new song every day for the next 20 days to win a popular song contest (let’s say its The Voice). Since it’s a new song, you first have to write the song and this would require some effort from you irrespective of how good a songwriter you are.
Writing the lyrics and then creating a song can be a daunting task for even the best artistes. Also, not all the lyrics you write would make the cut. Some of the songs would be ditched while others would evolve into totally new songs. Songs that make it to your list would be songs you deem valid for the competition.
In this same way, transactions in the blockchain aren’t valid if they are not added to a block in the blockchain. This means that for transactions to be valid, they must be added to a block in the blockchain. If not, they won’t pass for a blockchain transaction.
This is where the problem arises.
A block in the Bitcoin blockchain has a size limit of 1 megabyte. This means that it’s only capable of processing a small number of transactions at once. The Bitcoin blockchain could handle this well for a while, but it became challenging as Bitcoin gained more popularity, resulting in more transactions. As knowledge of Bitcoin spread and more people came on board, block size became quite a big issue.
If you’re still wondering just how slow the speed of the Bitcoin block is, you may want to contrast it with the trading volume of payment companies such as Visa and Mastercard. With Bitcoin’s current 1-megabyte block size, Bitcoin can process 4.6 transactions per second while Visa does up to 1,700 transactions per second on average.
At some point, the blockchain scalability challenge introduced the “replace by fee system” to solve this problem. But, even that was not good enough.
How the Replace by Fee System Works
The replace by fee system is a method that permits the substitute of an already transmitted transaction by transmitting another transaction with a higher fee. The replace by fee system only works on transactions before they are signed by miners.
Here’s an example:
Jane wants to send 1 Bitcoin to Daniel but the transaction is taking a while to confirm on the blockchain due to a backlog of unprocessed transactions. At this point, it’s impossible for her to stop the transaction because once a transaction is sent to the blockchain it cannot be cancelled, even if there are 0 confirmations.
Another option she has would be to send another 4 BTC to Daniel. The only difference would be that this time, she would use increase the transaction fees to motivate the miners to process her own transaction. The second transaction would thus override the first transaction when the miners add it to the block which would automatically make the first one invalid. And Jane would achieve her aim of sending just 1 BTC to Daniel.
The problem with this approach, however, is that although it’s more profitable for miners, users who cannot afford to send a second transaction would find it inconvenient. And users who pay the lowest transaction fees would have to wait for as much as 30 minutes, which is the medium time, for their transaction to go through.
This is where the blockchain fork debate starts.
In addition to the scalability debate, there are several reasons why a hard fork may occur including the need to correct important security risks found in older versions of the software; to add new functionality or to reverse transactions.
The Blockchain Fork Debate
When the block size is increased, more transactions would be processed. This is favourable for miners because the more transactions that are processed, the more fees miners can make.
Remember that miners are the ones who verify cryptocurrency transactions by adding new blocks to the chain.
There are several groups of miners. One group would prefer users to pay higher fees for their transactions to be processed. They believe they’d be losing a significant portion of mining reward if they went with the option of increasing the block size to process more transactions as there would be a reduction in individual transaction fees.
Hence the divide. Some of the miners want to stick to more reward from individual transactions while others want more transaction fees from increased transactions.
With this divide, there has to be a consensus for things to move forward. With forks, they could reach a point where it was a win-win for everyone.
What is a Blockchain Fork?
A fork is a point where the state of the blockchain diverges into different chains and one chain operates by rules that are different from what the other chain operates by.
Think of it as one group with one president that divides into two groups with two different presidents and a new set of rules for each group.
Some of the reasons forks occur could range from technical changes to the philosophy of the diverse developers and even to culture.
The two types of blockchain fork are the soft and hard fork.
A soft fork is a backwards-compatible change made to a blockchain. Simply put, a soft fork is a software update that is backwards compatible with other versions of the software.
This change is usually temporal and miners interact with the new chain using previous methods. But, newer updates are available.
For a soft fork to be successful, most of the miners need to identify and implement the new set of consensus rules. The old network stops being used if this majority is attained and the newer blockchain is acknowledged as the real blockchain.
Some of the examples of a soft fork include the change that was made to the Bitcoin block size in 2018. It changed enough to make things a little different but the change was not big enough to change things completely.
An example of a Bitcoin soft fork is SegWit. The idea was to create two compatible versions of the software that would share a single asset. Both SegWit and no SegWit software use the same exact Bitcoin. SegWit is backwards compatible.
A hard fork is a position on the blockchain where a blockchain deviates into different chains that operated by different rules from the existing. A hard fork usually requires the users to choose between an existing chain or creating a new one.
This was the case of Bitcoin and Bitcoin Cash, And consequently with Bitcoin Cash and Bitcoin SV.
The miners behind Bitcoin and Bitcoin Cash couldn’t agree on a new set of rules. Thus, the community had to make a choice. In all respects, Bitcoin Cash is still Bitcoin. But, the block size for Bitcoin Cash is 8 megabytes compared to Bitcoin’s 1 megabyte which automatically means there can be more transactions per block on Bitcoin Cash’s block each second.
In addition to this, the replace-by-fee feature is absent from the new chain. This means that you don’t have to pay a transaction fee to have your transaction confirmed faster.
In a hard fork, the data on the new chain is a replica of the previous chain. This means if you had 1 Bitcoin in your possession before the hard fork occurred, you would now own one unit of currency on the new chain and one unit of currency on the old chain. However, not every fork will result in owners of a cryptocurrency getting “free coins”. But, it’s usually the case that owners of a cryptocurrency receive free coins of the new coin when a hard fork is created.
A good example is Bitcoin and Bitcoin Cash. When the Bitcoin Cash fork was created, Bitcoin holders received one “free” BCH (Bitcoin Cash) for each BTC (Bitcoin) they owned.