What is Bitcoin Cash?

Why is block size important?

Bitcoin is the most popular and widely adopted cryptocurrency. This digital currency uses blockchain technology to create a decentralised, distributed ledger of all transactions. Every time Bitcoin is transferred between people, that transaction is recorded as a block and added to the end of the chain.

When the enigmatic Satoshi Nakamoto created the coin, the size of each individual block was limited to only 1 Megabyte (MB). The equivalent to about one minute of streaming music, or a single webpage – not very large at all. This size limit was introduced to help fight spam attacks when individual Bitcoins weren’t worth very much.

Related articles: Tacking 7 Common Myths About Bitcoin 

Bitcoins’s congestion problem

As Bitcoin became more popular and more people started using it, this hard limit started to cause congestion in the network. One way to speed up the transaction process was to pay a higher fee, sometimes well more than the original transaction amount!

This was a problem, particularly if Bitcoin was to ever become a widely adopted currency. However, the Bitcoin community was split over how to solve it. Some thought that the easiest solution was to increase the block size, up to 8 MB, allowing more transactions to fit into a single block and thus speeding up processing time. This would also increase the fee miners received for their processing power.

However, others in the community worried that this solution would drive smaller miners out of the network, as they wouldn’t be able to compete against larger and richer groups who could afford more powerful computers. This could result in control of the network being centralised and held by a few large corporations, something which is at odds with the founding principles of Bitcoin.

Instead Bitcoin adopted a protocol known as SegWit, or Segregated Witness, a method whereby some of the information that used to form part of the block was instead moved to separate files outside of the blockchain. This freed space in the block, fitting in more transactions and decreasing processing time. The block size limit was also raised to 2 MB.

The hard fork

Still, this was seen as a temporary solution by some in the Bitcoin community, and a hard fork was created on 1 August 2017. A hard fork is where a segment of a blockchain’s users separate from the original chain, creating a new chain with new rules. Bitcoin Cash is a hard fork of Bitcoin. Prior to 1 August 2017 they were the same, singular chain. However,  since then two separate blockchains have existed, Bitcoin with the SegWit protocol and a 2 MB block limit, and Bitcoin Cash with a higher 8 MB block size.

If you bought any Bitcoins before the hard fork, then you may actually already own some Bitcoin Cash – existing Bitcoins were duplicated when the fork was created to make the initial pool of coins. It might by possible to use the private keys associated with your Bitcoin wallet to access transferred Bitcoin Cash.

Since the fork, Bitcoin Cash has become popular, though it hasn’t overtaken Bitcoin yet. Ironically, because its user base is smaller than the original Bitcoin’s, that extra blocksize is yet to be used.

You can find out more about cryptocurrencies and other investments and Investor Hub.

Cover image: Wit Olszewski (Shutterstock)