Bitcoin Forks Explained
Since its invention by the mysterious Satoshi Nakamoto in 2008, the Bitcoin (BTC) network has churned out over 600,000 blocks while adhering to the protocol outlined in the whitepaper, and without ever being compromised on security.
There are currently 18.5 million Bitcoins in circulation, with another 2.5 million to be mined over the next 120 years. The last Bitcoin is expected to be mined in 2140, basing the calculation off the current hash rate.
Since the third halving on May 11, 2020, there are 900 Bitcoins minted per day. The next halving is currently projected to fall on February 29, 2024.
Bitcoins are issued as a reward to miners for completing the computationally-expensive process of mining. Mining involves verifying that every Bitcoin transaction is legitimate, i.e. the funds being sent are actually owned by the sender.
To see a real-time count of the number of Bitcoins left to be mined and the total number in existence, check out our tracker here.
All of these features were coded into Bitcoin at its creation. They give the network its strength. They are publicly known facts, which is an integral part of the decentralization of the network.
However, as millions of people have adopted the technology, Bitcoin has encountered some growing pains.
In particular, the limited block size has meant that Bitcoin can only process a certain number of transactions every block, or 10 minutes. This leads to network congestion and high fees.
Forking Bitcoin is one way to address the issues caused by widespread adoption. Forking is essentially the addition of a new chain to the existing blockchain. It doesn’t replace previous blocks, but the creators of the fork hope that their fork is widely adopted and becomes the standard.
Let’s take a look at the origins of the forking debates, then go through the different Bitcoin forks that exist today.
The original Bitcoin protocol coded in a block size of 1Mb, with each block being processed every 10 minutes. Using the median transaction size, this works out to between 4 and 7 transactions per second (tps).
This rate wasn’t a problem during the early years of Bitcoin, when the number of transaction processed on the network was still low. As this number grew, however, it started to take much longer to get a transaction processed. Users who wanted to get their transaction in the next block were paying fees of up to $50 in December 2017.
This is called the scaling problem.
Taking into account the structure of Bitcoin, there are two viable solutions to the scaling problem:
Both increasing the block size and reducing transactions size are means of allowing more transactions to fit in each block.
The Bitcoin block size and its associated scaling problems have been the cause of forks in the protocol. Bitcoin Cash and Bitcoin SV (itself a fork of Bitcoin Cash) are the two best known forks.
But did you know that Bitcoin itself has undergone a fork? Let’s first take a look at the different types of fork before we get into the main features of each split.
The main difference between a soft fork and a hard fork is the degree to which an update is respected by miners. If all miners agree to a rule change and then proceed to only validate blocks that respect the new rule, then there is no need for a new chain to split off.
However, if there is not consensus around the rule change, then some miners will continue to validate blocks according to the old rules, while others will validate according to the new rules. Blocks mined by each group will be incompatible with the other. This causes a hard fork, i.e. a new chain that splits off.
For an in-depth guide to hard forks, soft forks, and chain splits, see this writeup.
SegWit (which stands for Segregated Witness) is a soft fork of Bitcoin. The SegWit protocol upgrade intends to reduce transaction size by not including transaction signatures in the block. As signatures make up a large proportion of the size of a transaction, their removal means that more transactions can be processed per block. The result is lower transaction fees and shorter confirmation times.
Segwit is a soft fork protocol upgrade to fix all forms of malleability and increase the block capacity. The Segwit transactions use different signatures and redeem scripts that are moved to a new structure, which doesn’t count towards a block size limit of 1MB. Depending on the parameters, Segwit transactions are at least 25% smaller in size when compared to legacy transactions. Therefore, the blocks are still the same size but they can fit more Segwit transactions. Since they are smaller and the fee is determined by size, the Segwit transactions naturally cost less. A smaller fee can achieve the same speed as legacy transactions.
For a deep dive on the SegWit upgrade, check out our guide here.
Bitcoin Cash is a hard fork of the Bitcoin blockchain. It split off from the main chain at block number 478558 on August 1, 2017. Everyone who owned Bitcoin received Bitcoin Cash on that date. BCH initially traded at around $240, while BTC was at $2,700.
Bitcoin Cash allowed for 8MB blocks, while keeping the block time at 10 minutes. This meant that it can process up to 8 times as many transactions per block as Bitcoin.
There has been controversy around Bitcoin Cash since its inception. Some people object to its use of the Bitcoin name, taking the view that there is only one Bitcoin: the original (BTC).
Bitcoin Cash aims for usability by decreasing transaction times and fees. Yet in doing so, it compromises on the features that have given Bitcoin its strength since Day 1: its widespread adoption, decentralized nature, and resistance to attack.
If bitcoin is more expensive or slower than traditional financial systems, people aren't going to use it.
Hard forks ensure a fragmentation of the community. This decreases the strength of the network and makes it easier for a single bad actor to gain control via a 51% attack (see Bitcoin Gold below for successful examples of this exploit).
It’s not difficult to imagine a future where everyone who thinks they have a solution to one of Bitcoin’s scalability problems forks the blockchain, creating Bitcoin version 50.0, with each fork splitting the community further and weakening all blockchains.
Bitcoin is designed to resist any central authority. Naturally, this makes the efficiency of unilateral decision-making unrealistic, not to mention undesirable.
Decentralization is a core tenet of Bitcoin itself. The SegWit upgrade was an example of stakeholders coming together to improve a common good, reaching consensus in a decentralized manner. SegWit was “voted” on by miners including a piece of code in the IDs of blocks they mined if they were in favor of the upgrade.
Bitcoin forks are often most vocally supported by people whose personalities stand to benefit more than the technology and community.
Don’t be fooled by the name. Satoshi’s vision is laid out in the whitepaper.
Bitcoin SV is a fork of Bitcoin Cash, itself a fork of Bitcoin. On November 15, 2018, at block 556766, everyone holding BCH received the same amount of BSV. Bitcoin Cash was trading around $420, while BSV closed its first daily candle at $101.
Bitcoin SV’s loudest proponent is Craig Steven Wright, an Australian businessman whose claims to be Satoshi Nakamoto have been repeatedly and convincingly discounted.
BSV’s main claim to fame is its increased block size. In May 2020 a 309MB block was mined on the network, making it the largest block ever mined on a blockchain.
This race for the largest block ignores many factors of the original Bitcoin that lend it its strength. Such huge blocks require massive hashing power, which concentrates control of the network in the hands of those with the most means at their disposal.
This is a far cry from the trustless, decentralized system that Satoshi described in the whitepaper. In fact, if you remove the decentralization aspect of Bitcoin you end up with something closer to the Federal Reserve.
Cryptocurrencies that are truly focused on the benefits of decentralization have introduced algorithms that are resistant to ASIC (application specific integrated circuit) miners. Monero, for example, can be effectively mined on consumer-grade hardware, which ensures that power is distributed evenly over the network.
Another cryptocurrency that aims to resist ASIC miners is Bitcoin Gold, another hard fork of Bitcoin. As we will now see, it hasn’t worked out so well for BTG.
Bitcoin Gold forked from the main Bitcoin chain on October 17, 2017, at block 491407. Just afterward, the Bitcoin Gold website suffered a distributed denial of service (DDoS) attack. These attacks have plagued BTG since its creation.
It has twice been the subject of 51% attacks, where one actor gains an absolute majority of the hashpower and is able to approve whichever blocks they like. The result was an unidentified party stealing 388,000 BTC (worth approximately USD$18 million) from a number of exchanges in May 2018.
Bitcoin Gold was subsequently delisted from Bittrex, and once again suffered a 51% attack in January 2020, where $72k was double-spent.
Despite multiple forks with more or less success (often less), the original Bitcoin is still the most decentralized, most secure, and most valuable cryptocurrency out there. Its first mover effect continues to play a powerful role in adoption. Satoshi’s vision, which he explained in the whitepaper, was for a trustless currency that relied on no central authority. This has meant that improvements to the network are often slow.
While forks of Bitcoin have largely relied on the name recognition of their crypto celebrity advocates, changes to Bitcoin are achieved through community consensus, where no-one is compelled to support anything they don’t want to.
Developers are working on solutions to Bitcoin’s scaling issues. Any future changes will not be forced upon users, but instead will be brought about through discussion, collaboration, and consensus. This is the future of decentralized decision making, and Bitcoin is at the fore of it all.
The scaling problem refers to the bottlenecks encountered at times of high congestion on the Bitcoin network. Bitcoin needs to scale to meet transaction demands by users. This has been addressed with the introduction of BIP141 (Bitcoin Improvement Protocol 141: Segregated Witness - Consensus Layer) better known as SegWit.
The Lightning Network will also improve Bitcoin’s scaling. It aims to support billions of transactions per second, with each occurring in just milliseconds.
SegWit is a Bitcoin Improvement Proposal that reduces transaction sizes, meaning more can fit into a single block. This lowers fees for SegWit transactions.
SegWit also fixes a potentially very destructive flaw in the Bitcoin protocol: transaction malleability. For a discussion of this, see here.
Bitcoin Cash is a hard fork of the Bitcoin network. It uses 8Mb blocks, in comparison to Bitcoin, where the average block size hovers between 0.8 and 1.3MB.
BSV stands for Bitcoin Satoshi’s Vision.