On Tuesday, a faction of the Bitcoin community launched an audacious experiment: a new version of Bitcoin called Bitcoin Cash that's incompatible with the standard version. As a result, the Bitcoin network split into two mutually incompatible networks that will operate side-by-side.
The confusing result is that if you owned one bitcoin before the split you own two bitcoins now: one coin on the original Bitcoin network, and a second coin on the new Bitcoin Cash network. The two coins have the same cryptographic credentials, but they have very different values if you sell them for old-fashioned dollars. On Wednesday morning, one standard Bitcoin was worth about $2,700, while—on paper at least—a unit of Bitcoin Cash was worth around $600.
Getting Bitcoin Cash off the ground is a remarkable achievement. The big question now is whether the network's supporters can keep it aloft in the coming weeks and months. So far, most of the Bitcoin community has chosen to stick with the mainstream Bitcoin software and network. If Bitcoin Cash can't attract a critical mass of users and businesses, the rival payment network could wither on the vine.
If Bitcoin Cash does achieve critical mass, on the other hand, its future could be bright. It was created by Bitcoin supporters worried about growing congestion in the mainstream bitcoin network that has led to slow payment processing and high fees. Bitcoin Cash removes an important technical obstacle that has hampered the growth of the mainline Bitcoin network. In principle, that could allow Bitcoin Cash to become more widely used—and hence more valuable—in the long run.
Why people created a rival version of Bitcoin
For over a year, the Bitcoin network has been bumping up against a capacity limit hard-coded into the Bitcoin software. Each block in the Bitcoin blockchain—the network's public, shared transaction ledger—is limited to 1 megabyte. That artificial limit prevents the network from processing more than about seven transactions per second.
Technically speaking, it would be trivial to change that 1 megabyte limit to a higher value. But proposals to do so have faced opposition from traditionalists who argue the limit is actually an important feature of Bitcoin's design that protects the network's democratic character. To participate in the network's peer-to-peer process for clearing transactions, a computer needs a copy of every transaction ever made on the Bitcoin network, which adds up to gigabytes of data per month.
Small-block supporters worry that raising the block limit will raise the storage and bandwidth costs of participating in the network, pricing out ordinary users. That could lead to a Bitcoin network dominated by a few big players, making the network more susceptible to government control and regulation—exactly what Bitcoin was created to avoid.
Big-block supporters say storage and bandwidth costs have fallen so quickly that this isn't a serious concern. And they say Bitcoin is going to need to process a lot more than seven transactions per second to become a mainstream technology with a real shot at changing the world.
This argument has dragged on for more than two years with no resolution. So instead of continuing to bicker, a group of big-block supporters took matters into their own hands. They forked the standard, open-source Bitcoin client to create a rival version of the software.
They could have started over with an empty blockchain—the cryptocurrency version of a clean slate. But if they'd done this the new software would likely have languished in obscurity. Instead, they chose to branch off from the existing Bitcoin blockchain. Bitcoin Cash has the same transaction history prior to August 1, 2017, which means that anyone who owned ordinary bitcoins before the switch owns an equal number of Bitcoin Cash bitcoins, secured by the same cryptographic keys, after the switch.
Forking the blockchain allows the creators of Bitcoin Cash to position themselves as the true heirs to Bitcoin's still-pseudonymous founder Satoshi Nakamoto. The Bitcoin Cash faction views themselves not as creating an alternative to Bitcoin, but as laying the groundwork for the next stage of Bitcoin's growth. They believe that the higher block limit will allow Bitcoin Cash to overtake the standard Bitcoin network in transaction volume, eventually making it the most popular version of the technology.
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