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Bitcoin Cash (BCH): Engineered for Transactions and Daily Utility
Bitcoin Cash (BCH) outpaces the original Bitcoin (BTC) in speed, as BCH prioritizes spending over holding.
Overview
Despite sharing a name, Bitcoin (BTC) and Bitcoin Cash (BCH) are distinct cryptocurrencies, prompting questions about how Bitcoin Cash operates. Bitcoin Cash is crafted as a transactional cryptocurrency, functioning as an electronic cash payment system. It aims to tackle Bitcoin's perceived scalability issue and offer more practicality in everyday transactions—it's intended for spending rather than being a store of value. The key divergence between BCH and BTC lies in the larger block size of BCH's native blockchain, enabling faster and more cost-effective BCH transactions.
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Bitcoin’s Scalability Challenge and Segregated Witness
Before delving into Bitcoin Cash (BCH), it's crucial to grasp its origins and the problem it seeks to solve, which requires a brief discussion on Bitcoin (BTC).
Bitcoin revolutionized various aspects: philosophically, technologically, and economically. However, being the pioneer, Bitcoin revealed certain shortcomings. Bitcoin's speed is relatively slow, generating a new block every 10 minutes with a 1MB block size limit, handling merely seven transactions per second. While this is manageable for a store of value that sees minimal transactions, speed is crucial for everyday use. To put this in perspective, Visa processes 24,000 transactions per second as of late 2020.
As Bitcoin attracted more users, the network started to congest. Bitcoin faced its scalability challenge around 2015, leading to two camps: those advocating for small-block solutions and those for large-block solutions.
To simplify: Larger blocks are faster but compromise decentralization because fewer nodes can process them. Smaller blocks are slower but maintain decentralization and security as more nodes can join the network. Speed and decentralization exist on a spectrum, meaning more of one results in less of the other.
Despite advocating for small blocks, even proponents acknowledged the need for increased processing speed due to heightened network traffic. They proposed Segregated Witness (SegWit), a process that removes signature data from Bitcoin transactions.
A new Bitcoin block includes transaction and digital signature data about the origin and destination of bitcoin (BTC) in each transaction. SegWit, as the name suggests, segregates the witness (digital signature) from the transaction data, making block data arrangement more efficient. SegWit effectively allows for a doubled block size (around 2MB per block).
SegWit is a soft fork, not a hard fork, meaning each network node can choose whether to adopt the new rules. Rejecting SegWit doesn't result in a new blockchain and cryptocurrency (unlike the hard fork that created Bitcoin Cash, which we'll discuss shortly). Adoption of SegWit is limited, with an estimated 36% of all BTC transactions using it. Therefore, it only marginally increases the overall transaction speed of the Bitcoin ecosystem.
Bitcoin Cash's Structure and Block Size Significance
Bitcoin Cash emerged as a hard fork from Bitcoin. It is structurally similar to Bitcoin but with one major distinction: block size.
In the view of Bitcoin Cash proponents, Segregated Witness didn't adequately address Bitcoin's scalability issue. In response, Bitcoin Cash was created to pack 8MB of data into each block, processing an average of 116 transactions per second. While BCH significantly boosts transaction speed, the larger block size demands more processing power for nodes to support the blockchain network.
Why not make blocks much larger—say, 100MB? This would indeed increase network speed but severely limit who could run a node, verify new blocks, and support the network. The block size debate essentially weighs speed against decentralization, debating which is more desirable.
Institutions, organizations, or BCH-focused businesses can consolidate the processing power needed for large block sizes. In contrast, individuals would struggle to amass enough processing power for large blocks. This difference could lead to an oligopoly (where processing power is concentrated among a few players), jeopardizing the blockchain's decentralized nature. A balance of decentralized, distributed, independent verification is crucial for blockchain security and reliability, where more nodes translate to greater network security.
How Bitcoin Cash Operates
Bitcoin Cash utilizes a larger block size (4-8 times larger than BTC, depending on Segregated Witness use) to process transactions swiftly.
These transactions are fast enough for grab-and-go retail purchases with BCH (like a cup of coffee), but for larger purchases such as a car or a house, you might opt for a slower, more secure cryptocurrency like BTC.
BCH and BTC serve different purposes. Not every cryptocurrency is a store of value, and not all need to process data quickly for transactions like a credit card. It's sensible to use different cryptocurrencies for different tasks—similar to using a credit card for dining out and a bank transfer for a major purchase.
In essence, BCH is faster with lower processing fees than BTC, but its use in everyday cryptocurrency payments has yet to be widely adopted. Many believe that increased awareness and complementary technological improvements will pave the way for BCH to become a leader in cryptocurrency payments.
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