A Tale of Two Bitcoins

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way — in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only. — “A tale of two cities by Charles Dickens”

Nobody could have summed up my thoughts on 2017 any better than Charles Dickens. It was the year where the totality of eventualities that unfolded were absolutely unpredictable at the outset of the year. I have a feeling 2018 will be no different in that respect.

I decided to write this piece to establish the key differences, IMHO, between Bitcoin & Bitcoin Cash. This post is written with the intention of being neutral, and has been reviewed by supporters from both sides, who believe it is a reasonably fair representation of the arguments from each camp.

In early 2017, I expressed my concerns that a fast rising tide in the crypto world would result in another Bitcoin Bubble (which just means perennial overvaluations with subsequent bear markets, as has happened on 3 prior occasions to Bitcoin — it does not mean Bitcoin will die!). At the time of writing, the Bitcoin price has peaked to just below $20k in early December 2017 with a subsequent low of around $12k — and is now hovering around $13k. Not quite a bubble burst, but seems to be a correction in the making. That being said, this is still a pretty healthy state of consolidation for Bitcoin and my worst fears around unhealthy exuberance appears to be have been overcome with overall general positivity for Bitcoin by a fast growing global crypto enthused community.

The other major concern that I had written about did actually happen: Bitcoin forked into two major forks — Bitcoin & Bitcoin Cash. The success of the Bitcoin Cash fork, which resulted in a new coin being valued at around $10bn at the time of the fork (and now over $40bn), encouraged others to fork, and as a result, we have Bitcoin Gold, Bitcoin Diamond, etc. I went publicly bearish on Bitcoin earlier in 2017 because I truly believed that the market couldn’t sustain high transaction fees as a result of a higher Bitcoin price, if scaling was not resolved — but the viewpoint amongst Bitcoin supporters changed somewhat and it is now being seen as “Digital Gold” or a “Store of Value” — and not as a digital currency with low transaction fees.

When Bitcoin Cash forked out of Bitcoin, if you were holding Bitcoin — you would receive 1 Bitcoin Cash for every 1 Bitcoin you owned. The key difference is that each fork has a different set of miners and developers working on taking it in whatever direction they deem is best, with support from their respective communities. The key here is that no-one loses — you can hold both coins and see which fork of the chain becomes the best or most widely adopted. If you buy a coin after the fork, you risk that the other fork(s) wins out. For this reasons, I highly recommend that people do not sell their forked coins until we can see how all these forks play out . I believe you should maintain at least 1 Bitcoin Cash for each Bitcoin that you own, for example.

I was very bearish on the idea of a fork of Bitcoin primarily for a simple reason: Nobody owns the brand “Bitcoin”. It’s a very interesting dilemma that in a trustless, global, open source environment where government resistant software is being built to decentralize value and money, that the lack of governance or controls means that anyone can fork the code and create a variation of Bitcoin, and ironically, there is no government that you could appeal to, for help.

This also leads to the problem of fork inflation (creating more coins out of thin air) — we now have multiple Bitcoins on the market, and in the case of Bitcoin Cash, there is significant market cap (c. $40bn) which reduces Bitcoin’s market dominance (as forks are classified as alts) and creates/transfers value to another chain with another set of 21m coins. The market right now is very confused with all the new forks emerging, but eventually, I think it will rationalize.

Bitcoin:

The current Bitcoin is the longest proof of work chain, as defined by Satoshi in the white paper. This chain is what is traded under the ticker symbol BTC. The Core development team is an open source project, to which anyone can contribute and participate in.

The Core developers have the following philosophy around Bitcoin:

1. The ability to run a full node is important and that ability needs to be within reach of individuals. Therefore, growing the size of the blockchain by having lots of microtransactions will result in the blockchain becoming too big and expensive for the average individual to be able to run a node and validate their own transactions.
2. In order to be government resistant, Bitcoin needs to be difficult to change and so there is a process for submitting proposals and consensus changes are not meant to be debated in any more meaningful way by Core, than by the rest of the community that engages with them. Nobody can make a change unless there is a broad consensus from users/nodes.
3. Bitcoin’s security is maintained by ensuring that miners can earn enough money from mining rewards, but the belief is that the new coins being issued every block are a form of inflation and so when these coins run out (in 2140), a fee market needs to exist to ensure that there are enough transactions to mine at a fee, to keep mining profitable and ensuring that the chain is secure.
4. Nodes/Users are what matters and miners are simply paid coins to mine Bitcoins and transactions. They do not set and cannot change the rules. Soft forks (User Activated Soft Forks) is now a proven grassroots mechanism to upgrade the Bitcoin protocol, without requiring miner support.
5. Bitcoin needs layer 2 networks such as Lightning, in order to scale as that removes the dependency on increasing the block size in layer 1, and increasing the block size will lead to higher levels of centralization than is optimally desired for censorship resistance, etc. The idea behind layer 2 scaling is that transactions are handled outside the 1mb block space, which means the 1mb block space functions as a settlement layer, while layer 2 handles transactions.

Bitcoin Cash:

Bitcoin Cash is a fork that occured before Segwit was activated on Bitcoin, on 1 August 2017.

Activating Segwit through a soft fork/UASF represented a technical change to Bitcoin that was not enforced through the traditional mechanisms (a hard fork). For a number of supporters of Bitcoin, who believed that the Core development team had not steered Bitcoin in the right direction. Segwit represented an unacceptable technical change to Bitcoin and so, they took a small percentage of hashpower with them (around 10%) and created a fork of the original pre-Segwit activation codebase, called Bitcoin Cash.

Many false narratives have arisen around Bitcoin Cash and who is ultimately behind it. In reality, there have been many teams that rose up to challenge the Core development team’s implementation of Bitcoin over the years (Bitcoin Classic, Bitcoin Unlimited, Bitcoin ABC, etc). In the end, it seems they united under one banner and created Bitcoin Cash, including Gavin Andresen, who was the principal Bitcoin Core developer that Satoshi handed the reigns of Bitcoin over to when he left. Gavin had been an advocate for bigger blocks for years but was never able to get it implemented within Bitcoin.

At the time of the fork in August 2017, the fundamental changes were:

• An increase in the block size to 8mb (from 1mb) and no Segwit activation.
• Changes to the difficulty adjustment algorithm (DAA), due to it having a minority of hashpower — which required an emergency difficulty adjustment (EDA). This was changed again via a Bitcoin Cash hard fork in November 2017 and the DAA is more stable. The max limit of 21m coins was not changed, however Bitcoin Cash miners mined 100k more coins in the interim period until the new DAA kicked in. This also means that halving day for Bitcoin Cash will be sooner than Bitcoin by nearly 2 months.
• RBF (Replace by fee) was removed from Bitcoin Cash.

The Bitcoin Cash developers have the following philosophy around Bitcoin Cash:

1. Not everyone in the world should or will run a node and therefore making it economical to do so is not actually practical. Decentralization to the nth degree is a nice idea but they believe Bitcoin is a small world network. The tradeoff is that not everyone in the world will be able to run a node and so the question really is: How important is that level of centralization to trusting that the network as a whole can function? On Bitcoin, there are around 10,000 listening nodes today (so possibly 10x in terms of validating nodes), and probably over 30m people using Bitcoin worldwide, but it’s still unlikely that average users will want to run a node and would be comfortable trusting larger third parties.
2. Bitcoin was arguably designed to scale at layer 1, due to increases in computing capacity every 18 months, as per Moore’s Law. Brian Armstrong from Coinbase wrote about this a year ago. Bitcoin Cash intends to scale by increasing the block size, and not creating a layer 2 solution.
3. Nodes without mining power have no ability to contribute to the consensus mechanism of Bitcoin, so they are disregarded. The original white paper did not differentiate between the two, because it was never envisioned that you would have a node running without mining at the same time. Bitcoin Cash is using Nakamoto Consensus to determine consensus rule changes.
4. As per the original Bitcoin.org website — Satoshi said that a fee market should maybe exist, once the coins had been fully exhausted. There is no need to build a fee market today, as there is 120 years to plan for it. Keep transactions cheap and fast and ensure that there is global adoption first and foremost.
5. Anyone can submit changes to the network from any one of the multiple implementations/clients running Bitcoin Cash. If miners vote to adopt the change, a hard fork will occur and the network will continue to function using this consensus mechanism.

As many Bitcoin and Core developer supporters have indicated, the Bitcoin Cash philosophy is more closely aligned to Satoshi’s original white paper, but the centralization aspects of mining and other concerns around privacy and government resistance have come to the fore and as a result Bitcoin needs to pare back on these aspects because Satoshi could not have predicted these risks (ASIC mining, the rise of China, etc.)

At the end of the day, I believe that network effects win out and right now, Bitcoin has the largest network of users and supporters, even with high fees and slow confirmation times. The notion of layer 2 scaling is perfectly fine and it will work in the end and the Core development team are probably correct in that smaller blocks (possibly, even less than 1mb — as Luke, one of the Core devs did research that 350kb was optimal) are actually more ideally suited to fulfilling their philosophy around Bitcoin and requires moving transactions to layer 2. The reason that Bitcoin Cash split off was because they challenged Bitcoin Core’s philosophy around Bitcoin, not their technical ability. IMHO, Bitcoin Core is making the right decisions, technically, that align with the philosophy that they have.

I ran a poll on my twitter, trying to find out what aspects of Bitcoin were most appealing (only had 4 options) and unsurprisingly, 10% of people cared about censorship resistance in that they would have to run their own node and validate transactions. Mostly, they cared about saving money and making money (no surprise).

The question is: Which coin wins in the end in terms of market adoption, and by inference, market value over the next 12–24 months. If it’s based on the current network effect, Bitcoin will win hands down. If Bitcoin Cash’s philosophy proves to be superior and it can build a bigger network by attracting the businesses than can no longer run on Bitcoin due to high fees, even while sacrificing some areas of centralization, then it has a chance of building the bigger network effect and having a higher coin price as a result.

The gold market (Store of Value) is estimated at $7 trillion and the currency market (Medium of Exchange) is over $100 trillion. Both Bitcoin Cash & Bitcoin want to rule both.

It’s clear from the recent surge in Ripple (a highly centralized coin) to $2+ ($100bn+ market cap), that the market/traders definitely don’t care much about centralization.

So, what do the majority of consumers in the world really want?:

A cheap, fast global currency, or digital gold/store of value ? Time will tell.

Or, as my partner, Kyle Samani (at my crypto hedge fund, Multicoin Capital), puts it — they will converge into one, in the long term…