Bitcoin Cash (BCH): Built for Transaction Speed and Everyday Utility

Because Bitcoin Cash (BCH) is designed for spending rather than holding, it is speedier than the original Bitcoin (BTC).

Summary

Despite their similar names, Bitcoin (BTC) and Bitcoin Cash (BCH) are distinct cryptocurrencies, prompting some to wonder: What is Bitcoin Cash and how does it work? Bitcoin Cash is a transactional cryptocurrency that may be used to make electronic cash payments. It’s designed to be spent rather than stored as a store of value, in order to alleviate Bitcoin’s apparent scalability issue and give more utility in everyday life. The increased block size of BCH’s native blockchain distinguishes it from BTC, making BCH transactions significantly faster and cheaper to process.

Contents

• Bitcoin’s Scaling Problem and Segregated Witness
• The Structure of Bitcoin Cash and the Importance of Block Size
• How Does Bitcoin Cash Work?

Bitcoin’s Scaling Problem and Segregated Witness

Before we go into the details of Bitcoin Cash (BCH), it’s crucial to know where it comes from and what problem it’s trying to solve. To do so, we’ll need to talk about Bitcoin for a few minutes (BTC).

Bitcoin was revolutionary in a number of respects, including philosophically, technologically, and commercially. However, as the first of its type, Bitcoin quickly became apparent to have flaws. Bitcoin is a sluggish cryptocurrency, generating new blocks for the blockchain only once every 10 minutes and with a maximum block size of 1MB. It also only processes seven transactions per second. This is mainly doable as a store of value that is minimally transacted, but speed is crucial for everyday use. Keep in mind that, as of late 2020, Visa processes 24,000 transactions per second.

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The network essentially bottlenecked as more people accepted Bitcoin. Around 2015, Bitcoin’s scaling problem became apparent, and two groups formed to address it: those who advocated for small-block solutions and those who advocated for large-block solutions.

Simply, huge blocks are faster, but they compromise decentralization because they can only be processed by a limited number of nodes. Small blocks are slower, but they keep the decentralization and security benefits of the network because more nodes can join and maintain it. Speed and decentralization are essentially on a scale, so the more of one you have, the less of the other you have.

Even proponents of small block solutions understood the necessity for at least some increase in processing speed as network traffic rose. Small block supporters propose a mechanism called as Segregated Witness as a solution (SegWit). It works by obliterating signature information from Bitcoin transactions.

A new block released to the Bitcoin network comprises transaction data as well as digital signature data for each transaction’s origin and destination of bitcoin (BTC). SegWit does exactly what the name implies: it separates the transaction data from the witness (the digital signature). Essentially, it more efficiently rearranges the data in each given block. SegWit effectively doubles the block size (approximately 2MB per block).

SegWit is a soft fork, not a hard fork, which means that any node on the network can choose whether or not to implement the new set of rules. Rejecting SegWit does not result in the creation of a new blockchain or cryptocurrency (unlike the hard fork that resulted in Bitcoin Cash, which we’ll discuss later). The SegWit protocol is still in its early stages of adoption, with just about 36% of all BTC transactions adopting it. As a result, it only slightly improves the Bitcoin ecosystem’s total transaction speed.

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The Structure of Bitcoin Cash and the Importance of Block Size

Bitcoin Cash is the result of a Bitcoin hard fork. It is quite similar to Bitcoin in terms of technology and structure, but there is one important difference: block size.

Segregated Witness, in the opinion of Bitcoin Cash advocates, was not a sufficient answer to Bitcoin’s scalability problem. Bitcoin Cash was built in response to the flaws in SegWit, and it was supposed to load 8MB of data into each block and process 116 transactions per second on average. While BCH improves transaction speed, the higher block size necessitates additional processing power from nodes in order to sustain the blockchain network.

Why not simply make the blocks considerably larger, like 100MB? This would make the network significantly faster, but it would also be severely limited in terms of who could host a node, validate new blocks on the blockchain, and provide network maintenance. The dispute over block size boils down to a choice between speed and decentralization, and which is preferable.

Huge institutions, organizations, or BCH businesses can pool the processing capacity needed for large block sizes. Individuals, on the other hand, would have a far harder time amassing enough computing power to handle big blocks. This disparity risks forming an oligopoly (where processing power is concentrated in the hands of a few significant companies), jeopardizing the blockchain’s decentralized nature. The blockchain is secure and dependable because of a good combination of decentralized, distributed, independent verification, hence, in a nutshell, more nodes equals higher network security.

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How Does Bitcoin Cash Work?

To process transactions more quickly, Bitcoin Cash uses a bigger block size (which is 4-8 times larger than BTC, depending on the adoption of Segregated Witness).

These transactions are fast enough that you could use BCH to make a quick retail purchase (like a cup of coffee), but if you’re buying a car or a house, you’d be better off using a slower, more secure cryptocurrency like BTC.

As a result, BCH and BTC serve different purposes. Not all cryptocurrencies are meant to be used as a store of value, and not all cryptocurrencies need to process data fast in order to work like a credit card transaction. Using separate tools for different jobs makes logical, just as using a credit card for restaurant meals and a bank transfer for home purchases makes sense.

In the end, BCH is faster and has cheaper processing fees than BTC, but it is still utilized less frequently because ordinary cryptocurrency payments are still in their infancy. Many feel that increased awareness, together with related technological advances and developments, will help BCH become a leader in bitcoin payments over time.