Is the Bitcoin Cash hard fork good for Bitcoin Cash?

In Insights

A hard fork refers to a protocol update that is meant to improve the technical foundations that govern a network. In cryptocurrency, hard forks are often driven by political and economic motives that have little to do with making substantial technical improvements to the protocol.

More often than not, cryptocurrencies expected to hard fork experience a surge in price. In turn, this surge tends to bring about a disproportionate share of profits to those who plan the hard forks. The justification for any hard fork, therefore, needs to be carefully examined by identifying and exploring if there are legitimate reason for a group to initiate the fork.

What can we say about the Bitcoin Cash (BCH) hard fork that is expected to take place on November 15? We have seen that the price, hours prior to the expected fork, has declined much more than other major cryptocurrencies while the entire crypto market experiences a downturn.

Bitcoin ABC vs Bitcoin SV

On the face of it, the BCH hard fork is anticipated to produce two chains: Bitcoin ABC and Bitcoin SV. Bitcoin ABC is known to be supported by a mining giant Bitmain, which is also a major miner of Bitcoin.

Bitcoin ABC’s major technical amendment to the protocol is the use of identifiers in ordering transactions within a block. In doing so, Bitcoin ABC aims to lessen the severities of potentially lengthening confirmation time that can be a major obstacle to achieving further scalability.

While Bitcoin Cash is known for its fast transaction confirmation time, an even faster confirmation speed is desirable for achieving further scalability, and Bitcoin ABC aims to achieve this goal by changing the order that transactions are placed into each block.

Meanwhile, Bitcoin SV – an abbreviation for Bitcoin Satoshi Vision – is supported by Craig Wright’s research and development body nChain. Bitcoin SV approaches the scalability issue by increasing the block size. What this means is that Bitcoin SV will be able to contain more transactions per block which should result in increased transaction processing capacity at the network level even if the time needed to generate a block remains the same.

From a protocol improvement perspective, the different technological implementations to be taken by both parties signify that Bitcoin ABC is aiming to qualitatively improve the protocol by introducing a new transaction ordering algorithm whereas Bitcoin SV is aiming to quantitatively improve the protocol by simply increase the size of a block. But neither of the two seem to be significantly better than the other as an improvement to the protocol.

Hash power vs network nodes

We can see from Coin Dance, which has statistics on both Bitcoin ABC and Bitcoin SV, that it is very clear Bitcoin SV has by far the majority of hash power prior to the hard fork. This means that much of the computing power that comes from network participants such as miners is directed to support Bitcoin SV rather than Bitcoin ABC.

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On the other hand, the majority of the nodes, that is, the number of computers and equivalent connected to the network, are systematically compatible with and in support of Bitcoin ABC, meaning that only a minority portion of the nodes can be synchronized with Bitcoin SV when Bitcoin SV goes live.

The point here is that for Bitcoin SV, a few network nodes generate a large degree of aggregate hash power or computing power, whereas for Bitcoin ABC a large number of nodes generate a much smaller degree of aggregate hash power or computing power. This imbalance of hash power and the network nodes is concerning.

From the estimates, we can observe that Bitcoin SV has the potential to become the dominant chain over Bitcoin ABC. But we won’t know what happens until the hard fork takes place and sufficient time has passed to see what the imbalance that is currently taking place might mean to the entire network.

Either way, at the end of the day, it does not seem that either Bitcoin ABC or Bitcoin SV comes with ground-breaking technological innovation to upgrade the Bitcoin Cash protocol. In this regard, it may be wise to simply step back and remain neutral until the intention of the hard forkers in initiating the fork becomes clear.

Liquid is supporting both the Bitcoin ABC and Bitcoin SV chain. Read more in our statement on the fork

This report reflects opinions and views of individual researchers on this topic and does not represent views of Quoine or Liquid. This report is not intended to recommend buying or selling of certain virtual currencies and may contain inaccurate information. Investing in virtual currencies carries risks. You should not use this report as a reference for judging an investment, but rather carry out your own research and use your judgment to make responsible decisions.

For questions, comments and feedback for this report, please feel free to contact us at cryptoresearch@quoine.com.

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