Cash Is King, Is Bitcoin Cash King?

They say it's lonely at the top and it's hard to stay there.

Bitcoin Cash price went up to 0.55 BTC or $2300 USD and now hovering around $1400. WTF is going on? Is it going to replace BTC?

Warren Buffet assigns himself a story similar to a journalist to figure out what is going on (Watch this interview, at 11:20).

I assigned myself the task of writing a story about BTC and BCH. Below are some of my findings weaved with two important technicals, some drama, and embellishment. It's an exciting deep dive. Some level of technical understanding is required. I have written a simple explanation of these concepts to help you grasp the story. Enjoy and let me know what you think!

Technical Primer #1 

Hash

A hash is like a fingerprint. I don't know who's fingerprint it is, but if the guy shows up I can verify that it is him. 

Bitcoin's blockchain simplified

A Bitcoin block has 6 elements, 3 of which are: A hash of all of the bitcoin transactions since the beginning of the system. A bundle of transactions to be confirmed within this block. A nonce. Think of it like a Russian doll. The outer layer contains the inner layers. A new block contains a fingerprint of all previous transactions.

Nonce and Bitcoin Mining

A random piece of data. The Bitcoin miners are looking for that nonce. When added with the hash (fingerprint) of all previous transactions and the bundle of new transactions to be recorded and the results are something like this: 

000000000000000000117b008122e193f274c6d53b0c229bfe6281c5906ad2c4 (this is block #495184) 

You just won the bitcoin mining lottery. Notice the number of leading zeros, this is used by Bitcoin's software to adjust the mining difficulty level. More 0s means harder to find the right nonce (A random piece of data).

51% attack simplified

This means some miners control directly or indirectly more than 51% of the hashing rate (read guessing rate). Which means that miner wins the lottery more than 50% of the time and can attack the network by messing with what to include and what not to include in the blockchain. Here is the current hash rate distribution.

Immutability

cannot be modified after it is created.

Bitcoin's value proposition

Decentralized immutable ownership records (read: nobody can f*** with my bitcoins).

Bitcoin is valuable because there are hundreds and thousands of miners out there securing the network in a distributed fashion supporting Bitcoin's value proposition. The more hashing rate behind the network, the more secure and immutable the blockchain and the historical transactions are, the more valuable bitcoins become. Bitcoin's total hash rate went higher and higher away from the theoretical and the practical possibility of a 51% attack. Here we can see a chart that is best viewed in a logarithmic format. 

Here's a November 2013 article that says Bitcoin's network computing power is 256 times faster than top 500 supercomputers combined. It has since grown more than 100,000 times.

As Bitcoin's hash rate went higher and higher, the value proposition of bitcoin increased. The market recognized that and paid more for coins. Price of coins went up, mining becomes more profitable. Bitcoin value proposition increases, more people pay attention and come into the market. It's cycles of self-fulfilling prophecy. 

Technical Primer #2

Transaction Malleability simplified

this basically means people can mess with the transactions that they send out, tricking the recipient thinking that they got the coins but they actually didn't. It's fixed now. The Segwit update fixed it.

Segregated witness simplified

All you really need to know here is that the message structure of your transactions to the bitcoin's network has been modified to make the size of that message smaller. Smaller messages mean more messages can fit into the same block. 

Block size with Segwit

Bitcoin's block size limit right now is 1mb. Can't fit too many transactions in 1mb of data. Segwit is an on chain scaling solution and a soft fork which increases the block size to 1.6mb.

Hard fork

Changing old rules. Old and new are not compatible. Think VHS versus DVD. 

Soft fork

Adding new rules. The new can still handle the old. Think DVD to Blu-ray. 

ASICBOOST

Basically a "hack" in bitcoin mining which gives the user more efficiency, up to 30% more efficient. This translates to over $100m a year in profit. This hack is patented by CoinTerra, now a defunct bitcoin mining operation.

Transaction fees

The way miners sort which transactions to fit into the 1mb block is to sort by highest to lowest transaction fees. It's also important to note that miners are incentivized to want bigger blocks if the demand for transactions is there. This is because a new block is found every 10 minutes, if the blocks are bigger and are utilized to capacity, they get more transaction fees every 10 minutes. 

Full Bitcoin Node

For those who have used torrents before, this is like hosting the movie file for the torrent network. You allow others to download from your computer. For Bitcoin, a full node has the full version of Bitcoin's blockchain. If the node is a mining node, it can also process transactions. 

Scaling Bitcoin

For all the hype surrounding Bitcoin, it is a fairly inefficient system. Currently, bitcoin does less than 10 transactions per second. VISA does more than 25k transaction per second. For a global currency to be, we still have ways to go. 

There are mainly two ways to scale bitcoins. One is on chain scaling solutions, and the other is off chain scaling solutions. 

On-Chain Scaling Solution

An immediate example of on chain scaling solution is to increase the block size. Think of block size as a frame from a polarizing picture. The larger the frame of the picture the more people you can reasonably fit in there. In this case, instead of people fitting into the picture, it's a number of transactions that one can fit into the block. Right now for bitcoin, the block size is 1mb. With Segwit, the block size is increased to about 1.6mb.

From an economic incentive perspective, miners like on chain scaling solutions. Bitcoin Cash's block size is 8mb. This means it can process 8 times more transaction per second than Bitcoin. 50 transaction per second is still not a big deal. If the only solution is to scale on-chain, we would have to see block size of over some gigabytes. 

The second order consequence of big block sizes beyond just allowing people to send more transactions per second is that amateurs will not be supporting a full bitcoin node. They will get pushed out of the full node game because the blockchain will grow by more than 1mb every 10 minutes. If the block sizes are 1GB each, it's easy to see how that might blow up their hard drive in a day! 

The third order consequence of big blocks is that Bitcoin becomes more centralized. This is actually a good thing for the miners. It is good because they have a bigger say in what kind of features they want to add and remove from the blockchain for their benefit. There's an incentive for the miners to politically navigate towards this goal. 

Off-Chain Scaling Solution

The Lightning network is a second layer scaling solution. Think about the Brink's trucks that move money around at the end of business day. The transaction was already made, now they have to move the money into the bank and settle it on the account. The cost of using Brinks truck is really high if we wanted to settle every transaction right away, money in the bank style. Instead of doing that, the merchants accounting system acknowledge the receipt of money for goods and then settles with the bank later in a big chunk. Instead of saying Joe gave me a $1 for a piece of gum, it says received $12,384 worth of sales on that day.

The Lightning Network is similar to that. It doesn't settle every single transaction on the blockchain. It allows for a channel to be open between parties and they can transact as they wish. Then when they are done, they can lock in the final statement and send that to the blockchain. For the merchant's example, maybe it receives bitcoins on a daily basis for customer purchases, and the merchant will send that to a cryptocurrency exchange. If there is a lightning channel open between the exchange and the merchant, the merchant does not have to pay transaction fees for every transaction. He can keep sending money without a final settlement until later. Miners don't like this because they get paid fewer fees.

Brief summary before the main course

If you have read this far and followed along, I can honestly say that you now know more than 95% of the people who got into cryptocurrency this year.

We talked about the fundamental value proposition of Bitcoin's blockchain. The value is that we have a decentralized way of securing the network and it's history of all transactions ever made. This is made possible because of all the miner's and the hashing power that they bring to the network. 

Then we talked about two ways to scale the Bitcoin network. On chain and off-chain. Miner's like bigger blocks because it means potentially more fees. Miner's don’t like off chain scaling solutions because they make fewer fees. 

Now, what does all of this have to do Bitcoin Cash?!?

We need two more pieces before we can see the whole puzzle...

The main players and drivers

Jihan Wu

Jihan Wu runs Bitmain. Bitmain produces about 70% of the bitcoin miners out there and has about 20% of bitcoins hash rate. They fought hard to block Segwit from being intergraded into Bitcoin's blockchain as a soft fork because it fixes transaction malleability and patches the ASICBOOST hack. 

He was also a big proponent of bigger blocks and hard forks with features that favor Bitcoin miners. 

Roger Ver

He is an early bitcoin adopter. Old-timers remember him as Bitcoin Jesus. These days he looks more like Judah. He runs a mining pool at Bitcoin.com

We got most of the pieces now to see the puzzle. 

Blowing life into Bitcoin Cash (read Kish)

If we agree to that mining and hash rate contributes to the value proposition of Bitcoin then it's easy to reason that if that hash rate is put behind another blockchain, that chain's value proposition just increased.

It's harder to conceptualize how it would start. If there is no usage, then there is no price level, if there is no price level, then no mining profit. No mining profit means no miner and no chain. 

Only if we could bootstrap and leverage something that already exists…

Bootstrapping Bitcoin Cash (read Kish)

If I were a miner with a few friends and controlled a big % of hashing power, this is how I would do this: 

I would first spam the original chain with microtransactions to clog up the blockchain. It's cheaper for me and my miner friends to do this because we get a percentage of those fees back plus ASICBOOST also gives me an advantage. 

On average we would get back a percentage of the fees we use proportional to our mining power. We also receive normal transaction fees. Basically, we use the transaction fees that we make to fund the attack. We can see transaction fees increased significantly since the beginning of the year. Recently, before Bitcoin Cash's run-up, it reached an all-time high:

I would sustain this attack for a while to make a point and give the illusion to users that Bitcoin's blockchain is really slow. As a matter of fact, most of the public actually have no idea of confirmation time, block size debate, on-chain, and off-chain scaling solutions. What the public sees is what the public knows. I remember when I first got into bitcoin and just the QR code scared me.

So I spam the network because I want to clog it up. After I clog it up I will push for a hard fork of Bitcoin's blockchain and call it Bitcoin Cash (Read Kish). Since I forked the chain, from day one, my potential users are everyone who owned coins in the previous chain.

This means from day one, I have users and a chain that I can support with my miner buddies. These users don't have to buy my coins because they already have them. Now the only thing left to do is to influence public opinion.

The way I would influence public opinion is to keep spamming the original blockchain, making it slow and expensive to use. While making sure that they hear that my new chain does not have these problems. 

Then one day I decide to push for a statement and move my mining power and my friends' mining power behind Bitcoin Cash to blow life into it. While at the same time pump up the prices on the Korean Exchanges trading with myself because there are no transaction fees.

In the graph below we can see that Bitcoin Cash's hash rate went over Bitcoin's. That is also the day when Bitcoin Cash went all the way up to 0.55BTC.

Once the hash rate crossed, it created this impression in those people who value Bitcoin based on total hash rates.

I always thought that bitcoin was people's money, but it is really just miner's money. I say this because I do not run a full node, hence I am just paying lip service when I say I believe Bitcoin more than Bitcoin Cash. Miners, on the other hand, are financially motivated to support whichever coins that pay more. They also run a full node which means they participate in the network and can vote on features changes by running the software version of their choice. 

Bitcoin Cash is now a real player in the game. 

The evidence for this story is circumstantial at best. I cannot get into people's mind but I can follow them on Twitter. Read Roger Ver's and Jihan Wu's tweets with your new found understanding of the political landscape. This will give you an idea behind the motivation of the stuff they say. 

Is This Bad? 

Here is a good concept and support for fragmentation of Bitcoin, it's a religious one. Basically, Christianity started and Jesus had a bunch of disciples. Then Jesus went away and his disciples stewarded what Jesus has built for a while, and then went off on their own and started many other religions.

We are seeing something similar to Bitcoin and Bitcoin Cash. I'm sure that in the beginning all of the miners got together to support Satoshi's vision, then human nature caught up with them. 

From a technical perspective, 10 transaction per second, versus 80 transactions per second is not a big change. This is not scaling. 

Personally, I don't think it's a bad thing. I also don't believe that Bitcoin Cash will destroy Bitcoin. It's a new flavor on the shelve. Some people might like it, some people might not. Most people don't care besides that it might make them some money.

The great thing about this whole blockchain evolution is that if at some point people figure out what's going on, and realizes that they are been manipulated, they will just fork off and do something by themselves.

Plug for others

This piece was made possible by James Hapak, who is a good friend and financial industry veteran that found some of the pieces and helped me elevate my view of the situation to put them together into a story.

Plug for Self

If you liked this article, please like, comment and share! Also, I contribute to KoinTap, which is a site full of more awesome content.