Bitcoin Hard Fork Explained in Laymen’s Terms
Bitcoin splits once again after August 2017 and created a new cryptocurrency called bitcoin gold. Right after that, the price of bitcoin gold plunged over 60%. Everyone is looking forward to the upcoming Bitcoin SegWit2x hard fork in November 2017 as Bitcoin holders will be credited with an equal amount of the Bitcoin2x asset on the Bitcoin2x blockchain. Basically, it is a free money. Now, what exactly is Bitcoin hard fork? This article explains Bitcoin hard fork in laymen’s terms.
Bitcoin Hard Fork Explained in Laymen’s Terms
A hard fork is a radical change to the protocol that makes previously invalid blocks/transactions valid (or vice-versa), and as such requires all nodes or users to upgrade to the latest version of the protocol software. This simply means hard fork is a permanent divergence from the previous version of the blockchain, and nodes running previous versions will no longer be accepted by the newest version.
“Why do we need a series of Bitcoin hard fork?”
Firstly, it’s important to understand how the bitcoin system works.
A cryptocurrency such as bitcoin is made up of peer networks. All the peers have a full historical record of every transaction as well as the balance in all the accounts.
The transaction can be defined as a file that has information such as ‘James gives 15 Bitcoin to John’, with Bob’s private key serving as a signature.
The transaction is then shared to the network after it has been signed, with every other peer getting the information from the peer based on a simple peer to peer technology. Based on this, as soon as a transaction is completed, the full network becomes aware of it, almost instantly. It, however, gets confirmed on public ledgers within a particular time period.
The confirmation is a very important aspect of cryptocurrencies, as the confirmation is the major thing. This is because, prior to confirmation, it is possible for the transaction to be forged, since it is pending.
After confirmation, however, it can no longer be forged as it becomes a historical transaction record that is final. This is known as blockchain. Transactions can only be confirmed by miners. They are responsible for stamping the transaction and spreading them all over the network. The miners are paid with a token for stamping transactions.
Due to several constraints in mining, therefore, a few proposals have been put out to perform such hard forks.
Bitcoin Cash (BCH) Hard Fork
As mentioned above, mining is the process of confirming transactions and adding them to a public ledger. In order to add a transaction to the ledger, the “miner” must solve an increasingly-complex computational problem (sort of like a mathematical puzzle).
To be validated by the decentralized network of bitcoin miners, the transactions are bundled in “blocks.” The bigger the size of the block, the more transactions can be validated in a second. Bitcoin has a maximum block size of 1MB and some transaction can take up to an hour to complete.
Just like a page of a ledger, there is a limit to how many transactions you can log.
The low limit of Bitcoin has led to delays in the amount of time it requires to verify a transaction. Consequently, it leads to higher surcharges for verification.
Prior to 1st August 2017, key miners (e.g. Bitcoin Unlimited) and developers (Bitcoin Core) of Bitcoin agreed to increase the efficiency of operating the cryptocurrency. Since the technology is open source, changes are made to its underlying code if agreed by a consensus of users.
The User Activated Hard Fork was proposed by Bitmain which will enable the construction of a whole new form of bitcoin and blocks with larger sizes. Since this is a hard fork, the chain will not be backward compatible with the rest of the bitcoin blockchain. The biggest reason why this looks so appealing is that the hard fork does not require a majority of hashpower to be enforced. All nodes who accept these rule set changes will automatically follow this blockchain regardless of the support it gets.
At the “Future of Bitcoin” conference a developer named Amaury Séchet revealed the Bitcoin ABC (Adjustable Blocksize Cap) project and announced the upcoming hardfork. Following the announcement, and after Bitcoin ABC’s first client release, the project “Bitcoin Cash” (BCC) was announced which came into full effect on August 1.
On 1st August 2017, Bitcoin split and its clone, BCash (Bitcoin Cash) was since born. BCash shares its entire transaction history with Bitcoin up until the point of the split, with the history diverging after the split.
That simply means for whatever amount of Bitcoins you had before the split, you ended up having that same amount of BCash. For those who owned Bitcoin prior to August, you were able to spend your Bcash coins without spending Bitcoin.
The advantages of BCH are:-
Block Size Limit Increase – Bitcoin Cash provides much-needed relief to users with an immediate increase of the block size limit to 8MB.
Replay and Wipeout Protection – Should two chains persist, Bitcoin Cash minimizes user disruption, and permits safe and peaceful coexistence of the two chains, with well thought out replay and wipeout protection.
New SigHash Type – As part of the replay protection technology, Bitcoin Cash introduces a new way of signing transactions. This also brings additional benefits such as input value signing for improved hardware wallet security, and elimination of the quadratic hashing problem.
What about Bitcoin Gold?
The need for high-end machinery has meant that mining is controlled by a small group of people with powerful computers.
Jack Liao, the CEO of LightningASIC, which sells mining equipment, came up with bitcoin gold as a way to change this dynamic.
The idea is to allow bitcoin gold to be mined by more people with less powerful machines, therefore decentralizing the network further and opening it up to a wider user base.
To this end, the collective behind bitcoin gold came up with a code that creates a “fork” or split in the bitcoin blockchain. That occurred on October 24, 2017, and resulted in the creation of the bitcoin gold cryptocurrency.
What about SegWit2x Hard Fork?
The one-megabyte limit has created a bottleneck in bitcoin, resulting in increased transaction fees and delayed the processing of transactions that cannot be fit into a block.
On 21 July 2017 bitcoin miners locked-in a software upgrade referred to as Bitcoin Improvement Proposal (BIP) 91, meaning that the controversial Segregated Witness upgrade was activated at block 477,120 with the associated block size increase to two megabytes occurring three months later in November as the final last leg. It is scheduled to go live from block height 494,784, which is some time around 18th of November 2017.
First, SegWit2x seeks to upgrade bitcoin in two ways:
- It would enact the long-proposed code optimization Segregated Witness (SegWit), which alters how some data is stored on the network.
- It would set a timeline for increasing the network’s block size to 2MB, up from 1MB today, to be triggered about three months after the SegWit activation.
The sole objective of this proposal is to reunite the Bitcoin community and avoid a cryptocurrency split. Segwit2x does not aim to be best possible technical solution to solve Bitcoin technical limitations.
The Bitcoin Segwit2x fork is projected to take place on 18th of November 2017 and will temporarily result in two bitcoin blockchains.
It is noteworthy that the possibility of Bitcoin SegWit2x gaining more hashrate than BTC theoretically exists. However, Bitcoin will still be here and probably for a very long time.
Which Exchanges Support Bitcoin Segwit2x?
Coinnest – Full Segwit2x support (announcement here).
Coinone – Planning on full Segwit2x support (announcement here).
Huobi Pro – Will honor Segwit2x balances as well as enable trading (announcement here).