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Different Types Of Bitcoin: A Beginner’s Guide

After the 2008 market crash, the world stood in horrors witnessing the economic downfall evoked by banks and financial institutions. At uncertain times like these, the world was introduced to Bitcoin in 2009, which gave newer meaning to the terms such as transparency and decentralization. No one knew that the launch of Bitcoin would establish a multi-billion dollar industry of decentralized cryptocurrencies that would add another chapter in the history of currencies. 

Since Bitcoin is an open source network, over the years it witnessed multiple cryptocurrencies forming out from it. These variations of Bitcoin are a result of forking and are popularly referred to as Bitcoin forks. What is forking?

Forking

Forking is a process through which a blockchain diverges into two distinct chains, each with different protocol/protocols. These resulting networks with vivid protocols are called forks. Forking is done whenever the chain needs to be updated. Depending on the extent and nature of the fork we have 2 types of forking:

Soft Fork

A soft fork is an update in the protocol that is backward-compatible. A popular analogy for a soft fork is an upgrade in the operating system. For example, users with an older version of Powerpoint say Powerpoint 2016 can open files made in Powerpoint 2019 since Powerpoint 2019 is backward-compatible. But the upgraded features akin to Powerpoint 2019 can not be seen by those with the 2016 version. 

A soft fork is a result of change in consensus rules causing temporary divergence in the block chain because of non-upgraded nodes. Also, for the non-upgraded nodes the security gets weakened. 

Hard fork

Hard fork is an upgrade in the protocol that is not backward-compatible. Once a user goes with a hard fork then it can’t be undone and the user becomes part of the new chain. The users with non-upgraded consensus rules, can not interact with the users of the new system who have upgraded to become a part of a new blockchain. Plus, the non-upgraded nodes can not access the new updates present in the upgraded version. For example, games from Xbox 360 can not be played on Xbox (with exception of a few games, the context of which is irrelevant for our discussion).

Hard forks result in permanent divergence in the blockchain with non-upgraded nodes getting broken from the new network. 

Sounds interesting right? There have been numerous Bitcoin hard forks over the decade resulting in new cryptocurrencies. With popular support and adoption by crypto enthusiasts, some of these have become trailblazers in the crypto world. But unfortunately for most, the sun did not rise favourably. But first we will acquaint ourselves with the major necessity for all these hard forks.

Necessity of Hard forks

The necessity of the hard forks in Bitcoin history can be traced back to the issue of the limited size of blocks and the transaction processing in the Bitcoin network. We have discussed Bitcoin mining and transactions thoroughly here. The size limit of each block in the Bitcoin network is set at 1 MB, and as a result can only handle about 7 transactions per second. The block size is said to have been originally capped at 1 MB in a bid to cut down on the spam transactions that might congest the network. With the surge in Bitcoin’s popularity, the number of Bitcoin users increased, increasing the number of transactions. The limited block size resulted in a stockpile of transactions, all waiting to get verified by the miners. 

This issue paved the way for ‘replace-by-fee’ culture, where Bitcoin users paid miners a ‘transaction fee’ to prioritize their transactions for mining. However the users with limited resources were at disadvantage since they could not pay the soaring transaction fees. 

In the Bitcoin network, the limited block size issue can be tackled by simply increasing the block size. But the community has been divided with a significant number of miners in favour and against this move. Since any amendment in protocol requires majority consensus in support, many factions have broken out of the Bitcoin network through hard forks to establish newer currency tackling block size issues uniquely.

Another move which has prompted major hard forks is adoption of Segwit (Segregated Witness) in 2017, which itself was a soft fork. Segwit aimed to reduce transaction size thereby allowing more transactions to get mined in a single block. Factions of miners unhappy with this move formed other currencies through a hard fork. 

Since we have acquainted ourselves with major reasons prompting hard forks let us look at a few noteworthy hard forks.

Bitcoin XT

Bitcoin XT was released in late 2014 amid widespread media coverage by Mike Hearn. Hearn intended to apply his proposals introduced in BIP (Bitcoin Improvement Proposal) 64 to increase the transaction rate. 

Notable features of Bitcoin XT included:

  • Increasing the then transaction rate from 7/second to 24/second.
  • Incrementing block size from 1 MB to 8 MB.
  • A doubling of block size every 2 years. 

The early run in 2015 saw Bitcoin XT faring well with more than 1000 nodes running its software. But by the end of 2015 the popularity of Bitcoin XT fell drastically. As of 2017, it has only 2 nodes in the network and is a default client for Bitcoin Cash, another hard fork of Bitcoin. 

Bitcoin Classic

The crypto universe notes Bitcoin Classic to have risen out of the ashes of Bitcoin XT. With the decline of Bitcoin XT, some members still wanted an increment in the block size. With this vision in mind, a group released Bitcoin Classic in early 2016 garnering an initial support of 2000 nodes. 

Notable features of Bitcoin Classic:

  • Increment in block size from 1 MB to 2 MB. 
  • Doubling the then Bitcoin transaction rates. 

But just like Bitcoin XT, Classic too ceased to maintain its popularity. In a statement released by Tom Zander, release manager of Bitcoin Classic, on the company’s website in November 2017, he urged the members to migrate to other wallets.

Bitcoin Unlimited (BU)

After the failed attempts of XT and Classic in garnering support, Bitcoin Unlimited was another fork released to tackle the block size issue. Bitcoin Unlimited instead of setting a blocksize from the start, chose to let the users decide the blocksize themselves. The blocksize which would receive the majority consensus would therefore be set as the blocksize limit.

Noteworthy features of Bitcoin Unlimited as listed on their website:

  • Miners are independently able to set the size of the block.
  • Node operators can securely track consensus as defined by the most proof-of-work chain composed of valid transactions regardless of the block size. 
  • Instant transactions and low and predictable fees for users. 

Unfortunately for Bitcoin Unlimited, the network fell prey to a number of bug attacks from February to May 2017 resulting in mass node exodus from the network. Currently an edition of Bitcoin Unlimited software by the name of ‘BU Cash’ can be found on Bitcoin Cash. 

The above 3 are hard forks of Bitcoin Core, the program focused on determining which blockchain contains valid transactions making it the Bitcoin blockchain. The following Bitcoin types are the hard forks of the Bitcoin cryptocurrency itself. 

Bitcoin Cash (BCH)

Created in August 2017, Bitcoin Cash is the most successful fork till date and is aimed at allowing more transactions on the network. The hard fork was a result of disagreement regarding the adoption of Segwit on Bitcoin Core. Bitcoin Cash’s early success and adoption prominently lies due to the fact that it received major support from industry figures such as Roger Ver, early Bitcoin investor and evangelist, as well as Jihan Wu, Co-Founder of Bitmain, the world’s largest Bitcoin mining device manufacturer. 

Noteworthy features of Bitcoin Cash:

  • The blocksize is incremented to 8 MB.
  • No Segwit and ‘replace-by-fee’ feature.
  • It offers a quicker way to adjust the proof-of-work difficulty quicker than the then block difficulty adjustment interval found in Bitcoin.

Bitcoin Cash provided an effective protection against replay attacks. A replay attack is a malicious practice in which a transaction occurring in one blockchain is repeated in another blockchain. Blockchain Cash uses a redefined sighash algorithm as using a different sighashing algorithm invalidates the transaction.

(Source: Coinmarketcap.com)

Going by market capitalization as of May 2020, BCH stands at 5th rank globally with 1BCH equalling 230.75 USD. 

Bitcoin Cash was again hard forked on 16th November 2016, splitting into Bitcoin SV and Bitcoin ABC with Bitcoin ABC gaining recognition as the dominant chain taking over the BCH header. 

Bitcoin Gold (BTG)

Bitcoin Gold is a Bitcoin hard fork that occured in response to the statistical centralization of Bitcoin mining. It was observed in 2017 that 50% of Bitcoin’s hashrate was owned by 3 mining pools as they deployed specialized hardware for mining. Therefore on 12th November 2017, Bitcoin Gold hard forked and came into existence. It aimed at reducing mining capability requirements to provide equal chance to all by excluding expensive ASICs from mining. 

Noteworthy features of Bitcoin Gold:

  • Usage of memory hard equicash as PoW algorithm in place of sha-256. This made Bitcoin Gold inaccessible for AISC’s to mine.
  • Promotion of Graphics Processing Units (GPUs) for mining. 
  • A ‘Post-Mine’ event in which the developers quickly mined 1,00,000 and placed them into ‘endowment’ with a plan to utilise them for growth and research of the system. 5% of those went as bonuses for the team.

Unfortunately despite the measures Bitcoin Gold has suffered multiple 51% attacks.

(Source: Coinmarketcap.com)

Bitcoin Gold stands at 47th rank based on market capitalization with 1 BTG equalling 8.89 USD. 

These were some hard forks of Bitcoin with Bitcoin Cash and its subsequent fork, Bitcoin SV holding a strong user base in the cryptocurrency. Many other forks such as SegWit2x, and Bitcoin Private either never saw light of the day, or just didn’t see adoption. While we are likely to see many other forks and newer cryptocurrencies, ultimately their fate lies in their features and industry acceptance. 

Disclaimer: CoinCrunch.in content is informational in nature and is not meant to be investment advice. Buying, trading or selling cryptocurrencies should be considered a high-risk investment and every reader is advised to do their due diligence before making any decisions. © 2020 CoinCrunch
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