If you aren’t a regular reader of digital currency news, it can be confusing to hear about digital currencies with similar names. Digital currency is a fast-paced industry where major events change the landscape on a constant basis. Among these major events are hard forks, which are essentially splits in digital currency networks.
Hard forks occur when a digital currency network experiences something that divides community opinion in an unresolvable way, or when an event occurs that must be reversed, such as a network attack or design flaw. In blockchain networks, which form the basis of digital currency, hard forks help protect against malicious attackers and middlemen.
The decentralization aspect of blockchain relieves digital currency of many concerns associated with fiat currency, but also sometimes results in network forks. Network forks are the reason similarly-named digital currencies exist, such as Ethereum (ETH) and Ethereum Classic (ETC) and Bitcoin (BTC) and Bitcoin Cash (BCH). Though they have similar names, each of these is a separate, independently-functioning network.
What is a hard fork?
To understand hard forks, it is important to first understand decentralization as it relates to digital currency.
Decentralization means that there is no single governing body or centralized organization that controls the currency. This is different from traditional fiat currencies, which are controlled and backed by governments.
With digital currency, there are no banks to track transactions or the amount of money each person holds. While bank servers are prone to hacking and are directly associated with personally-identifiable information, this is not the case with digital currency. Because everyone who participates in the network helps create the network, the data is spread out and redundant. Any information that doesn’t match the records on the rest of the network gets rejected, making it impossible for a hacker to falsely claim ownership of digital currency that they don't actually own.
Similarly, decentralization attracts people who are victims of political unrest. When people lose faith in their government and government-backed central currency, digital currency offers a safe haven for personal financial security.
Decentralization poses its own problems, however, one of which is a failure of network participants to agree on the rules of the network. A blockchain network cannot operate under two different sets of rules. When unresolvable differences about the future of the network occur, the network must split apart, creating a hard fork and, with it, a separate currency. The two Bitcoins mentioned above came from a hard fork of the original Bitcoin network that resulted from a disagreement amongst community members.
Bitcoin vs. Bitcoin Cash
The hard fork that created a split between Bitcoin (BTC) and Bitcoin Cash (BCH) caused heated debates in the digital currency community. The issue involved transaction times and fees. Bitcoin transaction times had become painfully slow after a huge influx of investors seeking high returns invested in the coin. Not only were transaction times slow, but fees began to skyrocket as well, from pennies to $15 just to buy a meal that costed less than the fee.
Bitcoin’s utility for executing transactions began to decline for the first time, and merchants who previously accepted Bitcoin opted for other digital currencies or stopped taking digital currency altogether. It was apparent that something needed to be done if the Bitcoin network was going to survive.
When Bitcoin first came into existence, it was prevalent only among cryptography enthusiasts. Each transaction block offered only 1MB of space, which was at first no issue whatsoever. It was only after Bitcoin became more widely used that this small block size began to wreak havoc.
The Bitcoin community offered two solutions: Segregated Witness—often abbreviated to SegWit—and Bitcoin Unlimited.
Bitcoin Unlimited posed no block size limit and offered numerous benefits to miners. SegWit placed some information outside of the blockchain. Then, a combined solution was proposed called SegWit2x, which significantly lowered the amount of data to be verified per block by appending it to an extended block. Still, some people believed that any form of segregated witness technology went against the initial vision for Bitcoin and did not truly resolve the scalability issues at hand. Their concerns for the future of digital currency caused them to decide that it was time for a hard fork.
The fork resulted in the creation of Bitcoin Cash (BCH), which features an 8MB block size that helps increase verification speeds. According to Investopedia, BCH also features “an adjustable level of difficulty to ensure the chain’s survival and transaction verification speed, regardless of the number of miners supporting it.”
Both BTC and BCH remain in circulation. At the time of this writing, BTC is worth $9,351.75 per coin and has a market cap of $159,040,648,596. BCH is worth $1,412 per coin and has a market cap of $24,150,702,994. You can check the stats in real time here.