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Lightning Network: How Far Away Is It?

The Lightning Network is a second layer scaling solution made by Lightning Labs that promises to finally solve the huge problem of scaling the Bitcoin Network.

Whereas Bitcoin transactions were originally much faster, increased use and a larger blockchain database has clogged the network and led to transactions measured in minutes as opposed to seconds with high fees to boot.

The issue was the center of much debate in the community, with some people feeling that the block size should be increased to allow cheap, fast transactions and others believing that the increased size would lead to centralization. When Bitcoin forked last year, the latter camp continued working on the project known as the Lightning Network, an off-chain solution that will process much of the heavy lifting in a Bitcoin transaction in a ‘side chain’ to decongest the network and allow scaling without changing the block size.

The project was only proposed in 2015 – so what’s the situation now? Here’s a status update.

Lightning Charge and E-Commerce Store

In January of this year Blockstream, a company heavily involved in the scaling debate and Bitcoin fork, released Lightning Charge enabling them to charge transaction fees on the Lightning Network. Blockstream launched a test E-commerce store called Blockstream store to test the speed and cost of transactions and enable the company to create a Bitcoin network product that generates profit on its own without relying on the value of Bitcoin itself.

“By offering an early demonstration of this cutting-edge technology, we hope to bring Lightning to life with real-world functionality, providing a way for you to test Lightning and become a part of the micropayment revolution.”

Blockstream is releasing the Lightning Charge complementary package for c-lightning to make it simpler to build sophisticated applications on top of c-lightning.

“Web developers will be able to work with c-lightning through their normal programming techniques, and they’ll also get expanded functionality such as currency conversion, invoice metadata, streaming payment updates and webhooks,” says the Blockstream announcement. “Together, these additions make it easy for developers to use c-lightning to create their own, independent web-payment infrastructures.”

Mobile Wallets for Faster Payments

A number of Lightning Network mobile wallets have been developed or are in development, aiding with adoption and progressing the project further.

Eclair is technically a Lightning node,  not a remote control app for a node running on a server. Users can transfer money from a checking to a savings account by closing channels, generate Lightning invoices, and pay Lightning invoices through QR codes or Lightning invoices. The wallet has 3,000 downloads.

Bitcoin Lightning is an SPV BIP37-based wallet developed by Anton Kumaigorodski. It features full Lightning Network support that provides for both on-chain and off-chain network transactions and is available in both testnet and mainnet. Processing is local for both on- and off-chain transactions. Users can send and receive bitcoin almost instantly through dedicated channels. One unique quality of this wallet is that it uses a system of storage tokens to store channel backups and delay refunding transactions anonymously. It has 71 reviews on Google Play, but the exact number of downloads is unknown.

Rawtx, short for “raw transactions,” is a mobile Lightning Network wallet for Bitcoin that allows users to send and receive testnet bitcoins on the blockchain and Lightning Network. The wallet is available for Android and an iOS version is in development.

LND Thin Wallet enables users to send and receive Bitcoin privately and instantly from a mobile device with the “thin” Lightning wallet, which connects to an LND node the user is running on another device. In addition to allowing users to send and receive Bitcoin over the Lightning network, this app allows them to view transaction and channel details, open up new channels, and deposit Bitcoin to their Lightning wallet.

New LN Channels

Professional Bitcoin influencer @ArminVanBitcoin posted on Twitter a little over a week ago pointing out progress in other areas of the project – the network capacity has grown to 40 BTC (the total value of the Bitcoin being spent on the Lightning Network).

https://twitter.com/ArminVanBitcoin/status/1015708762542395392

While it’s early days, the recent figures do show some promise and definite growth for the scaling solution.

The influencer also posted some of the other progress given to him by the developers recently, listed below:

– 200K+ onchain txs / day

– 44% of transactions use

– Mempool cleared, 1 sat/byte fees

– 2MB+ blocks being mined

– 37 Ehash/s hashrate ATH

– 9500+ lightning channels

– lightning wallets for iOS + Android

– sub-satoshi offchain fees

– Schnorr Sigs BIP

Drawbacks and Obstacles

The Lightning Network has come leaps and bounds since its conception three years ago. While its not running at a capacity sufficient for widespread adoption, it’s already in use with launched apps and active nodes operational.

However, the system is not without its problems and there are a number of concerning issues that ideally should be overcome before the network goes fully live.

It recently emerged that the Network is very centralized, despite the fact that it was created as a more complex but decentralized alternative to increasing the block size. Bitcoinist reported that the 220% spike in the network activity seen recently was actually the work of just one person, Andreas Brekken who is a supporter of Bitcoin Cash advocate Roger Ver.

Prior to Brekken’s node going live, the entire Lightning Network had a capacity of only around $225,000, with Brekken now comprising 49 percent of total network capacity at $427,000.

Given that Ver is an outspoken advocate of larger block sizes and a critic of the Lightning Network, believing it to be simply a mechanism by which to profit from an inherently decentralized and un-monetized cryptocurrency network, there are now concerns that the spike is the result of an effort to harm or control the Lightning Network at a crucial stage in order to discredit its use case.

The recent news comes on top of general issues surrounding a lack of adoption and real-life scalability – however, if the Network can become more centralized and the developers maintain the current rate of progress, it’s possible that Bitcoin will have a real scaling solution very soon.

Follow us on twitter @cryptoiscomin

Interested in other cool crypto posts….check out What happens when the last Bitcoin is mined?and The Price of Bitcoin vs Cost of Mining.

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One Year Later: Comparing BTC to BCH (transactions/volume/github)

It’s been one year since the controversial fork of Bitcoin (BTC) to create Bitcoin Cash (BCH). We’ve writen about the two main figures of this fork, Jihan Wu and Roger Ver, in the past but today we want to look at the numbers. The cold.hard.facts. As President Trump would say…… We’ve scoured the internets to find interesting, and biased, visual representations comparing the BTC and BCH networks. It’s fascinating, and highly scientific stuff.

Bitcoin Cash Network Metrics Compared to Bitcoin Network

So how is Bitcoin Cash doing compared to Bitcoin in terms of active addresses, transaction count (tx), tx value (tx vol), difficulty and exchange volume? The chart below looks wild, but keep with me. The topmost horizontal line, labeled 1, represents the Bitcoin (BTC) network. All the squigly lines below 1 are the Bitcoin Cash network comparisons. The legend on the right provides averages, and as you can see the BCH network really doesn’t compare to the grand daddy. It’s only been a year though so there is clearly room for improvement. As the larger block sizes and smart contracts come into use we expect BCH network usage to increase.

SegWit Block Size

Smooth and steady wins the race. That’s what those old timers always say. But it seems in the case of SegWit activation and adoption, slow steady consensus is the winner. While BCHs claim to fame is larger block sizes and now Smart Contracts (with less usage and adoption, chart above), the scaling debate that engulfed the Bitcoin community last year seems to be all but forgotten. But let’s not forget that even though it’s not front tweet news, block size increase since adoption is doing it’s job and showing us that SegWit is having success.

Bitcoin and Bitcoin Cash Github Activity

Everyone talks about teams. Developers and “activity”. It’s a KPI many like to bandy about as a show of their blockchains community, strength and innovation. It’s also metric we use to measure how commited developers are to the vision of a project. There is no comparison below. The numbers speak for themselves.

Bitcoin and Bitcoin Cash Autonomous System Numbers (ASN)

How decentralized is BCH? Many of the twitter disputes revolve around whether Jihan Wu (Bitmain owner) controls BCH through hashing power. The same can be said about Bitcoin (most miners are in China). But below we see that 80% of the BCH network are concentrated on 12 ASN #s (networks). That’s pretty centralized. AS numbers are important because the ASN uniquely identifies each network on the Internet.

https://twitter.com/realLudvigArt/status/1016959665937080320

What is Satoshi’s Vision?

People who aren’t that into crypto might not understand just how… biblical the whole thing can be.

On the surface, there are the interesting debates about the potential use cases, the stories of insane gains and heartbreaking losses ($85 million spent on two pizzas – never forget). There are plenty of interesting figures in the space to provide us with juicy drama as different camps choose their heroes and villains, but the most influential figure of all is most notable by their absence.

Satoshi Nakomoto.

Like an absent God watching from afar, Nakomoto gave cryptocurrency and blockchain the gift of life and then promptly bailed out with their billions of dollars worth of Bitcoin as far as anyone can tell, leaving the community to bicker over how the Great One would have wanted it to be. You have different factions squabbling over their differences in belief, each claiming that Nakomoto is on their side, but it’s difficult to say what he, she, or they would really have wanted.

I’ve written on the mystery of Nakomoto’s identity in a previous article, and in it I voiced the opinion that their absence isn’t selfishness or cowardice, but a conscious decision to create a leaderless movement that thinks for itself with no figurehead for governments to try to take down, weakening the currency in the process.

With no God at the helm, the Bitcoin project has its own free will, and the civil war between BTC and BCH rages without any divine intervention. Whether mining pools control the hash rate or not, Bitcoin is certainly decentralized in one way – nobody’s in charge. The creator won’t weigh in on what the right direction to take is, and because they’re in the ether, they can never be framed or arrested or targeted in a way that would harm Bitcoin. That strikes me as a great idea, but it begs the question – what did Satoshi Nakomoto want for Bitcoin, and if they’re not here any more, does that even matter?

Scalability: Bigger Blocks or Second Layers

There are a lot of issues in Bitcoin, and at the forefront is the issue of how to scale the network to allow for greater volume of transactions as the userbase increases and Bitcoin smashes the establishment and creates a utopian new world order where everyone is free to live in an anarchistic nirvana of their own choosing becomes more widely used as a currency or store of value. Ahem.

This was of course the main reason for the hard fork that split the currency into BTC and BCH, with the former advocating for second layer protocols like Segwit and the Lightning Network and the latter opting for bigger block sizes with no second layer on top of the Bitcoin blockchain.

The arguments for either are as numerous as they are bitterly proclaimed from the battleground of crypto forums and social media platforms everywhere, with BTC supporters insisting that bigger block sizes will lead to further centralization and the BCH side claiming that their version of Bitcoin is the true Bitcoin outlined in Nakomoto’s scripture white paper.

Interestingly, much like any old timey religion worth its salt, there are a number of gospels to choose from. Nakomoto didn’t just drop off the face of the earth after launching Bitcoin, and there are forum comments from 2009 and 2010 that most people agree are written by the enigmatic figure on the subject of Bitcoin.

Dan Larimer Meets The Maker

Dan Larimer is best known for his creation of Steem and the invention of the Delegated Proof of Stake system of verifying blockchain transactions, which is used by cryptocurrencies like EOS and Lisk. Many in the blockchain community see him as a central figure and a community leader, and in 2010 he went toe to toe with none other than Satoshi Nakomoto over the scalability of Bitcoin in a bitcointalk.org thread.

A user named Red sparked it all off with this question:

I’m curious about the developers feelings on scalability. For example, could the system handle a million users, doing say 5 transactions each per day. 5 million transactions per day is roughly 35,000 transactions per 10 minute period? Is there a bottle neck in propagating 35,000 transactions to a million nodes for block generation? Or has that issue been designed for?

Under the name “bytemaster”, Larimer weighed in first:

I am convinced that bandwidth, disk space, and computation time necessary to distribute and “finalize” a transaction will be prohibitively expensive for micro-payments. Consider for a second that the current banking industry is unable to provide a reasonable micropayment solution that does not involve depositing a reasonable sum and only allowing a withdraw after a reasonable sum has been accumulated.

Besides, 10 minutes is too long to verify that payment is good. It needs to be as fast as swiping a credit card is today.

Satoshi followed shortly afterwards with the following rather snarky response:

The current system where every user is a network node is not the intended configuration for large scale. That would be like every Usenet user runs their own NNTP server. The design supports letting users just be users. The more burden it is to run a node, the fewer nodes there will be. Those few nodes will be big server farms. The rest will be client nodes that only do transactions and don’t generate.

Quote from: bytemaster:
“Besides, 10 minutes is too long to verify that payment is good. It needs to be as fast as swiping a credit card is today.”

See the snack machine thread, I outline how a payment processor could verify payments well enough, actually really well (much lower fraud rate than credit cards), in something like 10 seconds or less. If you don’t believe me or don’t get it, I don’t have time to try to convince you, sorry.

Larimer responded that he had already read the snack machine thread in which Nakomoto explains how Bitcoin avoids double spending, and said that he had had come to the same conclusion as Nakomoto.

So what’s the vision already?

Here’s the thing. An argument could be made that Nakomoto’s vision doesn’t really match either camp, and wouldn’t really have ever worked in the first place. Far be it from me to question the infallible creator of the crypto that started it all, but Nakomoto’s vision, apart from being vehemently claimed by both BTC and BCH supporters, also included something that neither camp bargained on – direct leadership.

It may sound strange in the current climate where Nakomoto is a legendary figure to endlessly bicker over, but at one point they seemed to intend to stick around and lay down the law.

It can be phased in, like:

if (blocknumber > 115000)
maxblocksize = largerlimit

It can start being in versions way ahead, so by the time it reaches that block number and goes into effect, the older versions that don’t have it are already obsolete.

When we’re near the cutoff block number, I can put an alert to old versions to make sure they know they have to upgrade.

In that particular thread, Satoshi essentially said that they’d be the one to decide how things were going to be by “putting out an alert” to the miners to instruct them to change consensus. Yes, in this case they’re suggesting a block size increase, but they’re also suggesting what is essentially direct centralized leadership.

So why the change of heart? Nakomoto never really issued a goodbye, but simply dropped off the radar one day in 2010. Maybe the government got to them, maybe they had a change of heart over direct leadership, maybe they went into hiding – maybe they died. Who knows.

What we do know is that Nakomoto got the ball rolling and gifted the world with an incredible technology that has the potential to change everything. That’s their contribution. Had they stuck around, they may have found that the reality of one figure telling the community what to do would never have worked, and maybe that’s why they disappeared. Vitalik Buterin nearly got skinned alive on social media over the mere suggestion that there was some kind of secret meeting to establish a “plutocratic government” to call the shots with Ethereum consensus.

It just wouldn’t happen. A major feature of Bitcoin is that nobody’s in charge, but Satoshi’s famous vision may have evolved as time went on. Can’t think of everything, right?

Hands down the best thread I’ve read on this is this one where users discuss what Satoshi’s vision was only to be bombarded with people saying it didn’t matter, and that Bitcoin had exploded beyond the vision of one person to a decentralized community around the world. People are arguing that Nakomoto would likely have welcomed the fork to explore both options, that they left the scene to promote community decision making, and that the community are the ones who should decide, not the creator – personally, I agree with all of those points, but the important thing is what you believe.

Bitcoin is seen by many as a self-empowering tool. Money 2.0, blockchain technology enabling peer-to-peer payments and much, much, more, and above all, taking the power from authority figures and putting it in the hands of the public.

So don’t take my word for it – take a look at the thread, take a look at the information that’s out there, and decide for yourself – what is Satoshi’s Vision, yes, but even more importantly – do we need it, now that Satoshi gave us the power to decide on a vision of our own?

Interested in other cool crypto posts….check out Mining Wars: Bitmain vs Dragonmint and The Price of Bitcoin vs Cost of Mining.

Follow us on twitter @cryptoiscomin

The most controversial figure in Bitcoin – Jihan Wu

Who is Jihan Wu?

You may know Wu as the founder of Bitmain, or as the person who translated Bitcoin inventor Satoshi Nakomoto’s white paper into Chinese, or as “that guy with the weird, offensive tweets on social media”. You may not even know him at all, but for better or worse, he’s a key figure of influence in the cryptosphere.

After becoming enamoured with Bitcoin and blockchain technology (as have we all), Wu pitched the idea of using ASIC chips for Bitcoin mining. ASIC = Application Specific Integrated Circuit, chips for a specific as opposed to a general purpose. This completely revolutionized crypto mining as miners moved away from CPUs and GPUs made for gaming, editing, and broader applications and began to use custom-made chips specifically designed for mining crypto.

Wu founded Bitmain, the company behind a lot of the Bitcoin mining hardware used by professional mining pools today, and owns brands like Antminer, Hashnest, and Antpool, one of the largest Bitcoin mining pools. Antpool mines over 16% of all Bitcoin blocks, allowing it to wield a huge amount of influence in term of community consensus and decision making.

Wu reached further fame and some notoriety as well by supporting a number of controversial projects. He’s closely connected to Bitcoin Cash and a vocal advocate of Bitcoin Unlimited, a potential solution to Bitcoin’s scalability problem.

What problem? Bitcoin blocks are limited to 1MB of data each. As more and more miners enter the game, that data restriction leads to network congestion and slows things down. Mining a block only yields 1MB of Bitcoin, which (as all digital currencies) is essentially made of data.

Yeah… about data and stuff…

Not everyone in the space understands the basics, and that’s OK! We’re here to learn, and everybody starts somewhere. So, super quick data breakdown for the uninitiated: Digital information is binary, meaning it’s measured in ones and zeroes. Think of them as little lights that can either be on or off, like LED bulbs on a screen.

Let’s say you have 100 bulbs, and they’re all off, or set to “zero”. If want to convey a message or image (like a smiley face!) you switch on some bulbs, set to “one”. The bulbs being either on or off make a pattern, and that pattern is information. The smallest piece of binary information is a bit – Bitcoin! 8 bits is one byte, and 1 megabyte is 1 million bytes, or 8 million bits, 8 million ones and zeros.


OK, OK!

Well, OK then. So there are two options for scalability (allowing Bitcoin network to scale up in terms of size and input/output, accommodating for the increased amount of users).

Segwit

Option 1: SegWit, or Segregated Witnessing. This has been in the news a lot lately recently and seems to be achieving widespread adoption – 30% of the network is using it, major exchanges are adopting it, and transaction fees are dropping as a result. With SegWit, data is compressed and the block size is increased to about 1.8 MB, allowing the network run more smoothly. Blocks of this size are needed for Lightning Network compatibility – if you haven’t heard of the Lightning Network, it’s a system that will operate on top of the Bitcoin network and allow most of the network processes take place in a “side chain”.

Imagine a queue of people lining up to fill out a form in order to buy something. The Lightning Network essentially proposes two queues – one for filling out the form, and one for making the transaction. Most processes will be handled outside of the Bitcoin blockchain (in the Lightning Network), and only the actual transaction itself will be on chain, which decongests the network.

A major benefit of SegWit for many people is that it’s backwards compatible – that means using SegWit doesn’t require splitting Bitcoin into another currency, like Bitcoin Cash. This is appealing for a number of reasons, a major one simply being brand awareness.

One of the reasons Bitcoin is more valuable than Bitcoin Cash is simply because it’s Bitcoin, the first major cryptocurrency. People recognise the name, and other coins can sound “off brand” in comparison. SegWit allows the network to update without becoming something else and forcing people to pick between the new system and the old.

Bitcoin Unlimited

Then we have the second option, Bitcoin Unlimited. This project aims to remove the 1MB limit and allow miners to opt for bigger blocks if they want to, which should enable smoother transaction processes and decongest the network significantly. Sounds good, right?

Here’s the catch. There’s a good chance that Bitcoin Unlimited could cause a hard fork in the currency (again), splitting off to create its own new coin. This divides the community and is generally perceived as something to be avoided if possible. People against BU also believe that miners being allowed to choose bigger blocks over smaller ones will squeeze out the smaller independent miners with fewer resources at their disposal to tackle larger blocks, much like big business coming to town and shutting down all the family-owned corner stores.

This would probably put even more power into the hands of mining pools and result in even more centralization of what was supposed to be a centralized currency, something that a lot of people already feel has gone way too far with Bitcoin.
Now, why would the man who controls a huge mining pool and the biggest crypto-ASIC manufacturing operation in the world want something like that?

Back to Jihan Wu

Why do I say things have gone too far? Well, Satoshi’s vision was one of a decentralized currency that empowered ordinary people to control their own finances, taking power away from banking conglomerates, world governments, and hedge funds. It never mentioned mining pools one way or another, but while it’s human nature to capitalize on opportunities, the concept certainly doesn’t sit well with the original plan.

Wu has attracted attention for his willingness to manipulate community consensus on the scaling problem through his hugely influential mining pool. He was even accused of trying to take down Bitcoin in an infamous (alleged) attack during which huge amounts of Bitcoin Cash mining resources were suddenly diverted to Bitcoin all at once, clogging up the network. Wu denied involvement, saying he had no desire to hurt Bitcoin Core (the current protocol). Of course, in the days preceding the Bitcoin Cash fork, which Wu did his utmost to help bring about, he’s also quoted as referring to Bitcoin Core as a “trap”, saying “don’t give core too much money”.

It’s not difficult to imagine why someone controlling the pools and the mining hardware would want something like Bitcoin Unlimited to come about, and it’s difficult to get behind something with such a seemingly nefarious agenda attached to it. Having said that, SegWit and Bitcoin Unlimited are more or less neck and neck when it comes to community consensus, which is how the decision will eventually be made, meaning that it could still go either way.

Wu’s controversy doesn’t end there. He’s been accused of and implicated in a number of other Bitcoin conspiracies, and whether there’s any truth to them or not, it’s made him something of a blockchain supervillain in the eyes of many.

Wu is clearly aware of his public perception however, and handles things smoothly when confronted.

https://twitter.com/JihanWu/status/731902686379933697

Well. Relatively smoothly.

Bitcoin’s Scaling Debate: A Beginner’s Guide

This article will attempt to provide a non-technical, beginner friendly, and mostly drama-free explanation of Bitcoin’s scalability debate (and why should care about it), the solutions that have been proposed, and the current state of the debate.

If you are new to Bitcoin or Cryptocurrencies in general, you might have heard terms such as “scaling debate”, “segwit”, “Block size”, “on chain” and “off chain” thrown around. If you have asked someone to explain such terms, either in person or online, you may have been presented with impassionate speeches arguing for one side or the other, conspiracy theories, menacing glares or outright censorship.

(Block) Size Matters

Blocks are the literal building Blocks of the Blockchain, the technology underpinning Bitcoin and all other cryptocurrencies out there. As the name suggests, the Blockchain is a sequence of Blocks, each of which contains a finite number of digital transactions.

Blocks could have theoretically been any size; however, they were first set to a maximum size of 1MB to avoid spam and abuse of the Blockchain. How could the Blockchain be abused? I’ll give you two examples:

Bitcoin users can append data to each transaction they send, which is stored along with all transactions in the Blockchain. A user could thus send an infinite number of transactions between two of his or her own wallets and use each transaction to store a small amount of data, thus being able to use the Blockchain as free and secure cloud storage.

The second reason to implement a limit was to avoid being hit by DoS (Denial-of-Service) attacks. Much like in the first example, this consists of a user (or group of users) sending hundreds of thousands of transactions with the intention of creating a glut in the Network. If you have ever tried to access a website that is being hit by a DoS attack, you know that these are generally impossible to reach. Likewise, if the Bitcoin network were to be hit by DoS attacks, it would become unusable.

Therefore the 1MB limit for each Block was created. Since each Block could only hold a finite number of transactions, and users pay miners a small fee to mine a Block, the 1MB limit ensured that only worthwhile transactions were carried on the Blockchain. Bitcoin was able to chug along happily with 1MB Blocks until…

Bitcoin’s Scaling Problem

While Bitcoin was only being used by enthusiasts it never faced any problems with the cap on Block size. Blocks were rarely filled to above 70% of their 1MB capacity before being processed by the nodes on the Bitcoin network.

However, as Bitcoin adoption grew and everyone and their grandma wanted to get on the Crypto-action, the number of transactions increased exponentially. Suddenly, Blocks were filled to the brim and the Network started having trouble keeping up with the number of Blocks being generated. Users were forced to offer higher and higher fees to Miners to process their transactions first, or at least in a timely manner. Even with heftier fees, Bitcoin transactions were taking longer than ever to be confirmed and added to the Blockchain. At 1MB per Block, it is estimated that the Bitcoin network is able to process up anywhere from 3.3 to 7 transactions per second.

To put things in perspective, Visa claimed back in 2010 to be able to process up to 24,000 transactions per second.

The Bitcoin community started coming up with solutions that would allow Bitcoin to scale and function as a currency, and very early on the community split around two proposed solutions:

  1. A Block Size increase
  2. SegWit and second layer (or off-chain) solutions

Both of these solutions have their own merits so naturally a horrible debate broke out among the community, including name-calling, conspiracy accusations, death treats and more! For objectivity’s sake, we will gloss over this part of the story and just look at the solutions themselves.

Before we get in to the discussion of both solutions, it is important to note that both of these solutions are currently co-existing in the form of Bitcoin Cash and Bitcoin Core. If you owned any Bitcoin before August 2017, you are the proud owner of both Bitcoin Cash and Bitcoin Core. If you are looking into purchasing Bitcoin, you are now faced with a choice of which Cryptocurrency to buy, which will be guided by which solution you consider to be the better choice for Bitcoin long term.

Solution #1: Increasing the Block Size

One of the greatest merits of the Block Size increase solution is its simplicity. It’s both simple to understand but also simple to implement. After a relatively painless change to Bitcoin’s source code, the Bitcoin Cash network can now handle larger Blocks. Proposals revolve around a new 8MB limit, instantly increasing the network’s speed eight-fold, however as we mentioned before there are no hard rules around what a Block Size should be.

However, some have worried that increasing the Block size will eventually crowd out smaller miners and nodes. As the size of the Blocks increases, the computing power required to verify each one and the storage capacity required to store the Blockchain increases linearly.

Thus, very large Block sizes would crowd out all but the more affluent of miners, as they would be the only ones able to process them. The problem would be even more severe for Nodes, whose job is to store the Blockchain and are not financially incentivized to do so. This would lead to a centralization of hash power, which is anathema to most Bitcoin users, and a lack of nodes, imperiling the entire system.

Although this doom case scenario sounds terrible, it doesn’t appear that a Block size of 8MB is anywhere near as big to trigger such an event. What the maximum Block Size of Bitcoin Cash should be remains in question.

Another problem with increasing the Block Size was that it implied changing Bitcoin’s source code. Nodes and Miners would have to upgrade a newer version of the software, which would be incompatible with older versions still using 1MB Block Size. This is what is known as a hard-fork, as parties who decided not to upgrade the software would be unable to transact with those who did upgrade.

Solution #2: SegWit and Off-Layer Solutions

SegWit (which is short for Segregated Witness and is in no way related to the gyroscopic scooters used by mall cops everywhere) proposed handling the Scaling debacle in another way. Instead of requiring a mandatory software upgrade (and causing a hard fork), SegWit proposed separating the Witness Data files from the Blocks and making these visible only to parties running SegWit software. Non SegWit-ready software would still be able to see the transaction data within the Block, thus maintaining backwards compatibility, and SegWit-ready software would recognize the Witness data within the Block.

As a result, SegWit achieves a virtual increase in the capacity of the Blocks (of up to 4x) without mandating a software upgrade. This pleased everyone who was weary of any changes to the Bitcoin Software source code, while at the same time increasing transaction speed.

SegWit was activated on the Bitcoin (also known as Bitcoin Core, to differentiate from Bitcoin Cash) on August 24, 2017.
However, as this change by itself only increased transaction speed by 1.7-2x (remember the VISA network is at least 3,400x faster), SegWit also prepared the field for “second-layer” or “off-chain” transactions.

These transactions imply users and businesses committing their Bitcoin to a third-party clearinghouse which, as the name suggests, clears all the transactions between its intermediated parties by itself (thus they are off-chain transactions, referring to the Blockchain), decreasing the number of transactions (and thus fees paid to miners) processed and verified through the Block-Chain.

The most well-known second layer is the Lightning Network, currently being developed by a company called Blockstream.

The benefits of second layer transactions are well-defined, but so are the risks. For starters, although users would avoid paying fees to miners, they would find themselves paying fees to the clearinghouses or Second-Layers providers, and one can only speculate on which solution would be cheaper in the long run.

A much more serious problem is Counterparty Risk, which is the risk of one of these clearinghouses defaulting on their obligations to their users. Although these kinds of risks are routinely hedged by Insurers, the 2008-2009 financial collapse has shown that even the insurers themselves will fail, leaving everyone swimming naked in a low tide.

Which Side Should You Pick?

Let’s do a quick recap of how both Scaling solutions have thus been implemented:

  1. Bitcoin Cash implemented an increase in the Block size from 1MB to 8MB, and hopes to scale with further Block Size increases.
  2. Bitcoin (also known as Bitcoin Core) implemented SegWit and hopes to scale with Second-Layer or Off-Chain solutions.

If it isn’t obvious, two different groups stand to win if either solution is the dominant one, which explains all the vitriol surrounding the debate. Let’s spell it out:

  1. Block Size increases benefit miners by ensuring that all transactions (and thus fees) are processed (by them) on the Blockchain).
  2. Second-Layer solutions benefit the developers of these Off-Chain platforms, as they will be the ones processing (and thus receiving fees) for most of the transactions.

By now you may be wondering which side of the debate to pick. The answer is:

Don’t.

Smart investors don’t pick sides. They pick winners, sell losers, and hedge their bets.

If you think either Bitcoin or Bitcoin Cash will be the dominant Cryptocurrency in the future, your investments should reflect that. If you think both can co-exist in the future (and the number of Cryptos out there are an indication that they probably can and will, perhaps serving different purposes), then you should hedge your bets and invest in both.

Don’t let the vitriol, name-calling, conspiracy theories or a sense of belonging to a “tribe” influence your investment decisions. Be smart, weigh the pros and cons, and make a rational decision.

If you need help investing in Bitcoin or Bitcoin Cash, be sure to check our guide here.

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