On August 1st 2017, the Bitcoin blockchain split into two separate chains creating a new altcoin called Bitcoin Cash. This two-part blog will first cover the build up to the split and in a follow-up post look at the fallout of this split.

Interestingly, hard forking and splits in cryptoworld are not uncommon, however it is the first time the leading cryptocurrency bitcoin has split. The closest parallel is probably the hard fork in Ethereum that led to Ethereum (ETH) and Ethereum Classic (ETC). However, the reasons behind the two hard forks are very different. With Ethereum, an ICO called the DAO got hacked and the network was hard-forked to refund investors. Bitcoin’s split was a result of years of tension regarding the ‘great scaling debate’.

Public blockchains are notoriously difficult to scale because decentralised ledgers require that everyone on the network must agree on the current state of this ledger – i.e. find consensus. Updating all nodes is a resource intensive process and thus limits the throughput of currencies such as Bitcoin. As the popularity of Bitcoin has grown, so has the incidents of backlogs and slow processing. The great scaling debate has raged for the past three years with various groups – all with different vested interests – giving their say on how Bitcoin should scale. However, the very point of decentralised governance structures is that no one party can exert control. This can make decentralised governance models such as bitcoins slow to change.

The two opposing approaches consisted of the ‘big blockers’ who wanted to increase Bitcoin’s blocksize from 1MB and the group that wanted to implement a soft fork upgrade called Segregated Witness (SegWit) that moves some of the data outside the network to increase capacity.

SegWit allows more transactions to fit inside 1MB blocks and it provides the infrastructure for other upgrades such as the lightning network and Rootstock (off-chain scaling and smart contract functionality). The ‘big blockers’ were primarily led by the large mining groups whereas SegWit proponents included the entire Bitcoin core development team, many exchanges and Bitcoin businesses.

The pros and cons of both scaling solutions can and have been debated extensively. As the community faced up to the possibility of an indefinite stalemate the ‘New York Agreement’ was signed in May 2017, otherwise known as ‘SegWit2x’. It was a compromise to introduce SegWit as well as increase block size to 2MB. SegWit2x is a scaling agreement signed by many important companies, mining groups and investors. Prior to the upgrade activating a mining pool called ‘Via BTC’ announced their User Activated Hard Fork (UAHF). They said they would create their own split of Bitcoin called Bitcoin Cash on August 1st and introduce 8MB blocks and a few other adaptions to the Bitcoin protocol. On August 1st around 15% of total Bitcoin hash power switched to the new chain and over 16 million Bitcoin Cash tokens were created.

Bitcoin Cash has gained some acceptance and after a very volatile opening few days the price has settled around $600. Holders of bitcoins were allocated an equal amount of Bitcoin Cash giving the Bitcoin Cash a market cap of $10 Billion only three weeks after its inception.

In the next blog post we will discuss what this split means and how the community has reacted.

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