The turbulent evolution of cryptocurrency took another significant step on October 24, 2017 with the activation of the Bitcoin Gold Fork on block 491,407 of the bitcoin blockchain. This was a hard Bitcoin fork, as opposed to a soft one, meaning it is not backwards compatible. It is, instead, the birth of a third sibling in the bitcoin nursery.
Bitcoin and its community continue to struggle with practical and ideological differences over mining. This birth comes in the middle of a period of intense revision that started with a preliminary bitcoin fork in August, which created a second currency called Bitcoin Cash (BCC), and which concludes in mid-November. The essence of this mitosis has to do with the processing capacity of blocks. The developers of the original Bitcoin (BTC) prefer to segregate the signature data (the witnesses) from each transaction, thus allowing more transactions to occur within the 1MB block. This is called SegWit2x. The teams behind the newer Bitcoin Cash prefer to follow a principle of increasing the mining capacity of each block beyond 1MB
Both iterations seek to address the growing problem of a nascent currency. As more people jump on the bitcoin bandwagon, more transactions are required, and the original parameters of mining each block suddenly become woefully slow, and significantly slower than other more traditional forms of electronic transactions such as credit cards that can process upwards of 50,000 transactions per second. The tedious approval process of blockchain, stretching into tens of minutes, even up to an hour, is impractical for any form of commerce, and represents one of the most profound liabilities of blockchain technology in general and cryptocurrencies like Bitcoin in particular.
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The Bitcoin fork of late October seeks to address a different set of mining problems, namely computing horsepower. It is intended to put the ability to mine back in the hands of the average person, rather than leaving it to organizations whose scale and wealth make them the only players able to compete.
At one time, blockchain mining was possible to perform on an above-average home computer equipped with a graphics card. But as mining became progressively more difficult, a design feature built into the original framework partly to maintain the deflationary nature of bitcoin, miners had to pool resources, sharing the workload and the electric bill. This, too morphed into a parody of itself, to the point now that mining operations look more like factory farms, with thousands of CPUs occupying the racks and cages that “not-free-range” chickens live and die in.
For a currency built on the notion of decentralization, the law of human nature has tipped the scale away from mathematical equality to one in which the country with the optimum inventory of cheap electricity and smart people suddenly becomes “more equal than the others.” That country, which for the foreseeable future is China, now potentially leverages a particular selective power over which blocks or transactions get processed first. Hence the ownerless distributed ledger finds itself at the behest of the hand that feeds it the most electricity.
The birth of Bitcoin Gold after the Bitcoin Fork, is one of ideological purity, and it joins hands in solidarity of sorts with Bitcoin Cash (thou shalt not destroy the purity of blockchain) and Ethereum Classic (thou shalt not destroy the immutability of blockchain, even if a bunch of people got their money stolen). These are the good children who believe in the original rules.
Market forces will dictate which brands will thrive. The original Bitcoin continues to reach record highs despite forks, competitors and bans. It lost a little of its value during Bitcoin Gold’s birth, but continues to lead the cryptocurrency pack with the highest market cap and dollar value of all.
Much will be written over the coming week with regard to the SegWit2x Bitcoin Fork. It, too, will represent a significant step forward in the group activity that is blockchain development.
Market watchers – the naysayers at least – will point to these events as proof of the technology’s collective instability, and its status as a historical bubble. Its proponents will see the same events as the emergence of a new financial technology, slowly perfecting itself as new ideas blend with real-world practical experience.
For the time being, Bitcoin Gold is being held back from public view. Its development team “pre-mined” 100,000 coins, but the software has not yet been released to the public. Consequently, Coinbase has stated it “cannot support Bitcoin Gold because its developers have not made the code available to the public for review. This is a major security risk.” This led to a quick decline in the price of Bitcoin Gold, from an opening price of $479.82, down to $274.44 within a day.
Further complicating matters is the concern as to whether its intentions, to re-democratize the mining effort, will actually be caught up by another production bottleneck: the limited availability of graphic processing units (GPU chips).
As with most developments in the cryptocurrency, the next step for individual investors post the Bitcoin dork is whether to buy or just watch. Cryptocurrency has a long way to go before it becomes stable enough to be boring.