The Many Flavours of Bitcoin
Bitcoin was the first truly unique digital asset built using blockchain technology. But a glance at the top 10 digital assets by market capitalization shows that there are three different assets using the Bitcoin brand; Bitcoin (BTC), Bitcoin Cash (BCH) and Bitcoin SV (BSV). In fact, there are 10 different traded assets that refer to themselves as a version of Bitcoin according to Coinmarketcap, the leading website that tracks digital asset prices. This month we are going to dive into how different versions of Bitcoin came into being, what differs between these Bitcoin derivations and how we can expect Bitcoin to evolve in the future.
To understand why different versions (or forks) of Bitcoin exist, it first helps to understand the basic architecture of Bitcoin at its inception. Back in 2009, the Bitcoin network formed blocks of transactions every ten minutes. These blocks could store a limited amount of data, just 1MB, meaning that there could only be a limited number of transactions inside each block. The size of Bitcoin blocks coupled with the 10 minute block generation time period resulted in a maximum throughput of around 7 transactions per second. This was how Bitcoin was originally designed and is more or less how Bitcoin (BTC) still functions today.
By 2017 it had become clear that Bitcoin needed to achieve greater scalability and move beyond 7 transactions per second. At this point, there was divided opinion in the community as to how to do this. Some people thought that the Bitcoin block size should be increased, enabling more transactions to be recorded in each block. Others believed that this would lead to greater mining centralization as bigger blocks would require more expensive mining rigs to processes. The critics of bigger blocks believed that a better and more decentralized solution would be to keep Bitcoin’s block size constant, while deploying a layer 2 scaling solution called the Lightning Network.
The result of this heated debate was that the community could not agree on a way forward. Therefore, in August 2017 a fork of Bitcoin occurred that created Bitcoin Cash (BCH). Bitcoin Cash (BCH) and Bitcoin (BTC) share the same history of transactions up until the fork took place; at this point in time the Bitcoin network effectively split into 2 separate networks. Bitcoin Cash allows for blocks to increase in size over time, including more transactions per block. As of today, blocks in Bitcoin Cash are 8MB in size, allowing for about 8x more transactions “on chain” per block than in Bitcoin (BTC). In the meantime, the Lightening Network has been rolled out, allowing Bitcoin (BTC) to scale “off-chain” using payment channels.
For a couple of years, Bitcoin Cash was the only major derivative of Bitcoin that held significant value. The two projects remained critical of each other, with Bitcoin Cash claiming that the purpose of Bitcoin is to be used as money which is what Bitcoin Cash is optimised for. On the other hand, many in the Bitcoin (BTC) community perceive Bitcoin as a digital version gold as opposed to digital cash. These people value on-chain decentralization over speed of transactions, and hence believe Bitcoin Cash to be a weaker and less valuable form of digital asset due to its reliance on more centralized miners.
In 2018, a schism appeared in the Bitcoin Cash community. Some of the core developers put forward a software upgrade that would change the way that the blockchain stored information, opening up the possibility for developers to create smart contracts on top of Bitcoin Cash. There was mixed feedback to this suggestion. Roger Ver and Bitcoin.com (powerful forces in the Bitcoin Cash ecosystem) supported the change, while nChain and its founder Craig Wright (the self-proclaimed inventor of Bitcoin) were opposed to it. In response, nChain wrote its own software upgrade proposal which it called Bitcoin SV, which stands for “Satoshi’s Vision”. As a result of this disagreement, on November 15th 2018 Bitcoin Cash forked to created Bitcoin SV (BSV) alongside the already existing Bitcoin Cash (BCH).
From a valuation perspective, the market has remained steadfast in valuing Bitcoin (BTC) far above any of its derivatives. This signifies two things. Firstly, that the market values the decentralized architecture that the original version of Bitcoin achieved. Secondly, that the brand “Bitcoin (BTC)” is stronger than any derivation. The majority of investors, traders and speculators are unlikely to be aware of the nuances that differentiate the versions of Bitcoin. The asset that keeps control of the ticker BTC is likely to remain the most valuable.
The Bitcoin whitepaper describes the network as a “system for electronic transactions without relying on trust.” From a technical perspective, Bitcoin and its main derivatives have spent recent years focused on exactly this; improving transaction speeds for peer-to-peer payments. Going forward, these Bitcoin platforms all have plans to offer more than just peer-to-peer payments. The engineering teams envisage that transactions could be more complex and could incorporate conditional logic. This would morph Bitcoin and its derivatives into smart contract platforms, with similar capabilities to Ethereum.
Bitcoin (BTC) already has a smart contracting language built into it, called Script. Script is intentionally not Turing-complete, with bitcoin programs unable to run loops. The language is difficult to understand and write, with usage limitations. In August 2019, Pieter Wuille, a prominent Bitcoin programmer, announced the release of the ‘Miniscript’ language which aims to make it easier for programmers to write smart contracts or conditions for spending bitcoins. Another approach is to create a Bitcoin sidechain that allows for smart contracts and Turing-completeness. A South American company called IOVlabs has been working on such a solution. Their project, Rootstock, attaches a deterministic virtual machine (based on the Ethereum Virtual Machine) to the Bitcoin network through a two-way pegged sidechain. Rootstock is looking to provide the same functionality as Ethereum, but with the underlying security of the Bitcoin blockchain.
Bitcoin Cash has been working on expanding its functionality and now has two ways to implement smart contracts. The most widely discussed is CashScript, which is a high level language that complies down into bytecode that is added to blocks as a transaction. This is similar to how Solidity works on Ethereum. The second implementation on Bitcoin Cash is called Wormhole, that is based on the Omni Layer protocol. Wormhole makes it easy to issue tokens and create NFT’s, similar to the ERC-721 and ERC-777 standards on Ethereum. Bitcoin SV has also been working to add smart contracts to its platform, with the recent “Genesis” upgrade paving the way for this.
It remains to be seen how successful Bitcoin and its derivatives will be in competing with Ethereum in the smart contract space. There are many narratives about Bitcoin that have evolved over time, from being a niche experiment in cryptography, to a tool for criminals, to censorship-resistant digital gold. More recently, Bitcoin has been regarded as an uncorrelated financial asset that can help diversify an investment portfolio. With improved scalability and new capabilities, we can envisage Bitcoin being positioned in the future as a day-to-day payment currency, as an emerging digital version of gold or as the value layer of a smart contract ecosystem.
CMCC’s thesis is focused on value accruing to the core technical and social infrastructure of a new Internet of Value. We believe that Bitcoin will remain valuable both as an uncorrelated financial asset as well as an asset that will be used in smart contracts. Our view is that the original Bitcoin (BTC) will remain dominant over its derivatives, due to both brand recognition and developer mindshare. As such, we hold BTC in our funds and also offer the Liberty Bitcoin Fund as a way for our LPs to easily gain direct exposure to Bitcoin with all underlying Bitcoin fully covered by insurance.
