Bitcoin Forks

Episode XXII. Block Height: 859500. Essential for growth and democracy within the Bitcoin Network, yet a dangerous task: Bitcoin Forks explained.

Sep 03, 2024

In the digital dawn where Bitcoin reigns, shadows of forks emerge, claiming new domains. They whisper of freedom, of better, brighter chains, yet often they mimic, caught in old refrains. Like echoes in a valley, they seek to break away, but end in hollow mimicry, repeating the same play. For in each split, a piece of truth might fake, not genuine divergence, but a mirrored quake. These forks, they promise realms anew, yet find themselves ensnared, in cycles they pursue.

Bitcoin operates on a decentralized digital ledger known as the blockchain. As Bitcoin's popularity grows over time, so is the need to address various challenges and demands for improvement within its underlying technology and consensus mechanisms. These pressures occasionally led to what is termed a "fork" in the Bitcoin blockchain. Simply speaking, a Bitcoin fork occurs when there is a divergence in the blockchain, resulting in two separate chains that share a common history up to a certain point. This divergence is akin to a fork in the road, where the blockchain splits into two potential paths. Forks can be initiated for various reasons, such as implementing new features, correcting bugs, or addressing disagreements within the community regarding the direction of the network’s future.

Bitcoin Nodes

The distributed fork decision center are Bitcoin Nodes, a fundamental components of the Bitcoin network, acting as the backbone that ensures its decentralized and secure nature. A Bitcoin node is a computer that runs the Bitcoin software, which enables it to participate in the network by validating transactions and blocks, relaying information to other nodes, and maintaining a copy of the entire blockchain. The decentralized nature of nodes, where no single entity controls the majority, helps ensure that any significant changes to the protocol require widespread agreement, thus protecting the network from contentious forks that could undermine Bitcoin's value and security.

Soft vs Hard

Bitcoin forks are broadly categorized into two types: soft forks and hard forks. A soft fork is a backward-compatible upgrade to the blockchain, meaning the new rules introduced do not conflict with the old rules. Consequently, nodes that have not upgraded to the new software can still participate in the network. In contrast, a hard fork represents a radical change to the protocol that is not backward-compatible, as a result the blockchain splits in two different cryptocurrencies. Thus, the decision to use a hard fork or a soft fork in the Bitcoin network depends on the nature of the changes needed and the level of community consensus.

Soft Forks

A soft fork is used for backward-compatible upgrades, where the new rules do not conflict with the old ones. This allows nodes that have not upgraded to still participate in the network, ensuring a smoother transition. Soft forks are suitable for security enhancements and bug fixes, as they can improve the network without causing disruption. They are also appropriate for minor feature additions and incremental improvements that do not require a fundamental change to the protocol. Soft forks maintain network cohesion and minimize risks associated with blockchain splits, making them ideal for implementing necessary improvements and optimizations. The most prominent Bitcoin soft forks are:

P2SH (Pay-to-Script-Hash)

Pay-to-Script-Hash (P2SH), activated in April 2012, is a significant Bitcoin soft fork. P2SH allowed transactions to be sent to a script hash rather than directly to a public key hash. This enabled more complex transaction types, such as multi-signature transactions, where multiple signatures are required to authorize a transaction. P2SH made it easier to use and deploy complex Bitcoin scripts, enhancing the flexibility and security of the Bitcoin network.

BIP 34 (Block Version Enforcement)

Bitcoin Improvement Proposal 34, activated in March 2013, introduced block version enforcement. This soft fork required that each new block include its height (the block number) in the coinbase transaction. This change improved the consistency and traceability of the blockchain, making it easier to detect and prevent certain types of chain reorganizations and attacks.

BIP 66 (Strict DER Signatures)

Bitcoin Improvement Proposal 66, activated in July 2015, introduced stricter rules for the encoding of signatures. This soft fork aimed to improve security and interoperability by enforcing the use of DER (Distinguished Encoding Rules) for signatures. The stricter rules helped prevent certain types of attacks and ensured that all signatures on the network adhered to a consistent format, enhancing overall network reliability.

Segregated Witness (SegWit)

Segregated Witness (SegWit), activated in August 2017, is one of the most notable Bitcoin soft forks in recent history. It aimed to address scalability and transaction malleability issues. By separating transaction signatures (witness data) from the transaction data, SegWit effectively increased the block size limit, allowing more transactions to fit into each block. This improvement reduced transaction fees and enabled the development of second-layer solutions like the Lightning Network, which further enhanced Bitcoin's scalability and transaction speed.

Taproot

Activated in November 2021, Taproot is a major upgrade that enhances Bitcoin's scripting capabilities and privacy features. Taproot combines the Schnorr signature scheme with Merkelized Abstract Syntax Trees (MAST) to enable more complex and private transactions. With Taproot, all transactions look the same on the blockchain, whether they are simple payments or involve complex scripts, thereby improving privacy. Additionally, Schnorr signatures are more efficient and secure, reducing transaction sizes and improving overall network performance.

Hard Forks

A hard fork is not backward-compatible, thus nodes and miners must actively upgrade to the new version of the software to participate in the new network, effectively creating and running another cryptocurrency. Just keep in mind, if you do not agree to the hard fork and thus do not upgrade your node you will continue to use the original network. The most prominent hard forks are:

Bitcoin Cash (BCH)

Bitcoin Cash is one of the most well-known and significant Bitcoin forks. It was created in August 2017 in response to growing concerns about Bitcoin's scalability and high transaction fees. The primary change introduced by Bitcoin Cash was an increase in the block size limit from 1 MB to 8 MB (and later to 32 MB), allowing for more transactions to be processed per block. This fork aimed to provide a version of Bitcoin that could handle a higher transaction volume, making it more suitable for everyday transactions and positioning itself as a peer-to-peer electronic cash system.

Bitcoin Gold (BTG)

Bitcoin Gold was created in October 2017 with the aim of decentralizing mining. It introduced a new proof-of-work algorithm called Equihash, which is more resistant to ASIC (Application-Specific Integrated Circuit) mining hardware. By doing this, Bitcoin Gold sought to make mining more accessible to individual miners using general-purpose hardware (GPUs), thus promoting a more decentralized network and reducing the dominance of large mining farms.

Bitcoin SV (BSV)

Bitcoin SV (Satoshi Vision) is another notable fork that emerged from the Bitcoin Cash community in November 2018. This split occurred due to disagreements over technical and philosophical differences within the Bitcoin Cash community. Bitcoin SV increased the block size limit even further, initially to 128 MB and then to 2 GB, with the goal of restoring Bitcoin's original protocol as outlined in Satoshi Nakamoto's whitepaper. Bitcoin SV emphasizes scalability and aims to support large-scale enterprise applications and transactions.

Pros and Cons

Bitcoin forks are essential for the Bitcoin network because they enable innovation and provide a mechanism for resolving disagreements within the community about the future direction of the protocol. By allowing developers to experiment with new features, upgrades, or changes to the consensus rules, forks foster the evolution of blockchain technology, helping to address scalability, security, and usability issues. Additionally, forks serve as a democratic process within the decentralized ecosystem, offering a way for different factions to pursue their vision without disrupting the original network. This ability to fork ensures that Bitcoin can adapt to new challenges and remain resilient, while also preserving the core principles of decentralization and user choice.

However, Bitcoin forks can be dangerous for the network because they create divisions within the community, potentially leading to fragmented development efforts, reduced security, and confusion among users and investors. When a hard fork occurs, it splits the network into separate chains, diluting the hash power (the computational effort securing the network) and making each chain more vulnerable to attacks. This fragmentation can also undermine trust in Bitcoin as a store of value, as the existence of multiple competing versions may cause uncertainty and volatility in the market. Furthermore, forks can lead to "replay attacks," where transactions on one chain are maliciously repeated on another, causing potential loss of funds.

Scaling in Layers

Keeping the Bitcoin main chain simple is crucial for maintaining the network's security, decentralization, and accessibility. The main chain, or the base layer, is where all transactions are verified and stored on the blockchain. A simple and lean base layer allows for more participants to run full nodes, which are essential for verifying transactions and ensuring the network's trustlessness. By avoiding excessive complexity on the main chain, Bitcoin remains resilient against centralization pressures, as it ensures that running a node doesn't require extensive resources, thus allowing individuals and small entities to participate in the network. This simplicity also aids in reducing the likelihood of vulnerabilities and bugs, as a less complex codebase is easier to audit and maintain.

Bitcoin's scalability is achieved through layers built on top of this simple and secure base chain. The most prominent of these is the Lightning Network, a second-layer protocol designed to facilitate faster and cheaper transactions by taking them off the main chain. Lightning enables near-instantaneous payments with minimal fees by allowing users to open payment channels that only require occasional settlement on the Bitcoin blockchain. This layered approach ensures that the Bitcoin network can handle a high volume of transactions without burdening the main chain, which remains focused on security and decentralization. By scaling in layers, Bitcoin can maintain its foundational properties while still being able to accommodate global demand for transactions. This is also the reason why all Bitcoin hard forks failed so far.

Conclusion

Bitcoin forks are a testament to the dynamic and evolving nature of a living and breathing organism. Forks reflect the ongoing debates and experimentation within the Bitcoin community as it strives to create a robust, scalable, and secure digital base layer. Bitcoin soft forks are crucial for the network growth because they allow for backward-compatible upgrades, enabling new features and improvements without disrupting the existing system. Soft forks have facilitated the adoption of enhancements that improve scalability, reduce transaction fees, and increase the network's capacity. These upgrades are implemented in a way that does not require all participants to upgrade simultaneously, ensuring that the network remains cohesive and secure. This ability to evolve through soft forks has allowed Bitcoin to address its limitations while preserving the integrity and continuity of the blockchain, which is vital for maintaining user trust and the stability of the ecosystem.

In contrast, hard forks have often failed to gain widespread adoption because Bitcoin scales primarily through layers, not by altering the base protocol. Hard forks require all participants to upgrade, which can lead to contentious splits and the creation of rival chains, as seen with Bitcoin Cash. These splits dilute the network's security and community, potentially harming the value proposition of Bitcoin as a decentralized currency. Moreover, Bitcoin's layer-1 (the base protocol) is deliberately kept simple and secure, while scalability and functionality are achieved through layer-2 solutions like the Lightning Network. This layered approach preserves the core blockchain's security and decentralization, avoiding the risks associated with hard forks and ensuring that Bitcoin remains resilient as it continues to evolve.

The End

That's it for this episode. I hope you got some valuable information from this one. Don’t forget: There is Bitcoin, and there are Shitcoins. Thanks for reading, and see you in the next one. ₿ critical, ₿ informed, ₿ prepared. Yours,