We just got a super smart and simple explanation what a bitcoin fork actually is
Bitcoin split in two in August when the digital currency officially forked creating Bitcoin Cash. Bitcoin gold was created when bitcoin forked again in October. And now the SegWit2x fork is looming. Meanwhile, bitcoin continues to hit new record highs.
We asked Nolan Bauerle, the director of research at CoinDesk, to come in to help explain what exactly happens when a cryptocurrency splits and whether it undermines the strength of the coin. Following is a transcript of the video.
Nolan Bauerle: I am Nolan Bauerle, the director of research at CoinDesk and here's what a bitcoin fork actually is.Sara Silverstein: So you're here to help me understand what exactly a bitcoin fork is.
Bauerle: So to think of these blockchains in a very simple way we can see them as cryptographic keys that move memory. The rules by which the memory is moved are set by the miners themselves. So you've got miners that understand the rules and when you wanna change those rules you need to fork it. All the miners need to agree about the new rules about what is a valid block in the chain.
Bauerle: You got it.
Silverstein: To change the rules.
Bauerle: Well, then you can have a fork where a certain minority believe that the truth and valid blocks are different and that's where you get into this area of forks which we saw this summer where you had a group of miners decide that different rules should apply to a valid transaction. So that persists as a different blockchain.Silverstein: So let's say all the chains have the same history and then there's two separate chains that have moved forward and both are valid?
Bauerle: Both are valid according to the miners working those chains. So those miners in Bitcoin Cash from the summer decided that blocks should be much bigger, that every miner should be moving bigger blocks of memory. Bitcoin now moves one megabyte per block.
Silverstein: And Bitcoin Cash?
Bauerle: Did eight megabytes.
Silverstein: Oh, wow.
Bauerle: But that was already baked into the original paper when bitcoin was first announced by Satoshi Nakamoto and he had a road plan for how to go up to those higher blocks.
Silverstein: Was part of the road plan just to split off?
Bauerle: No, there would be chaos and the debate around it is a feature of the technology, not a bug. It was never shy that there would be debate about when this should happen because there is no one in control of this. There are groups of people and individuals that all have their own vision about how this should work.So the point was that there would be no one on top of this, a top-down structure that would lead the chain towards whatever upgrades or changes that would be there. There would be from a fulsome debate and that people would have disagreement and that's okay. So there was never a desire to not have debate about this it's okay that it's rigorous and fulsome and that everyone's point gets through.
Silverstein: So then if there's two sides to the debate who gets to be the bitcoin and who has to be the Bitcoin Cash or gold or 2.0?
Bauerle: That's really where a lot of the emotions have come in. You can think of it a bit as when you go to a diner and you ask for a Coke and they say, I'm sorry, it's a Pepsi. Right, they're fighting over having that name. In the end there are rules that will help determine so the most difficulty accumulated, the longest chain.
Silverstein: So help me understand, if I have a bitcoin and a fork happens, what happens to me?
Bauerle: You get both, you get both.
Silverstein: I get both? It depends how you're holding it, right?
Bauerle: Yes it does, yes, correct.
Silverstein: If I'm actually holding it and I have a key and all that then I get both.
Bauerle: There are some exchanges who were uncomfortable with the development work behind Bitcoin Gold, a fork that's in the process of happening, and they said they weren't sure they haven't seen the codes so they're not even recognizing that one. In that case if your keys were stored on an exchange that doesn't recognize Bitcoin Gold, a third fork that we haven't talked about.Silverstein: Yeah.
Bauerle: Then you're out of luck you have to have those on your own wallet.
Silverstein: So what are they gonna do with them because they're gonna get them, right?
Bauerle: True and there is quite a bit of debate about that and that happened with Bitcoin Cash over the summer so that just becomes an issue of customer service and how much customers are fighting for what they believe to be their own property and we saw that and a lot of lessons were learned over the summer because this is new and there was nothing on the part of the people who didn't offer that for Bitcoin Cash over the summer. But they learned, a lot of these people have learned lessons and said we have to do better and provide better customer service because they certainly heard it and got feedback saying that this was not given to them and they were not happy.
Silverstein: Yeah, I got one of those emails.
Bauerle: Yeah, you got it.
Silverstein: If a bitcoin splits and you have a bitcoin and a bitcoin fork lets say - because I don't wanna use a specific one as an example - and my bitcoin was worth $5,000 at the time, does the price of my bitcoin now lessen in some of that value, does it split in half? Are they both worth $2,500, what happens?
Bauerle: Well one of the beautiful parts around bitcoin is that it is all from price discovery. From the very beginning it's been about price discovery, what someone is willing to spend to buy a bitcoin what someone is willing to take to sell a bitcoin. So in that case when it happened with bitcoin over the summer, bitcoin went along without barely noticing that Bitcoin Cash was created. Others received Bitcoin Cash and markets were created around that price and there was price discovery globally, immediately, and it settled on a number.
Bitcoin Gold is doing that right now where the value was a little higher last week and it's kind of fallen in the past few days so it's not worth quite as much. And like I said with the Bitfinex market we have a bit of an idea of what they're trending at currently before they're even issued. Before the forks even happen, that could change, that could change.
So every day the honey badger survives, every day that bitcoin survives, it fulfills more and more of this quality of being a store of value.Silverstein: And what does all this mean for bitcoin? It seems to be like the premiere cryptocurrency right now that a lot of other things are built on. Does it matter, is this a threat, all these forks a threat to bitcoin?
Bauerle: It's in some ways probably a good thing. Think of store of value and that usefulness of bitcoin that it behaves like digital gold or as a store of value. Gold itself to become what it is now to be in all these bank vaults around the world survived the end of the gold standard. It survived the end of coins, gold being used as coins. It survived the rise of paper money, so it fended off all of these other challengers - let's say - and is what it is today.
So every day the honey badger survives, every day that bitcoin survives, it fulfills more and more of this quality of being a store of value.
Silverstein: So every time it doesn't get killed it's made stronger. It always picks the longer, the better, the stronger chain with more people?So I don't think that's gonna go away I think it strengthens bitcoin. We have this idea of anti-fragility, so the more it survives the more reputable it becomes and I think we're seeing that.
Bauerle: You got it, you got it.
Silverstein: Great, thank you so much Nolan.Bauerle: My pleasure.
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