For Bitcoin and cryptocurrency enthusiasts, May 22, 2010, will forever remain in their folklore.
That day, 10,000 Bitcoins were used to purchase 2 pizzas. Yes. 10,000 Bitcoins for two tiny pizzas! Aside from the pricing, it was a fungibility milestone.
That of acceptance and one brave pizza restaurant made this feat possible. When the electronic transfer was completed and those two pizzas were handed over, a new value transfer period was ushered in.
Bitcoin has since proved to be an efficient and decentralized form of money run by the people.
- What the Legendary Pizza Transaction proved
- The link between Network Effect and Bitcoin
- Is the Bitcoin network saturated?
- Why increasing Block size is important for Bitcoin
- The birth of Bitcoin Cash
- Segwit 2X flaws which were ignored by developers
- Nobody messes with my money
- The altcoin pump
- Lightning Network will be a late remedy
- Bitcoin Cash is the future
What the Legendary Pizza Transaction proved
Even though it may look like a funny fact, the legendary Pizza transaction reminded everyone how value especially those derived from technological innovations can fluctuate.
Fast forward this and seven years later, it’s a popcorn moment for the owner of the restaurant.
The useless mud he thought he was holding is turning alchemic and is now sitting on a gold mine and wading cash in the millionaire’s club.
Of course, given the success of Bitcoin, piracy is bound to happen. Everyone wants a slice right? But, and that’s a big but, it’s a first come first serve affair and BTC was the first in this business.
Its roots are wide and deep given the free press-both negative and positive-over the past 10 years or so. Its value and growth path makes it’s the ultimate sledgehammer in the cryptocurrencies world. It’s a random fact but I cannot be swayed otherwise.
In my opinion, if there was no Bitcoin, Ethereum would just be an idea. Vitalik Butelik is a wise man who rode of Bitcoin popularity. Even though its market cap is 4 times that of Ethereum, Bitcoin is facing a mountain and if there are no safety harness and hiking ropes, gravity will pull it down like a sack of potatoes.
What I’m trying to say is this, the Bitcoin network is no longer a Ferrari when it comes to settling transactions. Compared to DASH or Monero, Bitcoin is a freaking jalopy trying to race against the Evo.
Anyhow, before pushing you guys straight to the “issues”, we have to appreciate a genius called Robert Metcalfe. This guy gave us the internet and it looks like he foresaw the current Bitcoin predicament. Remember that was almost 50 years ago.
You see, back in those days, folks didn’t see the need of connecting their Macintosh to a wider computer network. As a network engineer Rob had to sell his network cards otherwise his projects would have perished. It was a feat that required ingenuity knowing very well that taking established corporations head on was guaranteed to fail from the start.
To sell them, he went to great lengths explaining how the “Ethernet” worked and how his products were cheaper in the long term. His pitch was successful and lead to what we now call the Network Effect.
At the core, Network Effect is a simple yet effective formula linking user dependent products and value. Robert explained and proved successfully that the value of a product steadily rose along a quadratic S-curve until a point of saturation is reached. That is when value starts flattening just like in Bitcoin now.
If you extend Robert’s idea to these limited Bitcoins, then you realize that Bitcoin is at an early stage of saturation. First of all, look at the exponential pace of adoption especially after the Pizza event.
So far, close to 80% of all the coins set for circulation have been mined. 20% not so lucrative coins remain. As more and more Bitcoin enthusiast looks to profit from the mega rally, there arise issues of network capacity, scalability and of course transaction speeds.
Is the Bitcoin network saturated?
Now all these are interlinked. Some are inherent to Bitcoin while some are user-generated. It is becoming a common phenomenon that miners-these are the computers guys tasked with transaction validation-are involuntarily taking their time to verify transactions because of the decreased network capacity.
For example, as I’m typing this there are 200,000 pending Bitcoin transactions within a 48HR space. It is insane. You have to wait for more than 30 mins for your transaction to be settled.
For preferential treatment, users have to literally “bribe” these miners to validate their transactions via a little fee spike. This is unacceptable especially in a system meant to improve accountability.
Another systemic flaw-and what Segwit 2x appeared to solve was scaling concerns. No one can be blamed for this as it is design related BUT it can be resolved since the source code is open.
However, whether to improve or not is a pretty hot subject right now. There are two competing factions here each seeking to safeguard their interest.
The majority are BTC Legacy purists who insist that the 1MB block size is enough to keep the network decentralized as designed. On the other side of the divide are the progressives. Supporters of Segwit 2X desirous of a scalable and accommodative system.
Why increasing Block size is important for Bitcoin
BTC purists can bury their heads in the sand all they want but they cannot run away from facts. There is no escape here. From 2014, it was apparent that the default 1MB block size was too small to cope with the ballooning capacity.
With all the media attention and BTC traction after 2010, it was only a matter of time before the capacity related problem started creeping in. Transactions are done every day and irrespective of consensus, network efficiency is dropping because of these minute blockchain.
Jeff Garzik and Garvin Andersen foresaw this and laid the framework for Bitcoin core upgrade with BIP 101 and 102 proposals. Needless to say, these proposals were the foundation of Segwit’s User Activated Soft Fork (UASF) which was believed to be the first step in resolving scaling and capacity concerns.
After UASF, The New York Agreement (NYA) was formalized. In fact, during NYA signature, rumors were rife that the main players drawn from the mining community, exchanges and the business fraternity had unanimously agreed for a block expansion.
The birth of Bitcoin Cash
However, cracks begun appearing shortly after USAF and Segwit implementation. Bitcoin had its first hard fork on August 1 with Bitcoin Cash-ticker BCH launching at $550 per coin. Developers behind this main fork were Roger Ver and Jihan Lao.
Even though there are many explanations out there, it is obvious that block size limitation was a reason behind it. BCH Shared the same private keys as BTC Legacy but with better replay attack protection and had an 8MB block size meaning it was scalable. Undoubtedly, this fork improved capacity eliminated wait time and lowered transaction fees.
Hard statistics show that even before Segwit 2X hard fork, BCH was in a pump. One assumption could be attributed to the ease of moving BTC hot money to BCH as they are twins with different life goals. On the other hand, this appreciation could be linked to BCH intrinsic features and the toppings adopters were lured with.
Segwit 2X flaws which were ignored by developers
Better still, market observers were also quick to pinpoint glaring fundamental flaws in Segwit 2x which could trigger replay attacks. Nervous BTC users warned that if hackers took advantage of this loophole, the entire Blockchain could be compromised.
In their arguments, Bitcoin developers mapped out a situation where shortly after block 494,784, hackers would replicate B2x transaction on the original legacy chain. After all, B2X blocks could still be validated by BTC miners as they shared the same private keys as BTC legacy blocks.
Nobody messes with my money
Of course, this was nerve-wracking and emotive for BTC owners considering the cash involved-their cash – and the security of the Bitcoin platform itself. Therefore it was a no-brainer that a consensus was needed to veto the “scale fixing” hard fork.
Developers and businesses involved felt that the whole idea of scalability and capacity improvement was novel but no one had to be forced to participate in another fork until after Replay Attack loophole was patched.
The altcoin pump
Despite the Bitcoin-Segwit implementation in August, observable facts showed that nobody cared about Segwit. Contrary to expectations, transaction costs continued to balloon while queues grew longer.
After news of Segwit 2x postponement, BTC rallied briefly testing highs of $7800 but soon trickled lower after investors pulled out their money upon realizing future growth were limited. $1800 was clipped off BTC within 2 trading days. Concurrently, BCH guaranteeing scalability, efficiency, and increasing liquidity soared to as high as $2800.
Lightning Network will be a late remedy
Now BTC is on the precipice. Network capacity challenges that needed to be resolved after NYA continue to haunt. As long as transaction costs and wait time continue to frustrate, BTC will continue to leak investors needed to propel this gold coin along the S-curve.
Even though BTC developers talk of Lightning Network as the next coherent scaling alternative, it is 18 months until funds are available and implemented.
Bitcoin Cash is the future
In contrast, BCH offers a solution to this and don’t force anyone to use their network. Adoption is voluntary, unlike Segwit 2X where BTC owners were being forced to upgrade. With an 8MB block size, their future is bright. CoinBase statistics show that more and more people are keen on buying cryptocurrencies.
If this organic growth is extended to the future, then it is likely that a network that allows for a fast and cheap transaction will be on demand.
Under these competing choices, it came as no surprise that on November 10 and for the first time in history, BCH average daily volumes surpassed that of BTC.
With the new found demand, it temporarily flipped Ethereum as the second largest coin. At the same time, its market capitalization rose to $22.6B at $1500 per coin. At that valuation, this three-month digital asset is more valuable than HP, Twitter, and Snap.
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The question now is: Will Bitcoin scalability concerns continue to be a chimera and mark the end of this rally?