What you need to know about the upcoming Bitcoin Cash fork
Bitcoin Cash (BCH) is scheduled for a protocol upgrade on November 15, 2020. These upgrades happen every six months, but a controversial proposal to “tax” miners’ revenues may lead to a contentious hard fork during this upgrade.
What is a hard fork?
A fork in a blockchain protocol occurs when the node software is modified. Backward-compatible modifications result in soft forks – if a majority of network participants upgrade to the new software, then a single blockchain is maintained. Backward-incompatible modifications result in hard forks – the new rules conflict with the old rules and the blockchain splits, creating two separate networks.
If there is a disagreement within the network on which blockchain to continue to develop, then a contentious hard fork occurs, with the contending parties operating two versions of the blockchain with different consensus rules. This is exactly what is happening with Bitcoin Cash right now.
The point of contention: Bitcoin ABC’s Infrastructure Funding Plan (IFP)
The area of contention in this protocol upgrade is the Infrastructure Funding Plan (IFP) submitted by Bitcoin ABC, one of the main development teams of BCH. With the IFP, 8 percent of miners’ revenues must be transferred to a fund for the development of the protocol, which has been financed through donations thus far.
There has been strong opposition from the community, particularly from the Bitcoin Cash Node development team. Because no consensus could be found, Bitcoin ABC has announced that it will split off from BCH and enforce the IFP.
What will happen after the fork?
If the fork results in two competing chains, the dominant chain with majority support will retain the Bitcoin Cash name. However, existing BCH holders will also receive tokens from the new chain if their BCH is in a wallet which supports the fork.
Miners can signal their support for either side. An analysis of signals over the last seven days indicated that more than 80 percent of miners’ support Bitcoin Cash Node[1]. In addition, futures for the Bitcoin Cash Node chain (BCHN) are currently trading at 0.95 BCHN/BCH, while futures for the Bitcoin ABC chain (BCHA) are trading at 0.05 BCHA/BCH. The market value for the BCHN chain is therefore expected to be about 19 times higher than the BCHA chain[2].
Replay attacks – a potential security risk
Replay attacks can happen following a fork, where a transaction on one chain is replayed on the other chain by an attacker, which is possible since both chains share the same transaction history and signing algorithm. The user that sent the original transaction then loses the corresponding amount of asset on the other blockchain.
To illustrate how this would work – assume that after the fork, BCH is valued at USD 250 per token, while those from the new chain are valued at USD 10. A user holding both coins spends USD 10 worth of tokens from the new chain, but unfortunately, the vendor that they sent the tokens to broadcasts that same transaction to the BCH network, confirming it as a legitimate transaction, and the user loses one BCH, or USD 250.
Protection against replay attacks can be implemented on either of the chains, but with both sides claiming to be the next BCH, neither has announced this as yet.
How Sygnum will maintain security during the fork
For security reasons Sygnum will pause services for BCH during the fork. We will monitor the situation and resume services for BCH once a dominant and stable version of the protocol has been established. In the meantime, the BCH in Sygnum’s Custody will be held with banking-grade security within each client’s account.
[1] https://cash.coin.dance/blocks/summary [2] https://www.coinex.com/activity/bch-fork?lang=en_US
Disclaimer
This document was prepared by Sygnum Bank AG. This document may contain forward looking statements and may be subject to change. The opinions expressed herein are those of Sygnum Bank AG, its affiliates and partners at the time of writing. The document is for informational purposes only and contains general material. It is for use by the recipient only. It does not constitute any advice or recommendation, an offer or invitation by or on behalf of Sygnum Bank AG to purchase or sell assets or securities. It is not intended to be used as a general guide to investing, and should be used for informational purposes only. When making an investment decision, you should either conduct your own research and analysis or seek advice from an expert to make a calculated decision. The information and analyses contained in this document have been compiled from sources believed to be reliable. However, Sygnum Bank AG makes no representation as to its reliability or completeness and disclaims all liability for losses arising from the use of this information.