Why Cash Mining Shouldn’t Hurt Bitcoin Much (But Bitcoin Mining Could Ruin Bcash)
For the past few days, Bitcoin Cash (Bcash or BCH) has been more profitable for me than Bitcoin (BTC). This has resulted in miners switching from Bitcoin to Bcash, causing a significant acceleration of the blocks on the Bcash chain, to the point where several dozen blocks have been found per hour. Meanwhile, the Bitcoin blockchain had slowed down significantly; in some cases only one or two blocks were found every hour.
In the short term, therefore, Bitcoin users were inconvenienced: they had to wait longer for their transactions to be confirmed, and they had to pay more fees for them to be confirmed quickly.
In the long term, however, this dynamic could make the Bitcoin Cash chain very unstable.
Here’s why.
Theory vs. Practice: Assumptions
First of all, it should be noted that, for the sake of simplicity, this article makes some assumptions that do not fully correspond to reality (or not necessarily).
For example, the article will assume that all (or most) miners are primarily concerned with short-term profits, it will assume that miners can switch from one blockchain to another at no cost (or minimal cost), no will note that miners have to wait 100 blocks before they can spend their block rewards, and more.
Perhaps most importantly, the article will also assume that Bitcoin block rewards are more valuable than Bitcoin Cash block rewards. At the time of writing this report, this is the case, by a relatively wide margin. Both Bitcoin and Bcash miners are granted at least 12.5 new coins per block, but BTC is about six times more valuable than BCH. Also, Bitcoin blocks contain a significantly higher number of fees.
Although the reality of the situation is more complex than this, the general dynamics should continue, at least until and unless the rewards of Bcash are more valuable than those of Bitcoin.
Normal Mining Dynamics
Miners mine for profit, or at least that’s the assumption for this article. They invest resources – time, electricity, hardware, and more – in exchange for coins.
The profitability of mining is determined by the value of the block reward and the “difficulty” of mining a block. If the difficulty is higher, miners need to invest more resources to find a block. If the difficulty is less, the miners need to invest less.
In particular, what doesn’t really matter for profitability in the short term is how many other miners (by hash power) are mining on a particular chain. If many miners are, for example, mining on the Bcash chain, it means that all these miners find the Bcash blocks faster for a while.
This situation will self-correct over time, when the difficulty adjusts. In both Bitcoin and Bcash, the difficulty is adjusted once every 2016 blocks, which is “supposed” to happen every two weeks. If these 2016 blocks are in less than two weeks, the difficulty is adjusted up, so the next 2016 blocks will be harder to find. If these 2016 blocks are in more than two weeks, the difficulty is adjusted down, so the following 2016 blocks will be easier to find.
These adjustments occur relative to the number of blocks faster or slower than “supposedly” mined, but can be increased or decreased up to a maximum of four times (x4 or x0.25).
Bitcoin vs Bcash
Now, since a Bcash block reward is worth roughly seven times less than a Bitcoin block reward, Bcash can only be more profitable to mine if its difficulty is more than seven times lower. (This has been the case in recent days.)
But if that happens, something interesting happens. From the very moment that Bcash is most profitable for mining, it immediately becomes more profitable for all miners. In this hypothetical case, all miners would immediately abandon the Bitcoin chain, and instead exclusively mine Bcash.
Of course, this cannot last forever. If there are so many miners on the Bcash chain, the 2016 blocks will be found extremely fast. (This has been the case for the past few days.) As such, the next difficulty setting comes pretty fast too; potentially in a day or two. (This just happened.) And most importantly, because it’s too fast, the difficulty is now adjusted up by far – probably four times. (This just happened.)
That’s where Bcash’s problems begin.
At this point, Bcash’s difficulty is so high that Bitcoin is once again the most profitable chain to mine. As such, after a pause of about two days, all miners should go back to mining Bitcoin.Bitcoin’s difficulty, meanwhile, was already quite high. Once all those miners return, the 2016 blocks may or may not be found a little faster than normal. But nothing out of the ordinary.
As such, even after the 2016 Bitcoin blocks are found, there aren’t many changes. Bitcoin would still be a more profitable chain to mine. Hence, all profit maximizing miners would continue to mine Bitcoin only.
And once the next period of difficulty is over, once again, nothing will change. Bitcoin would still be more profitable for all miners.
Meanwhile, at the opposite end of the equation, no miner would mine with Bitcoin Cash. Not that profitable for mine. The Bcash blockchain should freeze.
Bcash solutions
Bcash has solutions for this problem, more or less.
First, Bcash implemented an emergency readjustment plan to deal with situations like these. If fewer than six blocks are found within twelve hours, the difficulty is adjusted down by 20 percent. This can help reduce the difficulty to normal levels faster.
But that is not a perfect solution in itself. For one thing, it still requires at least six blocks to be found, and probably more for the difficulty to return to normal. This means that miners still need to mine the Bcash chain at a loss, against their short-term interests. Also, miners who are not friendly to Bcash could ironically mine on this chain enough to avoid such a readjustment.
And even if some miners do mine on the Bcash chain towards a difficulty setting, it would just put the same dynamics in motion after a while. The Bcash chain would be more profitable to mine for a couple of days, after which the difficulty shoots up and the chain freezes in its tracks. Then these miners would have to, once again, mine at a loss to keep the chain alive, only to get the same dynamic going again. And again. And again.
Interestingly, this scenario could potentially benefit miners in general, especially if they coordinate. While some miners need to mine against their short-term interests to reach the required difficulty setting, once that difficulty setting is reached, all miners manage to earn massive amounts of block rewards within a day or two.
As long as there are buyers for these coins, this stop-and-go cycle could be very profitable for miners in the long run. But of course it is not very desirable for users.
Other solution (s)
This is not a new science.
Namecoin, one of the first altcoins, faced similar problems in 2011. After a sudden jump in the hash rate, its chain stuck, and it took ideologically motivated miners months to work towards a next losing difficulty adjustment. . This cycle was repeated a couple of times, at which point Namecoin fixed the problem by ‘merging mining’ the coin with Bitcoin. All Bitcoin miners can now automatically mine Namecoin using the same hash power, without the need to change chains. Many Bitcoin miners do.
The problem that Namecoin had to face is also a key reason why the creator of Litecoin, Charlie Lee, decided to implement the Scrypt mining algorithm in Litecoin, another early altcoin. He realized that a secondary cryptocurrency should not compete with Bitcoin for hashing power in the SHA256 algorithm, exactly because of the instability that would result. By choosing a completely different algorithm, miners cannot jump from one chain to another, thus solving the problem as well.
And many other altcoins, like Ethereum, have much faster resetting schemes. Although technically this may require miners to extract at a loss in some cases (and could have other detrimental effects), this situation should be resolved in a matter of hours or days, not weeks or months.
If Bitcoin Cash chooses to adopt any of these solutions, the coin will likely require another hard fork.
Alternatively, of course, your block rewards will have to be more valuable than Bitcoin’s …