Why Bitcoin Cash’s Mining Troubles Should Scare Bitcoin Maximalists

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October 27, 2019 by
Why Bitcoin Cash’s Mining Troubles Should Scare Bitcoin Maximalists

Bitcoin Cash experienced some mining issues recently, with what is reportedly a single actor controlling a majority of the hashrate, as well as serious fluctuations with how fast blocks have been produced. Naturally, Bitcoin maximalists have been gleeful to pile on and criticize. That’s too bad, because if I were a maximalist, I’d be pretty terrified right now about what something like this shows can happen to Bitcoin.

In a low-usage speculative market, lagging price can kill security

The profit that cryptocurrency miners make is largely dependent on the price of the coin they mine, as that emission tends to have a fixed total rate. When market price lags, it affects the profitability of mining on, and therefore securing, the chain. Naturally, if it’s less profitable to mine, fewer actors will do so, leading to reduced network security. This doesn’t necessarily mean that the total hashrate will plunge, but fewer actors will be willing to mine at a loss, and that means more hashrate concentrated into fewer hands. During a roaring bull market, the kind of hashrate centralization we’ve seen on Bitcoin Cash today would be much less likely, since more people would be competing for a piece of the pie.

Now, with high usage for economic transactions we have a different story. The market price can crash yet total transactions go up, delivering more in fees to miners and countering the effect of a reduced value from the regular block reward. In cases where fees price out some types of transactions, a drop in the cost of those fees can open up new opportunities to use the network, generating more use and therefore more profits. We’re seeing a constantly growing Bitcoin hashrate because its use, while artificially capped with the block size, remains high, and Dash’s growth in real-world use may similarly explain why its hashrate has significantly outperformed its price versus top competitors.

It’s worth noting that Bitcoin maximalists have not prioritized allowing more than the current on-chain limit of transactions to take place. This means that even with a sharp dip in price there’s a hard limit on how many people can transact, meaning that the “transaction fee firesale scenario” described above won’t be viable. Because of this Bitcoin will always have a security vulnerability to sustained price crashes where miners can no longer afford, or have no desire, to mine at a loss. Its speculative nature hurts its security.

We’re finding out just how fragile the state of mining can be

The Bitcoin Cash mining issue also drew light on problems with difficulty adjustment. That lone largest miner produced blocks significantly faster than the network should be putting out, then the network went hours without producing a block. The culprit is likely an adjusted mining difficulty algorithm, which was made necessary by the huge swings in hashpower following the initial split from Bitcoin… which, itself, shows how poorly the Bitcoin network would function if such a dramatic hashpower swing happened. Many years ago Dash implemented Dark Gravity Wave which readjusts difficulty every block, but I have yet to see any talk of implementing something similar on Bitcoin or its forks. Continue reading…

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