2018 was supposed to be the year of Bitcoin spinoff coins, but things didn’t really turn out that way. Bitcoin Cash achieved some initial success after it launched in the summer of 2017, but it is now down 90% against the US dollar this year — that is, if the Bitcoin Cash ABC (Bitcoin Cash ABC) side of the November 15th network split is viewed as the “real” Bitcoin Cash (Note: this article refers to the post-split Bitcoin Cash ABC as simply “Bitcoin Cash.”).
While many other Bitcoin spinoff coins were created this year, none of them are really on anyone’s radar today. Bitcoin Cash’s own split, which has led to the creation of Bitcoin Cash SV, is now making matters worse for the most successful Bitcoin spinoff, but even Bitcoin Cash has less on-chain activity than Dogecoin.
The key issue that all of these Bitcoin spinoffs are dealing with is centralization. When there isn’t consensus for a change to Bitcoin’s protocol rules, the inevitable outcome is a new chain that has a much lower number of miners, developers, and hodlers on it. Additionally, the fact that those who fork off to a new network are more likely to do so again the future means this centralization issue could possibly get more serious over time.
Fewer Miners, Developers, Hodlers, and More
The main value proposition of a public blockchain is that it is permissionless, but that attribute can be undermined if the network becomes too centralized.
Fewer miners means the network hashrate will be concentrated into the hands of few parties, which means the chain is more susceptible to 51% attacks.
Fewer developers means there are less eyes on the code to make sure no bugs find their way into critical software infrastructure, and there will also be fewer developers who are able to implement the changes necessary for the system to scale and evolve over time.
The fact that there are fewer hodlers may be the worse point of centralization. While not perfect, economic support tends to be the way in which the level of support for changes to the protocol rules are generally judged. For example, the hard-forking portion of the SegWit2x plan was called off late last year after futures markets indicated a lack of support for the change. Additionally, coin voting was used to gauge support for the hard fork related to the bailout of The DAO on the Ethereum network back in 2016.
While Bitcoin Cash was already somewhat centralized before the recent split, the creation of Bitcoin Cash SV has made matters worse. Now, Bitmain is in control of more than half of the Bitcoin Cash network hashrate, the network has lost all of the developers who decided to go with the Bitcoin Cash SV side of the split, the Bitcoin Cash price has fallen even further than it already had this year, and the distribution of coins is likely to have become more concentrated as the market cap shrank (based on bitcoin’s rich list versus that of altcoins).
Proponents of Bitcoin Cash might say that they still have the benefit of multiple full node software implementations, but the reality is this doesn’t much matter because protocol rule changes still need to gain consensus from the entire network to avoid splitting once again. Put another way: The total number and variety of developers is much more important than the number of implementations available.
Bitmain and Bitcoin.com account for roughly 72% of the Bitcoin Cash network hashrate and funded the benevolent dictator of Bitcoin ABC (and perhaps other Bitcoin Cash developers). Bitmain themselves own over 1 million bitcoin cash coins. This is the level of centralization that happens when a minority network breaks off from Bitcoin. Of course, it’s worth noting the level of centralization is even worse on the Bitcoin Cash SV side of the split.
When a cryptocurrency network is this centralized, it’s more difficult to sell it as a permissionless, apolitical digital cash system.
Forkers Keep Forking
In the aftermath of Bitcoin Cash’s November 15th split, it should be obvious that the two resulting networks would be much stronger if they stuck together. Indeed, Bitcoin itself would likely be stronger if Bitcoin Cash never forked itself off the network in the first place.
Additionally, those who are willing to stray away from Bitcoin are more likely to do so again in the future. Drivechains creator Paul Sztorc has spoken about this many times in terms of the altcoin market, but it applies to Bitcoin spinoff networks as well. Much like those who defect to altcoins are more likely to defect to another altcoin in the future, those who fork off from the Bitcoin network are more likely to eventually fork off from that new, spinoff network too.
Those who switch away from Bitcoin to some other altcoin may find themselves going down a path where every new network they switch to is even more niche and thus more centralized. The path from Bitcoin to Bitcoin Cash to Bitcoin Cash SV is likely the best illustration of this point, as it’s a movement from the strongest, most liquid network to one that is effectively completely controlled by one individual who everyone from longtime Bitcoin Core contributor Greg Maxwell to Ethereum creator Vitalik Buterin has called a fraud.
Those who continue to fork away from everyone else for the slightest of protocol rule changes will eventually find themselves on these sorts of centralized networks unable to engage in commerce with much of anyone outside the handful of others who tagged along.