Bitcoin Cash Development Update: November Hard-fork

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Bitcoin Cash is due for another upgrade on November 15. Unfortunately this upgrade will likely result in a contentious chain-split, potentially creating another cryptocurrency due to differences between the founders of Bitcoin ABC and the rest of the Bitcoin Cash network. 

There are two proposals set to be implemented in Bitcoin Cash, but it appears most of the network will only accept one because the other is deeply controversial throughout the community. The change with broad support is an update to the difficulty adjustment algorithm (DAA) that’s crucial to the stability of the network, its incentives, and the integrity of its inflation schedule. The change without broad based support, known as the Infrastructure Funding Plan (IFP) by its supporters, adds a new coinbase funding rule that would allocate some of the bitcoin cash mining rewards to a development fund controlled by a multi-signature wallet. 

Difficulty Adjustment Change

Difficulty, in proof of work blockchains, measures how “difficult” it is to find a new block. “Difficult” in our case is defined by the difficulty of finding a cryptographic hash below a given target set algorithmically by the Bitcoin Cash network. Any blocks broadcasted by miners that do not meet the required difficulty target are rejected by everyone on the network and thus will be worthless.

As miners join or leave the Bitcoin Cash network, the rate of block production oscillates, which affects the network’s inflation schedule. The rate at which new units are produced in proof of work blockchains depends on the speed of block creation since each block has a new coinbase reward. If the speed of block production increases, the inflation rate necessarily speeds up. And if the speed of block production decreases, the rate of inflation necessarily slows down. 

To keep proof of work blockchains such as Bitcoin Cash on its proper inflation schedule and reliable for users, the network adjusts the difficulty level needed to maintain the proper block production times and thus the proper inflation rate and user experience.

The difficulty level is adjusted every 2016 blocks (2 weeks) to a certain target such that the previous epoch of 2016 blocks would have been generated in exactly two weeks had everyone been mining at this difficulty level. This difficulty adjustment algorithm is the key algorithm keeping the user experience consistent and the inflation schedule of Proof of Work blockchains true to their intentions. 

The current BCH difficulty levels and block production times are prone to unstable oscillation. This oscillation is blamed on the current BCH DAA (cw-144) which uses a simple moving average to calculate what the next difficulty level should be. 

The proposed changes would use an exponential moving average known as ASERT which gives more weight to the end of a time period than the beginning of that same time period. In contrast, a simple moving average treats every slice of time as equivalent which can lead to larger oscillations in adjustment if there is a dramatic change in hash rate throughout this 2 week period. Bitcoin Cash developers think the current set up incentivizes miners to come and go from the protocol instead of becoming reliable, constant miners, resulting in unstable oscillations of the block production schedule and the difficulty level. 

Much of the Bitcoin Cash community has rallied around this move from cw-144 to ASERT. If the Bitcoin Cash development community is right they will have minimized bad incentives and improved the user experience for everyone on the network.

Coinbase Funding Rule

Bitcoin ABC was the first reference implementation and has been the historically dominant reference client within the Bitcoin Cash network. Bitcoin ABC was developed and spearheaded by Amaury Sechet, a long time Bitcoiner and veteran Bitcoin Cash developer. 

The proposal outlined by Amaury Sechet, adds an update that allocates 8% of the mining reward, traditionally allocated exclusively to the miners, to a multi-signature wallet that would be used to fund development of the Bitcoin Cash protocol. Even though this change was met with great pushback, Amaury said in a blog post this change was not up for debate.

At this time we do not know how many public keys are attached to this multi-signature wallet, who besides Amaury has the other private keys, nor how many keys are needed to spend funds from the wallet.

Unsurprisingly many of the miners, other dominant reference clients like Bitcoin Unlimited, some factions within Bitcoin ABC, and prominent community members in the BCH community have signaled that they are vehemently opposed to this upgrade and do not plan on supporting Amaury’s initiative.

We’ve even seen the rise of a new successful reference client named Bitcoin Cash Node (BCHN) in the ecosystem. The BCHN reference client is a fork of the Bitcoin ABC reference client stripped of the IFP changes.

In addition, companies like BitGo, Bitcoin.com, Bitmain and its umbrella companies, Binance, and a host of other projects reject the IFP coinbase funding change. And lastly, as of this moment, futures markets have been actively trading on the Coinex and Poloneix exchanges, giving us pricing signal as to which chain the market thinks will be defined as the Bitcoin Cash blockchain after November 15.

Poloneix, in an official update, expects that the anti-IFP chain(currently BCHN on Poloniex) will be the majority chain following the fork. The pro-IFP (BCHA on Poloneix) chain is expected to be the minority chain if it survives. Poloneix plans to enable BCHA if the hashpower makes it feasible and safe for them to support it. Currently, BCHN is trading at a high premium relative to BCHA which indicates more traders are willing to bet that BCHN will be the chain the majority of the market defines as Bitcoin Cash. The traders holding the minority coin will have traded their Bitcoin Cash for a minority fork of Bitcoin Cash. 

Futures markets on Coinex are also signaling the same support and premium for BCHN over its potential rival BCHA. If BCH forks into two chains on November 15, Coinex and Poloneix will anoint the chain with the highest price at the last moment before the fork as BCH.

The traders and other participants on these exchanges are expecting BCHN, the anti-IFP chain, to win the market’s definition of Bitcoin Cash. We can say this with confidence because it’s more “expensive” to own BCHN compared to owning BCHA on these exchanges at the moment. The anti-IFP camp seems to have the clear upper hand over the pro-IFP camp. 

Edge BCH Users

Edge will be supporting the majority chain as Bitcoin Cash, defined as the blockchain with the most proof of work and economic weight (business/exchange support/volume) behind it. From our vantage point it looks like Amaury Sechet’s fork, if it survives, will be the minority chain with some hash power, some full nodes, and some community support. But the vast majority of the hash power and economic weight is signaling they will be rejecting the Bitcoin ABC coinbase funding proposal. However nothing is done until it’s done and if this outlook changes we will be sure to communicate those changes to our users and support what the market supports as BCH. 

Edge users don’t need to take any action at this time. Your BCH is safe in Edge, whatever the minority chain ends up being called. As a result of using a self-custody wallet like Edge you’ll have access to forked funds by default whether or not we have native support for the minority chain. This can’t be said for Bitcoin Cash users leaving their funds on exchanges or with other custodial services.

We recommend not transacting on the day of the fork November 15, and possibly for a couple days after. It’s usually best to wait for the market to settle on the majority chain and define what BCH “is”.   

Replay attacks are possible post-fork when users unintentionally spend their money on both chains instead of just the chain they meant to spend on. Our CEO Paul Puey gave a great talk in Amsterdam in the middle of 2018, dissecting forks and replay attacks for the Bitcoin Wednesday audience. Watch that video if you want to learn about crypto forks and replay attacks. 

Post-fork we will give our user base specific directions as to how to access the forked funds if the minority chain survives in the market. 

Coda

Bitcoin and Ethereum have done a great job of creating a patronage culture where development has been funded informally through companies, wealthy benefactors, and non-profit organizations.

None of the newly minted supply of Bitcoin or Ethereum goes to an official development fund. This is a great source of strength. Patronage has its own problems, but having an unofficial, informal culture of donation based development can be a huge advantage in so far as it avoids a potential point of failure and potential source of vicious political infighting. However, other protocols have had trouble maintaining a healthy amount of patronage to fund quality development. As a result some of the developers of these protocols feel left out of the rewards of the networks they help maintain.

There are other protocols like Dash and Decred that have variations of the set up Amaury is trying to create, with block rewards going to stakeholders other than miners. There’s no reason that the problems that inevitably arise with a development fund can’t be worked out by one or more of the protocols experimenting with block reward allocation. We expect there to be a mix of success and failure in designing reward allocation schemes that reward stakeholders outside of mining both now and into the future but at this time it doesn’t look like Bitcoin Cash (BCH) will be one of them. 

Only time will tell how Amaury Shay’s faction of the Bitcoin Cash community will fare in the free market. We wish them luck. 

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