Loss of public trust and utility, branding issues, a market capitalization crash, and a collapse of trust in the entire crypto-currency space. A contentious Bitcoin hard fork, which represents a change to the Bitcoin protocol requiring all nodes to update, could indeed result in two Bitcoins. Exactly this – a split network – happened in the wake of Ethereum’s choice to hard fork after the $56 million hack of the DAO, a decentralized investor-directed venture capital fund on Ethereum.
Hard Fork Could Lead to Duplicate Bitcoin Network
Not only might perceptions of Bitcoin suffer in the case of a Bitcoin fork, but so too could Bitcoin’s use-case as electronic cash. The issue of scaling Bitcoin has certainly been contentious, and if a fork is initiated with considerable opposition, there could be proponents claiming both versions of Bitcoin are the real one.
In a recent Medium post entitled A Fork in the Road, Bitcoin entrepreneur CEO Vinny Lingham highlights how, at least in the short-to-medium term, a network split would impact Bitcoin negatively.
“If a split is portrayed badly in the media and creates confusion, we will possibly go into another 2 years of sideways and down,” wrote Mr. Lingham on March 15. “Do we have that much time again with other competitors on the heels? And let’s be frank, a Hard Fork is not Bitcoin dying. It’s Bitcoin duplicating. Now we have two Bitcoins, both won’t die, maybe one will. Which one is the real Bitcoin? Do not underestimate how many enemies Bitcoin has — a fork will just give them all the ammunition they need to confuse the market”.
Bitcoin exchanges have recently unveiled their contingency plans if Bitcoin splits in the wake of a hard fork, which involves them listing the duplicate Bitcoin on their exchanges as an alternative crypto-currency.
Before the Ethereum DAO hard fork, many believed that a minority chain in the case of a split would cease to persist. When the hard fork took place, an alternative blockchain to the original Ethereum deployment persisted (by some miners’ choice to stay with that chain), which itself claimed to be the original Ethereum. It called itself “Ethereum Classic” (ETC). Trading of ETC rivaled that of Ethereum (ETH) immediately after the split.
“There are some people who dismiss this problem in the Bitcoin community,” acknowledges the Ethereum Classic project coordinator who only goes by Arvicco. “But they are wrong to do so.”
An important aspect for any digital currency is its scarcity, which acts as an economic incentive for people to use a certain blockchain. If digital currencies risk splits, then their value is undermined. “Creating two networks destroys network effect,” Mr. Lingham suggests.
A Future with Many Bitcoins?
Wonders Arvicco: “If there is one Bitcoin with a 21 million coins limit today, and two Bitcoins with 42 million coins tomorrow, what prevent us from having 64 Bitcoins with 1.2 billion coins a few years from now?”
In another technical twist, if there were such a split as happened in the case of ETH and ETC, all bitcoin holders would have an equal amount of BTC and (theoretical) BUTC post-split. After the Ethereum split, cross-fork trading spiked between it and ETC, leading some to believe the same would happen in the case of a Bitcoin split.
As happened on Ethereum and Classic, this could result in cross-chain transaction replay. Transaction replay happens when transactions on one chain are replayed on the other chain, moving both types of coins.
“Imagine that as a result of fork, you got both Bitcoin (Core bitcoins) and BUTC (Bitcoin Unlimited bitcoins) on the same addresses,” explains Arvicco. “Now, you want to pay for something with BTC, but to your surprise the same amount of BUTC is also moving to the seller’s address, even though they were not supposed to.”
Another example would be if one wanted to get rid of their BUTC via an over the counter transaction. You get the payment and transfer your BUTC to the buyer. But, the ‘core’ bitcoins from the same address are also sent. This could damage user confidence and diminish the use-case for on-chain transactions.
Whereas Ethereum’s replay problem was mostly dealt with via ‘splitter’ contracts designed to separate ETH from ETC, Bitcoin does not have the scripting capabilities to deploy such contracts.
“The only practical way to mitigate the issue would be mixing the legacy coins with post-fork mined coins of different flavors, either BTC or BUTC,” he says.
Developers could introduce incompatible transaction formats, which could preclude a second hard fork – this was the solution used on the ETH/ETC networks. Replay protection could also be introduced simultaneously with the first fork, but this option is not being publicly discussed by developers.
“In practical terms, both networks would be hardly usable for some time after a fork due to replay attacks,” believes Arvicco. “For normal users, it will be problematic to gain the knowledge how to protect themselves from it, so they’ll probably stop using the network altogether.”
Splitting Coins is Not Hard, for Some
Many people are not worried about a split, including Bitcoin developer Peter Todd. “It’s easy to split Bitcoins via nLockTime, as the exact height of the different chains will definitely be different,” says Mr. Todd on Reddit. “I’ve been asked by two or three exchanges to evaluate their plans to do exactly that. IIRC one had invented the technique themselves, and one or two others I suggested it to them.”
But, while splitting his BTC from his BUTC via nLockTime might be easy for longtime Bitcoin developer Peter Todd, this might not be so for the common bitcoin user.
What are your thoughts about a potential Bitcoin split? Let us know in the comments.
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Bitcoin Could Face Ethereum-Style Split