Why hard forks are good for Bitcoin
An optimistic outlook on how Bitcoin Blockchain splits may actually help to advance the Cryptocurrency eco-system
What is a hard fork?
So we’re heading for another hard fork.
Whereas to the general public this is a phrase most associated with motoring, to the cryptocurrency community, a hard fork represents something much more serious.
Without going in any precise details, during a hard fork, the blockchain of a cryptocurrency splits to form two (often competing) forms of the currency. It occurs when sets of stakeholders within a cryptocurrency (normally miners and developers) have a conflicting perspective on how it should develop. Bitcoin itself has had just the two (major) hard forks in recent years, with the inception of Bitcoin Cash on August 1st earlier this year, followed by Bitcoin Gold on October 23rd. However, we know that there is at least a 3rd scheduled for Nov 25th in the form of Bitcoin Segwit 2x, or B2X as it seems to be widely referred to.
Forks create a fair deal of FUD and pandemonium, and most Bitcoin aficionados desperately hoped that Bitcoin Cash would be the first and the last for years to come.
Why do forks occur? No one cares, just stop forking!
In all honesty, the average Bitcoin holder has very little empathy (and even less understanding), of the details of these splits. All we know is that disgruntled miners are once again splitting (what we view as) our beloved currency in order to form their own rogue chain of Bitcoin. So you can imagine that another major fork to take place within a month, we were beginning to get that dreadful feeling of déjà vu. Not the exciting, nostalgic kind, but rather the nauseatingly familiar form, similar to how you feel when you step into a building that reminds you of an old job they never really took a liking to.
All’s not doom and gloom however…
But despair not, the tide may be turning as current trends seem to suggest that periodic forking might actually serve to benefit the growth of Bitcoin and the cryptocurrency space as a whole (at least in my humble opinion). Here are a few reasons why hard forks may actually help to build the cryptocurrency eco-system.
The dynamics of ‘No Split’ or ‘Clone’ Economics
In a blockchain hard fork, you don’t actually have a chain ‘split’ in the traditional sense of the word. What you actually have is chain clone. A split implies a severance of value, whereas, what really happens is a cloning or multiplication of assets. Traditional economics would suggest that 2 assets coming from the same stable and serving the market would naturally have to share the market between one another. However, in the case of both the Bitcoin Cash and Bitcoin Gold splits, what we actually saw was a Bitcoin market value that remained largely unaffected, and the formation of a new currency created an increase in the overall market cap. Economically this is a very hard concept to accept, since it implies creating something from nothing, but in the digital world this is not only entirely possible, but actually quite common since digital assets are literally created from thin air.
A forking analogy
One way to be able to comprehend this better is to imagine you own an iPhone (yes, I can only imagine this, since I am an Android user), but I digress. Now, imagine a small portion of Apple’s core team broke away and formed their own brand called, say Applex. The Applex company then decide to issue a free handset exclusively to owners of the iPhone. Let’s say that they called it an iPhoney (I know, I know… cheesy, but bare with me). Now the Applex iPhoney works almost identically to the iPhone, same hardware, same software, perhaps it even has a superior processor. But the problem is that it isn’t compatible with iTunes, Apple Pay, the App Store, or any proprietary Apple products. In itself, it’s a cool bit of hardware, but it has a long way to go in terms of building a community of support behind it. This is what happens during a hard fork. You receive a clone, but the clone is not really a direct competitor to the original because it lacks the network effect. Does the clone have value? Sure. You can still sell your Applex on eBay and earn around £100, and for something that you got for free, you’re not doing badly at all.
Now here’s the kicker. Has the existence of Applex iPhoney affected the value of your iPhone? Well, perhaps marginally, but it reality, not really. It’s just another smartphone competitor that just happens to have a similar name and history. So overall, you would have benefitted from the Apple/Applex hard fork.
When people worry about forks, they seem to fail to understand that Bitcoin is open source. Anyone could create a new Blockchain identical to Bitcoin today. The threat of a copycat coin is as relevant as a fork.
The competitive track record of Bitcoin
Another factor to consider is that hard fork chain splits do not represent the first major competition that Bitcoin has faced. In fact, every major iteration of the cryptocurrency space has presented a potential competitive threat to Bitcoin, but ultimately has only resulted in increasing the value and adoption of Bitcoin.
Take for instance the first alternative cryptocurrency Namecoin that was launched in 2011, which was soon followed by Litecoin in the following year. Whereas Namecoin had the purpose of decentralising domain names, Litecoin was algorithmically a direct competitor for Bitcoin, designed to operate faster and more efficiently as a currency alternative. When these alt coins first started to appear on the market, you had the same kinds of fear and uncertainty that we have now in regards to hard forks. However, the genesis of alt coins was far from the death of Bitcoin, and rather, they only served to create an entire cryptocurrency eco system that all in all has bolstered the need and demand for Bitcoin, by providing an additional and more viable spend use for it, outside of daily transactions. Indeed, Bitcoin’s most recent value explosions can be linked to the alt coin crypto space existing. This space is dominated by the BTC pairing that exists on majority of Cryptocurrency exchanges. Similarly, ICO’s that use the Ethereum blockchain to create investable tokens have also helped to boost Bitcoin since Ethereum is almost exclusively traded against Bitcoin in the first place.
So we see here that the track record in terms of competitive markets so far has never managed to result in the overall devaluation of Bitcoin. Will hard forks prove any different?
Accepting decentralisation and open source with all of its flaws
Whether or not you like the idea of forks, they represent a true expression of a decentralised democracy. The day when we mollycoddle and worship Bitcoin as a monolithic deity is the day that Bitcoin becomes a cartel, and we lose sight of what Bitcoin is. It is not only the right, but it actually is a healthy evolution of an open source economy to create new protocols and mandates as and when they please, and it is our right as users/consumers and community members to decide whether or not we wish to engage in these proposed updates. To deny or threaten against the existence of such hard forks is a contradiction in values. What the advent of Bitcoin Gold has proved is that the success of a fork is dependent on adoption, and it is within the power of Nodes, Miners, Exchanges and ultimately Users whether or not they wish to lend their support to a chain.
If, like the Bitcoin Gold team, you propose and present a questionably programmed, somewhat unstable, rushed and morally dubious hard fork, the community will react (… or more fittingly, refuse to react), leaving your chain split unsupported and ultimately without an use case. Proving that a fork is no more powerful than the engagement and attention that it is granted. That is a democracy. That is decentralisation.
Utilisation of the Bitcoin Network Effect
In this sense, it proves that forks are in fact, a natural evolutionary step of bitcoin or any healthy decentralised democracy. If we as a Cryptocurrency community had complete consensus on every issue, we would be the most peculiar society in world history! Bitcoin Gold, and indeed Segwit 2x will not be the last forks of Bitcoin (in fact, there are already rumours of Bitcoin Silver to fork towards the end of the year). They should be viewed a healthy symptom of the expression of choice and preference that exist in a true distributed economy, and eventually, we will live in a Bitcoin ecosystem where forking of the chain becomes the defacto means to distribution of technological advances in the cryptospace.
When you think about it, what better method do you have to distribute new technology amongst the cryptocurrency eco system, than to fork Bitcoin? It’s the one currency that pretty much everyone will hold. Now, getting people to support or value your fork, that part is a little more difficult, and it’s sensible to assume that winning the trust and support of the community will become more and more difficult with each attempt to fork.
Bitcoin as a store of value
I have heard many people argue, very convincingly, that many of these hard forks are deliberate and orchestrated attempts to disrupt and dissuade new investment into the Bitcoin ecosystem. Now, whereas this might be true, what people seem to be missing is that if forking Bitcoin is indeed supposed to be an attempt to dissuade investment in Bitcoin, it is failing. Miserably.
Any Bitcoin investor will know that in the run up to a hard fork, Bitcoin has its most bullish rallies. The market dominance of Bitcoin in the Cryptocurrency ecosystem also always increase by around 4–7%. In fact, with every Bitcoin fork, the market dominance of Bitcoin shift slightly upwards. Why is this the case? Simple. Forks are providing yet another reason to always ensure that you hold some Bitcoin in your portfolio as they are acting as a dividend for Bitcoin holders. As it stands, Bitcoin is the only Cryptocurrency gifting it’s holders with Bonus coins that (like in the case of Bitcoin Cash at it’s height) can be worth up to $1000 each! Where else in the world do you get that kind of dividend? Imagine, if Bitcoin forks several times year, you get the opportunity to bolster your portfolio at absolutely no additional cost. Surely this only enhances Bitcoins reputation as an accumulating store of value.
The resilience of Bitcoin
One of the notable trends this year with the huge amount of change that has been occurring in the Cryptocurrency ecosystem is the amount of disruption that’s occurring. Not only has China all but banned ICOs and Cryptocurrency exchanges, but Korea have looked like they are ready to follow suit with Russia hot on their heals. When China first announced the banning of ICOs and exchanges in September, it sent the market reeling and money came flooding out of the system. Almost immediately following this however, when Korea and Russia made similar announcements, and the market didn’t so much as blip. Bitcoin (or the community that backs it) are beginning to build a considerable resilience to external influencers and we’re seeing the same thing with forks. Bitcoin Cash created waves of panic and pandemonium. Bitcoin Gold created a few ripples, and I think by the time we get to Bitcoin Silver, or Bronze, a hard fork will be about as significant as a new ICO.
The future of the forking landscape
So with that all being said, what’s a plausible outlook for the forthcoming ‘forking’ landscape.
1. More Forking
Well first and foremost, prepare for more forks. They are certainly not going away. In fact they are likely to become a common practise, but this is not a bad thing, since their regularity will create a more proportionate response from the community. Some forks will rightly be given good support and attention, whereas others will be ignored for the scams that they are.
2. Forks as an ICO alternative
Next, forks may replace ICO’s. Since the legislators and regulators have ICOs in their site, companies will look for new and imaginative way to monetise the world of decentralised applications, so you will find that forking existing open source blockchains will become the means by which firms will tokenise their ventures. How exactly this will play out, I’m unsure. But even the mild success of the Bitcoin Gold and Bitcoin Cash (success being that neither are worth zero), will have ignited the spark of opportunity in many an entrepreneur.
3. More Hodling of Bitcoin
No it’s not a typo. HODLing is a term referring to Hold On for Dear Life…Finally, and most significantly, the almost inevitable landscape of regular hard forks may result in an increase in the overall market cap and the market dominance of Bitcoin. More people will buy and hold, simply accumulating multiple assets as hard forks become more popular, and the increased holding (hodling) may boost the demand and therefore the price of Bitcoin.
What do you think? Do you think forking presents a threat or an opportunity to the future of Bitcoin and the Cryptocurrency eco system? Share your opinion below.