Bitcoin Cash and the 12.5% Developer Fund

A few days ago, a group of miners (BTC.TOP, Antpool, BTC.com, ViaBTC, and Bitcoin.com) announced a plan to divert 12.5% of the Bitcoin Cash (BCH) block reward to a developer fund over the course of six months. The developer fund would be mandatory, meaning that the group will orphan any block that does not adhere to the developer fund proposal. We will explore the implications of this.

1. This scheme is a double edged sword

Jiang Zhuoer, the author of the proposal,  is correct in claiming that “0.375% of the total SHA-256 rewards are being pulled out of the entire system” and that all SHA-256 miners will bear the cost of the 12.5% BCH dev tax.

  • Miners that only mine BCH will need to deal with the reduced rewards.
  • Profit switching miners that mine all SHA-256 coins will be less likely to mine BCH.
  • Miners that strictly mine BTC/BSV will see increased competition.
  • This will result in the least profitable SHA-256 miners being turned off until equilibrium is reached.

Some have called this scheme “brilliant” because of the way it affects the profitability of all SHA-256 miners, not just BCH. However, this comes with a trade-off: You will need the consensus of all SHA-256 miners to enforce this scheme and many will not be willing to cooperate.

Effectively, four organizations have formed a cartel declaring: “We are taking 0.375% of the total SHA-256 rewards and diverting it to our own private company. If you oppose us, we will orphan your blocks”.

The other miners, if they are paying attention, are unlikely to follow along and have a high incentive to orphan the dev fund cartel’s blocks. A successful attack to orphan blocks produced by the dev fund cartel will have two benefits for the attacker:

  1. They will have prevented their bottom line from being eroded.
  2. They will have caused losses to their competitors by orphaning their blocks.
As mining is a zero sum and highly competitive game, causing losses to your competitor is a lucrative proposition.

If the dev fund was proposed as something miners could voluntarily opt into, there would be no need to bother obtaining consensus from all SHA-256 miners (or even other BCH miners). Making the “donation” mandatory for all blocks on BCH means that consensus will be needed from all SHA-256 miners.

2. Dev fund needs full user buy-in

The other part of this equation are the BCH users; specifically, users that run full nodes that accept BCH. If the dev fund cartel thinks they can ram this proposal through with only BCH miner support, they are badly mistaken for this very reason. However, if they can get BCH users to buy into this scheme, they will have a better chance to thwart any challenges.

If BCH users are running full nodes that reject blocks that don’t donate to the dev fund, any amount of hashing power that gets thrown into a non-donating block will be useless. The problem is that only BCH users running full nodes that are accepting BCH payments at the time of the dev fund deployment will have a say in the matter. This is a small segment of the total user base for any cryptocurrency. Thus, exchanges will play a big role, as is the case historically in any consensus event.

Getting the exchanges on board will make the biggest difference, but this will be challenging unless the exchange can be absolutely certain that the dev fund will go through. Exchanges do not want to get caught on the wrong chain, in the event the dev fund chain fails. This is a chicken and egg problem. You need exchanges on board for the dev fund to succeed, but the exchanges will want to know for sure that the dev fund will succeed.

3. Does the average user have a say?

Some BCH users are despondent over the situation, feeling that they are powerless to do anything. Others are beginning to believe big miners and influential companies will simply dictate the future of BCH. This is not true. BCH users do have power if they’re willing to take action through the use of hashing power.

  • If users believe the dev fund is a good idea, they can deploy hashing power at the dev fund deployment date, mine at a pool supporting the dev fund, and help that chain succeed.
  • If users oppose the dev fund, they can mine at a pool that rejects the dev fund.

The most obvious way to mine is to purchase the hardware and do so directly. For instance, you can purchase a BitMain S9 (which are going for the very low cost of $70 USD right now) and set it up in your home. At the current BCH hashrate of about 4 Exahash/sec, a single S9 (15 Terahash/sec) gives you 1 vote out of 266,666. Another way to put it is that BCH needs more than 266,666 users, each running an S9 unit in their home, to push whatever changes they want.

That may sound like a lot of work (and it is), but there’s a better solution than buying and setting up physical miners. An easier and more cost effective way to mine in this scenario is to rent hashing power by the hour.

People may already be familiar with Nicehash, which has been around for a while.  WariHash.com is a competing US-based service that we launched three months ago that allows users to buy hashrate from miners in a trust-minimized way. We sell SHA-256 hashing power by the hour, and users can point that hashing power to any pool they want. By renting hashing power by the hour, the steep initial capital cost and knowledge requirement of setting up a mining operation can be avoided. This allows the average user to take more efficient roles in consensus events.

We fully agree with the statement made by Bitcoin.com on this matter: “In a free-market, it is not always possible, efficient or necessary to engage in lengthy dialogue with every possible player in the space, and indeed markets work best when individuals pursue their peaceful, voluntary interests.

As we approach the deployment of the dev fund, we will be looking to add additional hashing power and accept payments in BCH. If you are interesting in reserving hashrate in advance of the dev fund deployment, contact us at support@warihash.com and we can give you a quote. We look forward to serving the consensus needs of BCH, whatever they may be.