So Bitcoin hard forked the other day, resulting in there now being two flavors of Bitcoin: regular and extra crispy leaded and unleaded vanilla and chocolate chip Bitcoin and Bitcoin Cash. The result? Well, Bitcoin Cash is up 200% so that’s something.
I have to confess that I was semi-interested in mining Bitcoin Cash for all of about five minutes. In the short term, there will be room for less efficient (i.e. non-Bitmain mining rigs) to operate less efficiently and still be profitable during the initial bootstrap. In other words, it’s an opportunity to make some money before the mining population gets super competitive – probably for about 3-6 months depending on how much miners do or don’t embrace Bitcoin Cash. Upon further reflection though, as the impact of mining significantly undermines the performance of Elder Scrolls Legends on the computer I’d be using to do that, ergo I decided against it (gotta have one’s priorities straight after all).
Anyway, hard fork complete. The brouhaha is a result of philosophical disagreements about the underlying architecture. It’s not exactly about the size of the block, though that’s how it seems like it’s being discussed in the press. The block size is actually not the issue though. I mean, it matters, but it’s not motivating either side of the debate. In reality, It’s about two things: the security of the model vs. the economics of mining. To set the stage, there’s a core problem: specifically, transactions weren’t getting processed in a timely fashion. To fix that, you can do one of a few things: keep some transactions off the ledger, open the “throttle” on transaction processing, or let it be slow. Miners don’t want to move stuff off the ledger (because, of course, that’s how they make money.) Likewise, the other side doesn’t want to undermine the security of the model to preserve the business model for miners.
What do I mean by “keep transactions of the ledger”? Think about a stock trade. Say I buy 100 shares of IBM from a broker dealer like the big dumb bull (i.e. Merrill). For the record, I’m allowed to call it “big and dumb” because I worked there — so I say it with love. Anyway, where do the actual securities come from to fill an order like that? Some dude buying or selling them on a trading floor in lower Manhattan? Not likely. In reality, 9 times out of 10 a transaction like this comes from inventory the broker dealer maintains in house. They have a pool of inventory, and they buy and sell from that pool meaning that not every trade some yahoo like me might want to buy has to go to the floor and cost them money and resources every time I want to rebalance my portfolio or because I decide pork futures are the hot new thing.
This is analogous to an off-ledger BTC transaction. It’s efficient because coins can be exchanged without having to record each and every fractional coin transaction that somebody happens to want to make. The downside? It decreases the need for mining – and thereby reduces the amount of money miners can make from transaction fees and so on.
I don’t think this debate is over. Yes, the problem may be solved (sort of) for now, but what I really think is that cryptocurrencies need a market-maker. I’ve said this before, but we need someone to add liquidity. How do you do that? Have someone (ideally more than one someone) day-trade it on an institutional scale. Like a bajillion transactions a day. To get there, we need a way for someone to actually make a bajillion trades and not crush the ledger in the process — and not spend an equivalent bijillion dollars on transaction fees to do so.
If a market-making’s worth of transactions hit the ledger as a matter of course, transaction processing would be jacked on a scale we haven’t even imagined. So clearly we need some method – honestly, I don’t really care what – to normatively allow market making… allowing someone (coinbase, bitfinex, the ghost of Mt. Gox, whomever) to keep an inventory and escrow. For example this.
Does this fork get us closer to that? Maybe. So I’m cautiously optimistic. Time will tell which side wins… or maybe both do. Either way a money making opportunity in the short term and a potential path to marketing making in the future. So yay… I guess.