You might not expect bitcoin miners to leave money on the table – but according to estimates, some are, and lots of it.
Rather than simply mining the version of the bitcoin blockchain that’s purely the most profitable (today it’s the original BTC blockchain), a portion of the network is instead choosing to earn less by directing computer power toward bitcoin cash (BCH or BCC), a version of the blockchain created in a fork earlier this month.
But, far from just another data point in the ongoing flame war between the two camps, it’s a development with some interesting implications.
That’s because the results, while early, appear to provide a counterpoint to the thinking that has so far driven decisions in the field of “crypto economics,” wherein protocols are built to combine economic incentives and game theory.
Should more money be available on one version of the blockchain, it would stand to reason, some miners would simply switch.
But the continued existence of bitcoin cash shows that short-term profit isn’t the only consideration.
While some argue that blockchains that failed to garner majority hashing power will die off – and bitcoin cash still could – it is now providing the latest example that this theory doesn’t necessarily work in practice.
And, as bitcoin heads for potentially more forks ahead, this suggests more versions of the blockchain could persist, possibly splitting miners and diluting the network.
So, who’s mining bitcoin cash? And why are they OK with losing money?
To begin, there are currently only a few mining operations, the largest an unknown actor (or pool of actors) controlling roughly 90 percent of the hash power on bitcoin cash.
Some speculate the motivation driving these miners is a purely ideological devotion to bigger blocks, the reason bitcoin cash supporters split from bitcoin in the first place. (Bitcoin cash boasts 8MB blocks, as opposed to 1MB blocks on bitcoin).
Others believe it’s more personal, and there’s reason to suggest it could be both.
ViaBTC, the first mining pool to enable its miners to support bitcoin cash, has called for the developers of bitcoin’s most popular software implementation, Bitcoin Core, to be fired. Further, Jihan Wu, co-CEO of Bitmain, one of the world’s largest miners, spends much of his day sending memes mocking the team on a popular bitcoin cash WeChat thread.
The anecdotal evidence would suggest then that “political” or “ideological” motivations are also coming to play a role in mining. After all, there is always a certain intangible value to validating your own arguments.
Others, though, believe there’s more at play than simply a digital “I told you so,” and that miners are banking on bitcoin cash’s future profitability.
The mining loop
Another question is how to gauge “profitability,” as there are many factors that contribute to how profitable it is to mine any cryptocurrency. This includes its price, how hard it is to mine (“difficulty”) and how often block rewards are released
Against these metrics, it’s safe to say bitcoin cash is having challenges, so far.
Today, it’s taking longer for bitcoin cash miners to mine blocks, and coupled with the fact that its price is roughly 6% of bitcoin’s, most miners don’t seem particularly interested (yet) in moving over to the new network.
This creates a kind of chicken-and-egg scenario, one the creators and users of bitcoin cash appear to be aware of as evidenced by their complex efforts to make it easier mine. But, it is taking a long time for these changes to be enacted.
Still, supporters are hopeful that bitcoin cash can reach an equilibrium at which more miners might have an economic motivation to make a switch.
As bitcoin cash difficulty slowly adjusts downward toward a targeted 10-minute block time, the cryptocurrency is growing easier to mine. Several blocks are now being mined an hour.
Still, even if bitcoin cash finally reaches the point where it’s as profitable or more profitable than bitcoin, it’s unclear what will happen.
Scott Morgan, co-founder of bitcoin wallet Airbitz, expects some miners, serving their profit motives, to move over to bitcoin cash.
Morgan told CoinDesk:
“There are some miners that are going to be smart. They’ll wait to see what the blocks look like, and then divert some attention to it.”
The profit could be even greater seeing that miners of bitcoin cash can use older, less-expensive mining rigs. And at this point, mining pools, which provide the software for many smaller miners, could be tempted to enable the option.
China-based BTC.TOP, for example, plans to let miners in its pool mine the cryptocurrency once it becomes profitable. It’s possible that even mining pools that are ideologically opposed to bitcoin cash and its scaling goals might do so for the profit.
But we might not have to wait and see for long.
According to a Reddit post, bitcoin cash could have its first “non-emergency” difficulty adjustment this weekend. At its current price, and with the difficulty adjusting downward by about 60%, some believe bitcoin cash could then eclipse bitcoin, becoming more profitable to mine than the latter.
Still, even if mining pools move over, bitcoin developer Alphonse Pace argued this could only be a temporary move. Switching from cryptocurrency to cryptocurrency to chase profit is a common practice, he argued.
“Mining will eventually reach a parity where mining one chain is equally profitable on any chain,” Pace said. “If it becomes more profitable, it will be temporary until difficulty swings back, and it’s no longer.”
The arguments for temporary spikes in bitcoin cash mining only get more complicated from there.
Bitcoin Unlimited chief scientist Peter Rizun highlighted another potential scenario: Mining bitcoin cash blocks could be more profitable to mine than bitcoin during short periods that have to do with its difficulty algorithm, contingent on its price increasing.
“Because the difficulty adjusts only very slowly, bitcoin cash becomes twice as profitable to mine as bitcoin. Hash-per-hash, miners would earn double by mining bitcoin cash,” he said.
Basically what Rizun’s saying is that if the price of bitcoin cash rose, the long difficulty adjustment window would give miners a longer time period to make money. But Rizun said that could also be temporary.
Based on the bitcoin cash’s unique mining algorithm, miners might earn more for a couple weeks, before the difficulty would adjust back up again.
Miners follow users
But whether bitcoin cash and its mining mechanism will be profitable isn’t solely based on this “break-even” point where miners are incentivized by profit.
“It’s a gamble,” Airbitz’s Morgan said, arguing the price of bitcoin cash could just as likely go down, since many users still intend to sell off the coins they received simply by being bitcoin owners during the fork.
Some bitcoin cash owners might not yet know how to sell their holdings, Morgan continued, or haven’t been able to because the slow block times have led to transaction backlogs.
“A lot of volume hasn’t been touched yet.”
Sources also stressed that bitcoin’s rise has been more about user adoption, and that it will likely be the same for bitcoin cash.
The argument is that bitcoin’s long-term viability, and mining profitability, has depended on (and will continue to depend on) consumers and businesses actually using the cryptocurrency, and that the blockchain with the most users is the most valuable.
It’s an increasingly common philosophy in the bitcoin space due to how recent game theoretic events related to scaling have played out, one that also advances understanding of the nascent science driving it all.
Bitcoin developer Daniel Krawisz argued:
“I think investors matter a lot more than miners. [Bitcoin cash] should worry about them.”