How Bitcoin Cash's Higher Inflation Rate Harmed Bitcoin

Note: This article has been updated to make it clearer that a Bitcoin Cash hard fork was initiated on Monday to solve the issues discussed herein.

In the aftermath of the abandonment of the SegWit2x proposal by some of its most prominent supports, Bitcoin Cash has seen a spike in interest, and due to the way Bitcoin Cash mining works (or at least how it worked until Monday's hard fork), supporters of the Bitcoin alternative were able to launch a clever propaganda campaign (intentional or not) of sorts against the original Bitcoin over the weekend.

Bitcoin Cash’s Mining Difficulty Adjustment Algorithm

To understand the recent Bitcoin Cash propaganda, one first must understand the spinoff coin’s emergency difficulty adjustment (EDA) feature.

Bitcoin has a difficulty adjustment algorithm that is used to keep the time between each new block at around ten minutes. As more hashing power is pointed at the Bitcoin network, it becomes easier to solve the mathematical puzzles that reward miners with new bitcoins and transaction fees. If blocks are being found by miners too quickly, the Bitcoin Difficulty will increase to make it more difficult to find blocks in the future and therefore slow down the pace at which new blocks are found.

Conversely, bitcoin mining becomes easier when blocks are being found too slowly.

When Bitcoin Cash was first created, it included an alteration to this algorithm that controls the mining difficulty. This was needed because Bitcoin Cash had relatively low support and blocks would be found very slowly if the original Bitcoin’s mining difficulty setting was not changed.

While Bitcoin’s mining difficulty is readjusted roughly every two weeks, Bitcoin Cash’s difficulty adjustment algorithm can make changes on a more frequent basis. It is these more frequent changes that miners having been gaming for months. When looking at the history of Bitcoin Cash inflation, it’s easy to find periods of time where blocks are found six or more hours apart followed by new blocks being mined basically every minute.

Miners are effectively able to inflate Bitcoin Cash at a rate much faster than was originally intended in Bitcoin. As of this writing, there are around 125,000 more Bitcoin Cash tokens than there are bitcoins, even though they’re supposed to have the same monetary policy.

A hard fork intended to fix the problems associated with the EDA feature was activated on Monday.

How Bitcoin Cash Mining Negatively Affects Bitcoin

Because Bitcoin Cash had these periods of time where blocks are being mined once or twice per minute (or faster), it skewed the economic incentives for miners who were able to mine both Bitcoin and Bitcoin Cash. While the vast majority of the economic value is found on the Bitcoin chain, mining on Bitcoin Cash became more profitable at times because more block rewards were being found over a shorter timeframe.

This means that economically-motivated miners were incentivized to stop mining Bitcoin and move over to Bitcoin Cash whenever these fast blocks were rolling out. The drop in Bitcoin’s hashrate led to much slower blocks, which had the side effect of increasing congestion on the network.

A higher rate of inflation on the Bitcoin Cash blockchain had effectively been incentivizing miners to lower the capacity of the Bitcoin network over short periods of time such as this past weekend. Bitcoin Cash’s higher rate of inflation from before Monday's hard fork can be seen at fork.lol.

The increased congestion on the Bitcoin network is what Bitcoin Cash proponents could use as propaganda on social media because it led to much higher transaction fees and slower confirmations on the Bitcoin network. Of course, those who have recently been pointing out the high fees on the Bitcoin network via Twitter and elsewhere leave out the relevant technical details regarding Bitcoin Cash’s EDA algorithm when talking about this sort of stuff.

Bitcoin transaction fees are at outrageous all-time highs right now. pic.twitter.com/EPirMGjOwk

— Ryan X. Charles (@ryanxcharles) November 12, 2017

It should be pointed out that it’s unclear whether people are participating in this propaganda campaign knowingly or if they just see the higher fees on the Bitcoin network without an understanding of the root cause.

It’s unclear if Bitcoin Cash’s EDA was specifically implemented for the purpose of increasing congestion on the Bitcoin network, although Bitcoin Unlimited Chief Scientist has indicated as much.

According to data made available by Bitcoin Core contributor Pieter Wuille (see chart below), Bitcoin’s one-day window hashrate estimate declined by more than 50 percent over the weekend, while Bitcoin Cash blocks were being mined left and right.

A clearer indication of Bitcoin’s decreased capacity over the weekend due to Bitcoin Cash’s increased inflation can be seen when searching for Bitcoin blocks mined on November 11, 2017 on Blockchair.com. The results indicate that 81 blocks were mined on that day. This is 56.25% of the number of Bitcoin blocks that would be mined on a normal day (144).

Data from BitInfoCharts indicates Bitcoin was experiencing all-time high transaction fees over the weekend. Fees are still high today as the network continues to chug through the transaction backlog.

All Fair Game in Bitcoin Land

The use of a higher inflation rate (intentional or not) to bleed miners away from Bitcoin is fair game in the land of cryptocurrencies. Simply put, there are no rules and regulations, and crypto systems are not supposed to be built on everyone getting along and playing nice. Cypherpunks write code.

While this weekend’s propaganda campaign may have been able to win over some Bitcoin Cash converts, it’s likely nothing more than a short-term gimmick to pump the price. In fact, the Bitcoin Cash price doubled in value and then lost all of that doubling in a matter of hours over the weekend.

#BitcoinCash doubled in value and then went back to where it started in a matter of hours early this morning. Be careful out there.(Pic via @CoinMarketCap) pic.twitter.com/JtVYRucr4J

— Kyle Torpey (@kyletorpey) November 12, 2017

Bitcoin itself is still a risky investment by traditional standards, and this weekend’s Bitcoin Cash price swings show that the risks involved in altcoins or spinoff coins are potentially even greater. Over the summer, many speculators were hyped about the prospects of “The Flippening,” where the Ethereum market cap would rise about Bitcoin’s market cap for the first time ever. Since then, the ether price has declined around 66% against bitcoin.

As the MIT Digital Currency Group’s Tadge Dryja stated at the recent Scaling Bitcoin workshop at Stanford, “Bitcoin is the currency of enemies.”

You can’t trust anyone in these markets. Be careful out there.