Bitcoin Exchanges and the Delicate Balancing of Fork-Coins

Bitcoin exchanges have to be some of the most nimble and fire-proof service providers in financial cyberspace. For eight years every possible problem has been thrown at them. Maybe. Here is another…

Exchanges are making preparations to safely handle a transition to a >1MB Bitcoin blockchain. They are right it is important to minimize the risk of such a split through appropriate planning and preparation. They must ensure a smooth transition, protecting users, and avoid confusion.

Observers of this activity will consider that it is important not to list the coins of a minority proof-of-work chain post-fork as BTC (XBT). Exchanges should desire to remain neutral as the market determines which chain shall be declared “Bitcoin”; this requires the avoidance of sending a message to end-users that the minority chain is still Bitcoin and that it would be safe to use.

A minority chain carries risks as it will need considerable time for a mining difficulty adjustment. The combination of high difficulty, low hashrate, a 1 MB block size limit, significant exposure to a 51% attack risk, and background transaction volume will severely congest transaction capacity on the minority chain. End-users will find it exceedingly difficult to make any of their transactions confirm in a reasonable time.

Nodes currently consider the valid chain with most proof-of-work (PoW) the correct one, and miners will keep extending that chain regardless of the size of a minority chain of specific blocks below the historic limit of 1MB. Adhering to a minority chain would not only be detrimental to the current user experience, but it would also be viewed negatively by the outside world looking in. End-users, mistakenly guided to believe that the minority chain is still Bitcoin, may incur significant financial damages.

The probability of a minority hashpower catching up diminishes exponentially as subsequent blocks are added to the majority chain.

It is paramount that respective exchanges safeguard the monies of their customers during a potentially turbulent coin split. Therefore, a wise strategy is to use new identifiers for both forks: e.g. BCC (or XBC) and BCU (or XBU) for coins on the minority PoW and majority PoW chains, respectively. As already stated, the identifier BTC (or XBT) can be assigned to the dominant coin at a later, more appropriate time.

The majority’s choice is represented by the chain which has the greatest proof-of-work effort invested in it. This chain will grow the fastest and outpace any competing chains.

Exchanges, for the benefit of their customers and the bitcoin sector, should clarify what they consider as Bitcoin. Whether it is defined by the majority hash rate, or defined by a particular development team. This will enable end-users, in the event of a fork, to make better decisions as to whether they wish to trade on a less secure and, possibly, ever-diminishing minority chain, or to continue to trade on the majority chain.

With regards to replay risk, the general principle is that the minority fork should protect itself with the approprate measures in the wallet code of relevant implementations.

“The probability of an attacker catching up from a given deficit is analogous to a Gambler’s Ruin problem.”

It might also be prudent for exchanges to notify users as to whether it is defined by the SHA256 majority hash-rate if the PoW of the minority chain is changed in an implementation by its development team.

Quote from: https://www.bitcoin.com/bitcoin.pdf

Andrew Clifford — President at Bitcoin Unlimited.
Thanks to a number of BU members for contributions to this article.