A flaw in Bitcoin’s design created the incentives for ICOs & now chain forks: here’s why
We’re heading into what could well be a $&!* storm in the cryptocurrency space during November 2017 with plans afoot for creating both BTG and B2X Bitcoin chains. BTG is a fork of BTC and depending on whom you ask, either B2X or BTC will be the fork from the original Bitcoin chain. That will bring the total versions of Bitcoin created within 3 months to 4!
The cryptocurrency community was just coming to terms with the massive amount of money poring into token sales in 2017 (more than $2bn already) and now we have to wrap our heads around why Bitcoin will continue to create chain splits. It’s actually not that hard to understand what’s going on here, it’s about economic incentives.
I’ve been running the Bitcoin Foundation for over a year now and let me tell you — just because everyone except Jamie Dimon loves bitcoin doesn’t mean that they’ll contribute to funding programs that lobby for better legislation, drive awareness & educate people about bitcoin. Even regular code contributors to the Bitcoin Core client that we all rely on, have to rely themselves on being employed by organizations like Blockstream & MIT DCI in order to pay the bills. Only a minority of people will contribute to FOSS projects for free, usually for reasons relating to either philosophy or personal prestige.
Most people won’t contribute to funding a project unless there’s an economic incentive for them to do so. Why have we seen such a massive influx of funding into token sales in 2017? It has made economic sense to contribute to projects that raise funding in a token sale because many of the tokens have increased in value on secondary markets. I’m invested in a startup that is trying to solve the problem of financial exclusion in developing markets and we’ve concluded that the most effective way to bootstrap the network effects needed to drive marketplace adoption is by using the tokens to pay customers to use the product — strong economic incentives to contribute to the project exist for both funders and users.
On the other hand, there have been few economic incentives for people to contribute to funding the development of Bitcoin, outside of mining. ICOs wouldn’t have come into existence if there were strong economic incentives for holders of bitcoin to participate in crowdfunding campaigns to support cryptocurrency protocol and application development. Similarly, more chain forks will happen, because they enable just about anyone to airdrop free coins into the hands of early adopters to accelerate network effects, and in the latest incarnations, even enable a pre-mine of the chain coins to go to the new chain’s creators.
If 2017 has been the year of the ICO, then 2018 is likely going to be the year of the chain split. Is this bad news for the Bitcoin brand? More signs of a bubble in cryptocurrencies? I don’t think so. This is evolution and evolution is characterized by chaos.
PS: you’re welcome to prove me wrong and send a few BTC our way to support the programs of the Bitcoin Foundation.
