A Brief Study of Cryptonetwork Forks

Analyzing Variances Between Forked Assets

BlockChannel
Sep 25, 2018 · 12 min read
  • Despite lower use metrics, child networks trade at higher user and transaction value multiples (e.g., NVT ratio) than their parent networks.
  • Users and developers tend to remain loyal to the original network, while most miners are loyal to economics only, directing hashpower to the most profitable network of the moment.

Intro

Forks are as ubiquitous as they are misunderstood. To frame the debate on the role and value of forking, the aim of this article is to establish a factual baseline for the study of forks.

How do protocol developers behave after a fork?

The loyalty of users to the parent network is matched by that of core protocol developers. Comparing the top contributors of Bitcoin to Bitcoin Cash, Ethereum to Ethereum Classic, and ZCash to ZClassic, their corresponding developer communities diverge over time (note that the recency of the Monero forks precludes serious comparative analysis of the codebase). Following Azouvi et al’s work, I compute the Sorensen Dice coefficient for each network and its child. [1] Plotting the coefficient over time (Figure 2), we see a clear divergence in the contributors beginning at the time of the fork (lower numbers imply less overlap in core developers).

How do miners behave after a fork?

Unlike users and developers, miners exhibit no discernable loyalty to an underlying chain; they behave like economic mercenaries, loyal only to profit. This is consistent with the hypothesis of an efficient mining market, which we explore by looking at a proxy for relative mining profitability. Following Kiffer et al’s work on the Ethereum/Ethereum Classic fork, I divide average daily difficulty by total revenue per block (block reward times average USD exchange rate per coin). This can (very roughly) be thought of as the number of hashes required per dollar of revenue.

What does all this mean for cryptonetwork value capture?

It is often casually argued that network rents can be “forked away,” with value flowing to a less rent-seeking fork. While we lack sufficient evidence to confidently reject this hypothesis, early evidence points against it.

How do divergences in network values correlate to cryptonetwork ‘fundamentals?’

Divergences in the network value of parent and child chains present an interesting petri dish to further investigate relative valuation metrics, and how the market rationally prices cryptoassets based on their fundamentals (or not).

Conclusion

While we are still in the early days of understanding the consequences of cryptonetwork forks, a few tentative patterns have begun to emerge. Contrary to the narrative of frictionless forking sucking value away from large networks, child chains to date have struggled to attract demand and developer talent from their parent communities. We can speculate that the inability of almost any child chain to meaningfully appreciate relative to its parent may result from this difficulty of diverting users and developers from parent networks. That said, child chains often trade at relative valuation premiums when compared with parents. While the short history of major network forks precludes more confident assertions, we intend to use this study as a baseline to revisit the economic dynamics of forking as more data becomes available.

Footnotes:

[1] Sorensen Dice is a measure of population heterogeneity commonly used in ecology. Here, it is computed by taking two times the number of common contributors in the set of top 30 contributors for each codebase (ranked by total number of commits) and dividing by the total number of contributors in both sets (i.e. 60).

BlockChannel

BlockChannel is a new media & educational hub focused on the socio-cultural/economic issues related to blockchain technologies like BTC/ETH/& ZEC. Visit BlockChannel.com for more resources; and SoundCloud.com/BlockChannelShow for our official podcast.

BlockChannel

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BlockChannel is a new media & educational hub focused on the socio-cultural/economic issues related to blockchain technologies like BTC/ETH/& ZEC.

BlockChannel

BlockChannel is a new media & educational hub focused on the socio-cultural/economic issues related to blockchain technologies like BTC/ETH/& ZEC. Visit BlockChannel.com for more resources; and SoundCloud.com/BlockChannelShow for our official podcast.