Fork Off: What the Bitcoin Cash Hard Fork Means for Crypto
Over the past weeks, the crypto ecosystem has been abuzz with the news of the Bitcoin Cash division that has created two new projects: Bitcoin Cash ABC and Bitcoin Cash SV. This comes just over one year after Bitcoin Cash forked from Bitcoin.
Putting aside the drama of the threats being made from one project to another, we have to ask ourselves — What does this division mean for the crypto ecosystem as a whole?
To answer that question, let’s dive into what precipitated this dispute in the first place, and the pros and cons of Bitcoin Cash splitting into two competing projects.
Unstructured Governance, Divisions and Hard Forks
Systems of governance are what frame the decision-making process and determine who has the power to make decisions. Governance is not a new issue and has been the subject of countless books, studies and academic papers. In fact, pick up almost any Harvard Business Review and you’ll find an article or two on the subject or corporate governance.
Traditionally, organizations have been governed through centralized systems of control. That was, until Bitcoin was introduced and challenged everything we thought we knew about traditional governance structures.
For the first time, it was technically feasible to have a currency that could be run without a centralized managerial authority.
At the start, this novel system worked well with Bitcoin creator Satoshi Nakamoto at the helm. His presence as the founder and leader helped to unofficially guide the project when there were disagreements as to what decisions should be made.
But once he left the project, things changed.
Factions grew amongst the different stakeholders, and eventually reached a breaking point over the issue of block size limitations.
Unable to reach consensus and without any explicit governance structure in place to push forward a decision, the Bitcoin community ultimately fractured itself whereby one disgruntled group split off to create Bitcoin Cash.
After forking from Bitcoin, Bitcoin Cash made some changes to the code, but maintained the original system of unstructured governance. In fact, it was the Bitcoin Cash community that claimed to be the “true Bitcoin” because it’s code changes were more in line with what Satoshi Nakamoto envisioned for Bitcoin.
Fast forward a year and now we’re seeing irreconcilable differences within the Bitcoin Cash community itself, causing Bitcoin Cash to split into Bitcoin Cash ABC and Bitcoin Cash SV.
When there is no governance mechanism, if uniform consensus cannot be reached the project simply splits. And as long as there continues to be no defined system of governance in any of these forks, we can expect to see further forks down the line. Forks of forks of forks.
Now the real question is — is this good or bad for the crypto ecosystem? Is the instability and unpredictability worth upholding the ideological ideas of completely decentralized decision-making?
To find out, let’s look at the pros and cons of project fragmentation.
The Benefits of Forking
If you’re in crypto and have not read Antifragile by now, I’d go to Amazon right now and get yourself a copy. It’s a great non-crypto exploration of the benefits of decentralization.
The premise behind the book is the consistent role that unpredictability, randomness and probability play in life. But rather than being negatives, Taleb argues that the systems that embrace these qualities become more robust and resilient as a result — Antifragile.
“Some things benefit from shocks; they thrive and grow when exposed to volatility, randomness, disorder, and stressors and love adventure, risk, and uncertainty.”
― Nassim Nicholas Taleb, Antifragile: Things That Gain From Disorder
Looking at the bigger picture of the crypto industry, even if we see individual crypto projects fragment and compete with one another, in the process of doing so they are driving the development of the overall crypto ecosystem forward.
This is at the core of decentralization and community-led projects.
When you split a project in two there are a couple of benefits.
First is the potential for much faster development of technology. When groups split off they don’t have to deal with competing interests and internal politicking and they’re able to push forward their unique visions of what the “ideal” technology should be.
Take the Bitcoin and Bitcoin Cash hard fork. I’m not going to pretend to know what the best technological approach to dealing with blocksize limitations is. But now the world has two different projects working intensely on competing technologies. May the best technology survive.
Which brings us to our second benefit. Splitting projects results in a more diverse ecosystem of projects. This is darwinism at its best. Survival of the fittest blockchain project. The more variety of crypto projects that are pursued the more likely it is that the industry itself will survive. While the ability to fork might make any individual project more vulnerable, it certainly makes the industry as a whole stronger. This is antifragility at its best!
Finally, users benefit most from the competition and competing technologies. The fastest, cheapest and most competitive technologies will survive. And that serves consumers most.
This is very much similar to how Taleb describes the food industry in Antifragile. While individual restaurants are weakened when competition enters the neighborhood, the industry as a whole becomes superior and consumers ultimately get better food and service at lower prices.
The Drawbacks of Forking
On the flip side, a hard fork can have serious consequences on the individual projects and their community of users and investors.
At a minimum, when a project is fractured it will result in fewer users, miners, and developers. This can have negative consequences as fewer users means greater price volatility, fewer miners means less hashpower and the accompanying security it provides, and fewer developers means less robust technology and fewer products and services.
Only exceptionally large projects can usually survive such fragmentation.
On top of that, when a project splits into two, the future of both projects is shrouded in uncertainty. At the outset, it’s difficult to tell which side the various stakeholders will back. Will the split result in two projects that can succeed? Or will one project thrive while the other fails? Or will the split cause both projects to fail as neither will have the necessary resources?
As you can imagine, investors and businesses aren’t big on extreme uncertainty, so in the case of a hard fork you’ll find many running for the hills. The risks are just too great.
Just a week into the Bitcoin Cash split and we’re already seeing some businesses discontinue accepting Bitcoin Cash altogether, such as payment provider GloBee. And we’re likely to see many more in the coming days and weeks.
What does this mean for Crypto Law Insiders?
Disputes in any organization are inevitable. It’s to be expected. But without strong governance systems in place, even mild disagreements can have serious consequences.
That’s what we’re seeing in the Bitcoin Cash community. And that’s what we’ll continue to see in other organizations that have no system of governance. Today it’s Bitcoin Cash ABC and Bitcoin Cash SV that are splitting off from an otherwise robust project.
In a year or two, those projects will both likely face internal strife of their own. If anything is certain, it’s that difficult technological decisions will need to be made by both Bitcoin Cash ABC and Bitcoin Cash SV if they want their projects to stay relevant.
But what are the odds that either project can make those decisions without fracturing themselves again? What faith can we, as users and investors have that either project will remain robust and not simply result in a series of never-ending forks? Over and over again.
Insiders should be aware of this possibility when making investment decisions and realize that only projects with strong governance are likely to be around for the long haul.
However, this article would not be complete without an acknowledgment that Satoshi’s decision to forgo any formal governance system in Bitcoin has greatly benefited the crypto ecosystem as a whole. From Bitcoin, thousands of competing projects have emerged. Thousands of competing versions of the ideal technology. And while most will eventually fail, some will survive.
It’s technological Darwinism. And in that sense, Satoshi should be credited with an amazing accomplishment: cryptocurrency is antifragile.
