Why all the Bitcoin forks?

in #bitcoin7 years ago

New cryptocurrencies face a simple economic dilemma: how fast to mine?

chart: Blue is Bitcoin

If they mine faster than Bitcoin, they're more attractive to miners, and the inflation rate drops off very quickly. The miners can become missionaries and the network effect can start. But when the mining reward drops off, the miners will abandon the coin. New miners will have little motivation to join late. If the coin tries to transition to transaction fees too quickly, the users will find it too expensive. If the coin is technically superior, miners and users will be tempted to fork it with a new genesis block, and do the whole thing again (see zcash, zerocash and zencash).

If they mine slower than Bitcoin, the mining rewards are low, and the coin won't attract miners in the first place. For the users, the inflation rate stays high for years, making it a bad store of value. Advanced technical features can't save such a coin, users can exchange into it, use the features, and change back out to a safe store of value. A halfway successful coin can be attacked by the miners for more profit than they would make mining it.

This leaves the alternative: piggy back on Bitcoin's distribution by forking Bitcoin.

This leverages the popularity and network effect of Bitcoin to bootstrap the coin into existence. Bitcoin forums that would normally consider your altcoin off-topic allow discussion... Everyone already has some! These users can create much more pressure on exchanges to add the coin than a fresh cryptocurrency, especially if your fork has "bitcoin" in the name.

Unfortunately, most new currencies created this way won't be very innovative. To really leverage the network effect they need to be as compatible as possible at the wallet-level. This forces them to keep the front-end of Bitcoin; which means the same addresses, usage, and most of the same features. The trend to forks may not last very long for this reason.

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