Why a Bitcoin Divorce will be REALLY Painful
It’s cliche at this point to say that I, as the author, don’t want to write this piece but that I have to. I didn’t think I had to write this piece. I thought that the drawbacks of a Bitcoin Permanent Fork are really obvious.
We’re at a crossroads in Bitcoin and it’s my contention that we’re in a very fragile state at the moment. We’re about to crack into two with consequences not unlike a divorce, with ramifications in every part of the ecosystem for years to come.
Tweets like this sound a lot like couples rationalizing divorce. “It’s for the best.” “It’s not going to be that bad.” “It’s going to be different for me than everybody else I know that’s gone through divorce.” Divorce may or may not be necessary, but the suffering is hardly over-hyped. By almost any measure it’s one of the most painful things anyone can go through.
Still, after seeing tweets like this, I figure that maybe the after-effects of a great Bitcoin Divorce are not that obvious or perhaps more contested than I believe, so in this article, I seek to show what will happen in case a hard fork does happen.
Idea vs. Reality
The idea of a fork sounds nice. After all, each branch can go their separate ways, the arguing can stop and each side can do whatever it is that they want instead of having to deal with the stubbornness of the other side. It’s more often than not the reason couples divorce. Divorce looks like it will give everybody what they want in the face of irreconcilable differences.
Unfortunately, the reality is different. There’s a whole lot of stuff that used to be communal property that now needs to be split up. And this isn’t just the house and bank account, there’s a lot of relationships (the kids, the extended family and friends) that need to adjust to the fact that the couple is not married anymore. Given the obvious adversarial conditions, almost everything ends up getting fought over and is usually the source of suffering.
Similarly in Bitcoin, the entire ecosystem will now have to adjust to the reality of two different coins. To begin with, you have miners and developers. Then you have other parts of the bitcoin ecosystem like wallets, exchanges and merchants. Finally, you have the users and the bitcoin brand, which both sides will fight over for a long, long time.
The Obvious Split
Perhaps the easiest thing to split will be the mining power and developers. This would be like splitting friends or relatives you had before the marriage. Many miners, for example, have already declared which side they will be on in the case of a split. There are already two development projects and developers will most likely continue to provide the features and bug fixes for their side of the branch.
What’s dangerous here is to assume that miners will simply mine the most profitable coin at that moment. This may be the short-term profitable thing to do, but we have neither the balance sheets of these miners nor their long-term plans. Many people going through a divorce do economically irrational things because it’s emotionally satisfying. Much like assuming everyone at a poker table will play rationally, assuming that one branch will win due to a higher price at one point is not safe.
More Difficult Splits
The more difficult stuff to split up will be wallets and exchanges. Generally, they’ll want to support both coins if they can. Unfortunately, doing so will require chain reorg protection (so called “wipeout” protection) and transaction replay protection. Both are fairly technical in nature and without some cooperation between warring sides, this is going to be difficult to implement.
The fight over wallets and exchanges will play out like kids in a divorce. Both sides will try to accommodate the wallets and exchanges, but ultimately, the judge (users in this case) will decide whether there’s enough demand for the wallets and exchanges to actually make the changes.
The Hardest Split of All
The most important group here are the users as they’ll ultimately determine the absolute and relative prices of the coins. The users are the ultimate judges as each coin will rise or fall based on their adoption. There’s a conceit by both sides that it is in fact their side that has the economic majority, but this is not something you can possibly know until the actual split. There are three reasons why this is the case.
First, people change their minds. Your current zealot for one side may very well switch sides for all sorts of reasons. A casual user publicly proclaiming they’ll hold no matter what may sell their coins once they see the market panicking.
Second, most people that own Bitcoin are not on Twitter or Reddit. I personally know several people that own enormous amounts of Bitcoin that have no opinion on the current situation. There simply isn’t good data about what the economic majority thinks and anyone claiming to have such data is lying.
Third, the actual event that leads to the split will have an enormous impact on how the split is perceived. A UASF fork at 55% is different than a BU emergent consensus fork at 75% is different than Segwit activation at 95%. Much as the actions leading up to divorce (affairs, hiding money, etc) matter to how the divorce is perceived, the same is true of Bitcoin and how its split will be perceived.
Since we won’t know where the economic majority will go and given that the situation is a lot more fluid than anyone admits right now, the biggest fight will be over the Bitcoin brand. This is the equivalent of a fight over alimony or child support in a divorce. This is not a fight that gets settled once. This is a fight that will continue for years to come. To understand why let’s take a look at the reasons why the Bitcoin brand is valuable.
Bitcoin, the First Mover
Bitcoin has built up over the 8+ years of its existence a fairly large infrastructure. This includes what we’ve already covered, including miners, developers, a user base, wallets, exchanges, businesses and liquidity against many different currencies. These are all built on the Bitcoin brand and while many altcoins have done fairly well in terms of price, all of them pale in comparison to Bitcoin in terms of all of the above in track record, security, volume and brand-awareness.
If none of these things were a factor, either side could make an altcoin with their wanted features tomorrow. Neither side does because Bitcoin itself is very valuable. This would be the equivalent of one partner in a marriage giving up everything and starting a new life elsewhere. It sounds nice, but who wants to give up on the tremendous investment they’ve already made?
Brand Confusion is Coming
If there’s a split, there will be two coins claiming to be the real Bitcoin. You can make all the arguments you want for your side, but the fact that there are two camps claiming to be the real Bitcoin will confuse just about everybody that wants to invest. Remember that bitcoin.org and bitcoin.com will belong to different sides after the split. r/bitcoin and r/btc will be run by different sides. Of course, that’s true today, but it’s going to get much worse after a divorce. Each side will want their side to be known as the “true” Bitcoin and the other as a false claimant.
War Inevitably Follows
All the people that are moderate now will either get out, become silent or become more extreme in hating the other side. The extreme people are certainly not going to become more moderate. What you’ll end up with are two sides that will be at each other’s throats. Think Game of Thrones level of ruthlessness.
You think the situation is bad now? Imagine what well-funded, tech-savvy, semi-anonymous people can do to each other. Much like political campaigns that are built on negative ads, this will turn off many users. Instead of effectively voting for either side, users will get out of Bitcoin instead.
Cycle of Destruction
The incentives in a war are to destroy the other side and inevitably, both sides will succeed in some measure. Users will be leaving in large droves while relatively few users will be entering due to brand confusion. This will further escalate the war and cause more destruction and brand confusion, resulting in net negative user growth.
The only end to this sort of escalation is when one side is subdued or destroyed or both sides sue for peace. Suing for peace doesn’t happen until both sides are sick of conflict and that’s years away. What’s far more likely is that both sides fight for a long time and destroy Bitcoin with it. Even if one side wins, the prize is going to be a much weakened, tainted, less secure and brand-confused Bitcoin. In other words, we have a Pyrrhic war ahead.
The prospect of a very destructive war ahead should be a sober reminder to all involved that a contentious fork is NOT a good idea. Yet the idea that there will be a quick and decisive victory persists and is the basis of the very aggressive and conflict-heavy drama that currently plagues Bitcoin discourse. We are, in a sense, headed for divorce, so what can we do to stop this destructive action?
First, let’s recognize that the status quo isn’t that bad. In fact, it’s preferable if you’re a believer in market innovation. Ryan X. Charles (the same guy that wrote the tweet above) is creating a trust-less micro-transaction hub as part of Yours.org. If there is a large demand for micro-transactions, services like his will save users money, unclog the Bitcoin network and generate money for his investors. This is an excellent BATNA (best alternative to negotiated agreement), not a disaster as many people on both sides believe.
Second, let’s recognize that what we’re arguing about really isn’t that big a deal. Transactions on the network are more expensive, that’s true. But the main way in which people use Bitcoin isn’t to buy coffee, it’s as a store of value/investment. This is the equivalent of divorcing over a minor issue when the major issues are agreed upon. (And for the record, you can still buy coffee with market innovation like Yours.org above!)
Third, don’t let saber-rattling go unchallenged. Both sides are guilty of threatening divorce. Ask those people if they really know what divorce would mean and what they would do in case their very optimistic scenario of quick victory doesn’t come to pass. Ask if they would be willing to throw away all the good stuff Bitcoin provides for their way on this one small issue. Peace is the way to prosperity, not war.
Bitcoin is a huge, revolutionary change to so many industries. Let’s not throw away all the progress we’ve made on a minor disagreement.