BCHN may become the victory of BCH hard fork

The BCH network emerged in August 2017 after leaving the original Bitcoin (BTC) blockchain through a hard fork. On November 15 this year, it experienced another hard fork, splitting the BCH network into two new blockchains: BCH ABC (BCHA) and BCHN (also known as "BCH Node"). The main difference between the two is that miners must pay an 8% miner tax to the BCH ABC development team.

In the above two networks, BCH ABC has almost no hashing power, while BCHN has obtained the majority of computing power, which indicates that miners may generally favor BCHN over BCHA. Before the fork, the last "common block" of BCH was mined by Binance, while the first block that split the blockchain in two was mined by AntPool.

Another fork

This is not the first time that the BCH community has experienced a fork. The network experienced its first fork in August 2017, followed by another fork in November 2018, through which it was further split into Bitcoin Cash ABC and Bitcoin Cash SV (BSV). The latter's token is named "Satoshi Vision", and the purpose of this split is to allow Bitcoin to maintain its original vision of "currency for peer-to-peer daily transactions."

As time went on, Bitcoin increased in value and received more mainstream attention, which led to it being used more as an investment tool and less for daily transactions as originally envisioned. In addition to straying from its original vision, Bitcoin also faced scalability issues, as the network was unable to handle a large number of transactions due to its 1-megabyte block size. This caused transactions to spend a lot of time in the queue waiting for confirmation.

BCH solves this problem. During its "stress test day," the BCH network's transaction volume rose to 25,000 per block, and fees did not surge compared to the Bitcoin network's 1,000 to 1,500 transactions per block. However, the most recent hard fork, which took place on November 15 this year, was motivated by something other than improving network efficiency.

A hard fork is beneficial to the pre-fork asset because it clearly divides the different advantages of the network, allowing participants to choose which advantages affect them more, which can also result in the value of the resulting token exceeding the value of the original coin. However, due to the different incentive mechanisms of the forked coins, one coin will usually take the lead, while the other coin will lose most of its market value due to lagging behind and be more vulnerable to 51% attacks.

Impact of the current fork

The reason for this particular hard fork was a disagreement among miners over the proposed rules that would have required BCH ABC to fund protocol development with an 8% miner tax on mined BCH. Developers were split into two factions: BCH ABC, led by Amaury Sechet, who proposed the update, and BCHN, which has removed the source code, otherwise BCH miners would be subject to additional taxes.

Ashu Swami, CTO of Apifiny, a cryptocurrency liquidity and solutions provider, told Cointelegraph why BCHN will get more support. "The mining camp and decentralization supporters are supporting it, so many well-known exchanges like Coinbase and Kraken have also extended olive branches to it." He further added: "There is a high probability that another coin BCHA will not survive for more than a few months." As a long-term supporter of BCH, Roger Ver, COO of Bitcoin.com, wished the BCHA node good luck and stated that he was not one of the people who caused the split.

Since the fork, BCHN appears to have the greater hash power advantage of the two. Swami believes that the 8% tax on BCHA is the main reason, but this may change quickly. He explained: "The relative rewards of the two coins determine what miners will actually do at any given time. Since BCHN and BCHA share the same proof-of-work algorithm, there is the ability to redistribute between these coins very quickly. If the price of BCHA can remain high enough that its mining ROI is higher than BCHN even after the 8% tax, then all rational miners will immediately reallocate hash power to BCHA unless they are deliberately willing to take losses to manipulate future prices."

However, even if BCHA's return rate is not high enough in the future, the network will not necessarily disappear from the community. Sam Bankman Fried, CEO of cryptocurrency exchange FTX, told Cointelegraph about another possibility: "This does not necessarily mean that it will disappear completely. There are many examples of minority chains continuing to exist on forks, but it looks like BCHN is the most likely to become the dominant chain in the future."

Data shows that even before the fork, 80% of BCH miners supported BCHN, which has been reflected in the mining data after the fork. In the previous few days, the trading price of BCH fell to $233.96, a record low, and then recovered to the level of around $250 before the fork.

Bankman-Fried explained the root cause of the decline. “Through the fork, ‘BCH’ was originally ‘BCHN + BCHA’, but ultimately represents only BCHN, so its price should fall by the price of BCHA, similar to a dividend or stock split.”

While BCHA’s immediate $20 price post-fork is consistent with this logic, the coin has since lost 20% of its value and trades at around $16.

Long-term vision

The price of BCH has almost recovered to its pre-fork level, but it is clear that the hard fork event has created uncertainty for investors and miners about the currency before and after the fork. Since this particular fork has a centralizing effect on an otherwise decentralized network, it seems to be a power struggle between miners and developers. Swami further explained: "Giving mining rewards to the blockchain team will weaken the decentralized nature of the chain and make it more like a government. Therefore, there is very little support for this fork. Unfortunately, the development team is the one who supports this fork, and if this team is unhappy, it will not be good for the development of the coin. This has created some anxiety in the market about the long-term prospects of BCH or its forked currency."

This uncertainty may be why assets managed by institutional investors, such as Grayscale Investments’ Bitcoin Cash Trust, shrank by $1.6 million before the fork. This insecurity does not seem to exist among retail investors, who, based on ChainAnalysis’ trading activity, deposited $1.5 million of BCH into various exchanges before the hard fork instead of selling the assets immediately.

Currently, the community-driven BCHN seems to have taken the lead, as can be seen from the higher hash rate. BCHA miners must pay an 8% mining reward tax to the development team, which makes the token vulnerable to further price fluctuations and even network attacks. Swami believes that considering the current miners' gross profit margin is about 10% to 15%, the 8% fee is too high, which means that 80% of miners may exit the BCHA network to restore the same profit margin.