[Knowledge Mining Q&A] BCH halving time is earlier than BTC, will it be involved in a death spiral?

Some readers are concerned that the BCH block reward halving time is earlier than BTC, which may cause BCH to be involved in a "death spiral". They think so:

Because the halving time is earlier than BTC, when the halving comes, 50% of BCH's computing power will be cut off, and the average block time of BCH will be greatly lengthened. The output of BCH mined with the same computing power is lower than that of BTC, resulting in more computing power being cut off. More computing power is cut off, resulting in a longer block time... thus being involved in a "death spiral".

Is their judgment correct?

Let’s talk about this topic today. Before discussing the “death spiral”, let’s first talk about the halving time and computing power distribution of BTC and BCH.

01
Halving Time

Users who pay a little attention to BTC and BCH basically know that the halving time of BCH will be about 30 days earlier than that of BTC:

△Data from https://coin.dance

The halving rules for BTC and BCH are the same. When the block height reaches 630,000, the block reward is reduced from 12.5 coins to 6.25 coins.

The block height of BCH is about 4,900 blocks ahead of BTC. Based on an average of one block every 10 minutes, the halving time of BCH is about 30 days earlier than that of BTC.

02
Computing power distribution and coin price

The mining algorithms of BTC and BCH are the same, and the computing power between them can be switched freely. The purpose of miners' mining is to obtain income, and mining is a fair and free market. Therefore, whether mining BTC or BCH with the same computing power, the income should be the same in theory. In other words, the ratio of the total computing power of BTC and BCH to their respective coin prices should be at the same level, and their price ratio is equal to their total network computing power ratio. If the price of the two coins fluctuates greatly, this balance will be broken instantly, and the machine gun mining pool will quickly eliminate this spread. The computing power flows to places with high returns, which is an economic law. In short: the higher the coin price, the greater the proportion of computing power, and the distribution of computing power is proportional to the coin price.

Let’s look at a set of data first:

△With the same computing power, BTC and BCH miners are basically the same

Take BTC as an example. The computing power of 111.51EH/s competes for a block reward worth $126912.5. For each block mined, the expected output value of 1EH/s computing power is $1138.13. In the long run, the output of unit computing power of the two is basically the same. Even if there is an imbalance in profits in a short period of time, the machine gun pool will cut computing power to smooth out the spread.

The incoordination of halving time will break this balance.

BCH block reward halving time is about 30 days earlier than BTC. Let us first assume that the price of both coins remains unchanged (or the fluctuation range remains the same), and the computing power also remains at the current level. At the moment when BCH block reward is halved, the balance of BTC and BCH mining income is instantly broken:

△The balance is broken. With the same computing power, the income of BCH miners is half of that of BTC miners.

In the real game, miners will not wait until the BCH block reward is halved before starting to cut computing power. When block 629999 is mined, miners will immediately cut about half of BCH's computing power to BTC (this is based on the assumption that the price fluctuations of BTC and BCH are consistent), thus reaching a new balance:

△Miners’ dynamic game, computing power flow, and building a new balance

Even if the halving time is not coordinated, which is a rare event, the computing power will flow to places with high returns. This economic law is still valid, and miners can still build a new balance by quickly switching computing power.

03
Will BCH be caught in a "death spiral"?

In order to avoid the losses caused by BCH halving earlier than BTC, miners will switch about 50% of BCH computing power to BTC when the price fluctuations of BTC and BCH are basically the same.

As a result, BTC computing power increased by about 2%, which has a negligible impact on BTC's block speed and mining difficulty. In the absence of the uncoordinated influence of the halving time, BTC's computing power often increases by more than 5% within a difficulty adjustment cycle.

Let’s go back to the topic at the beginning of the article. BCH computing power dropped by 50% in an instant, and netizens were worried about the “death spiral”:

50% of the computing power was cut off, and the average block time of BCH was greatly lengthened. The output of BCH mined with the same computing power was lower than that of BTC, resulting in more computing power being cut off. More computing power was cut off, resulting in a longer block time... thus being caught in a death spiral.

Can a 'death spiral' really happen?

The above logic seems correct, but it is actually wrong. They may not understand the difficulty adjustment algorithm of BCH and think that the difficulty adjustment algorithm of BCH is the same as that of BTC, and the difficulty is adjusted once every 2016 blocks. In fact, the difficulty adjustment algorithm of BCH has been improved.

BCH's mining difficulty adjustment algorithm is a modified DAA algorithm. In short, it has the following features:

1. Adjust mining difficulty block by block;

2. The mining difficulty of each block is adjusted based on the computing power of the 144 blocks before it;

3. When the computing power changes exponentially, the network will quickly adjust the difficulty to ensure fairness

4. Avoid feedback oscillation caused by the mismatch between current computing power and target difficulty.

…

The above characteristics of the DAA algorithm ensure that even if the computing power drops by 50% instantly, it will only have a short-term impact on the BCH block speed. The DAA algorithm can quickly adjust the difficulty according to the actual computing power situation, so that the block time returns to normal levels.

A large amount of computing power has been withdrawn from BCH, which can be verified by actual cases:

The most typical example is the "computing power war" when BSV split. The BCH computing power has dropped sharply for several consecutive days, with a cumulative decline of more than 50%. The average block time of BCH can still be stabilized at around 10 minutes.

△Data source: btc.com

Facts have proved that when a large amount of computing power is withdrawn quickly, the DAA algorithm can quickly adjust the difficulty according to the actual computing power, so that the average block time is restored and stabilized at about 10 minutes. It can be seen that even if 50% of the computing power is withdrawn, the impact on the BCH block time is short-lived and slight, and there is no risk of being involved in a death spiral.