Abstract: In this piece we look at the hashrate oscillations between Litecoin (LTC) and Dogecoin (DOGE) in 2014. We compare it to the current Bitcoin (BTC) & Bitcoin Cash (BCH) hashrate oscillations and consider whether we can learn any lessons from “history”.
Although there are many crypto tokens, the number of proof of work tokens, with their own set of miners, is actually surprisingly small. Therefore having two significant proof of work tokens, sharing the same hashing algorithm is quite rare. There appear to be three major examples of significant hashrate oscillations caused by this, in blockchain history:
|2014||Litecoin (LTC) vs Dogecoin (DOGE)||Scrypt|
|2016||Ethereum (ETC) vs Ethereum Classic (ETC)||EtHash|
|2017||Bitcoin (BTC) vs Bitcoin Cash (BCH)||SHA256|
Source: BitMEX Research
In our view there may be lessons to be learnt from comparing the 2014 Litecoin (LTC) vs Dogecoin (DOGE) and the 2017 Bitcoin (BTC) vs Bitcoin Cash (BCH) hashrate oscillations.
In early 2014 Dogecoin enjoyed a sudden meteoric increase in price (figure 1), such that mining incentives increased quickly, attracting significant hashrate over to Dogecoin. This is analogous to Bitcoin Cash’s now infamous EDA, which resulted in sharp drops in the mining difficulty, such that Bitcoin Cash had higher mining incentives than Bitcoin, for some short periods. Both instances caused sharp swings in the hashrate between the coins, causing network distribution, to varying degrees in each case.
Many are tracking the swings in hashrate between Bitcoin and Bitcoin Cash on the fork.lol website. Due to the mentioned similarities, we will take a look back at the 2014 incident. We will show some charts from this period, displaying hashrate oscillations, that some of our readers may be less familiar with.
Mining incentives vs the difficulty adjustment
The hashrate distribution between two tokens with the same hashing algorithm should, in theory, be allocated in proportion to the total value of mining incentives on each respective chain. Mining incentives can be thought of the US Dollar value of both expected block rewards and transaction fees, in any given period of time.
Even when token prices, block rewards and transaction fee levels are stable, in the short term, within the difficulty adjustment periods, further oscillations may occur, because miners may switch to more profitable tokens with lower difficulty, until the difficulty adjust to an equilibrium position.
Litecoin vs Dogecoin in 2014
Dogecoin enjoyed a large price rally in early 2014 and then began to challenge Litecoin, for the title of the highest hashrate Scrypt token. Litecoin has a 2.5 minute block target time and its difficulty adjusts every 3.5 days, in contrast Dogecoin has a 1 minute target time and at the start of 2014, it had a 4 hour difficulty adjustment period.
Figure 1 – Litecoin (LTC) vs Dogecoin (DOGE) price chart – US$ – 2014
Source: Coinmarketcap, BitMEX Research
The Dogecoin price increased at a much faster rate than Litecoin in the early part of 2014, although as figure 2 below shows, Dogecoin never really approached Litecoin’s market capitalization. Despite the lower market capitalization, the higher inflation rate of Dogecoin, meant that miner rewards were often higher, such that during some periods a majority of the Scrypt hashrate switched over to Dogecoin.
Figure 2 – Litecoin (LTC) vs Dogecoin (DOGE) market capitalization chart – US$ million – 2014
Source: Coinmarketcap, BitMEX Research
Dogecoin had a higher hashate than Litecoin in late January and then February of 2014, as figure 3 below demonstrates. There was a period of around 1 month of regular swings between the coins, with the majority of miners switching back and forth.
Figure 3 – Litecoin (LTC) vs Dogecoin (DOGE) hashrate chart – billion hashes per second – 2014
Source: Litecoin blockchain, Dogecoin blockchain, BitMEX research
In 2017, during periods when Bitcoin Cash had higher mining incentives per unit time than Bitcoin, many miners switched over to Bitcoin Cash. However, this lesson appears to have been learnt first in 2014. As figure 4 below shows, miners “followed the money” back then to.
A key difference is that even after the difficulty adjusted to the equilibrium level, in some periods, Dogecoin remained in the lead with respect to the US Dollar value of mining incentives. In contrast, Bitcoin Cash’s incentive lead was always only driven by anomalies in the difficulty adjustment algorithm. Bitcoin always having higher incentives per block than Bitcoin Cash. Bitcoin Cash only had higher incentives due to its faster blocks and as soon as the difficulty returned to equilibrium levels, Bitcoin retained its position as the highest incentive SHA256 coin.
Figure 4 – Litecoin (LTC) vs Dogecoin (DOGE) – mining incentive (US$ per day) vs hashrate share – 2014
In order to calculate mining incentives for Dogecoin, we had to consider various events which occurred in 2014, including six changes to the block reward and two hardforks. They are outlined in the table below:
Figure 5 – Dogecoin (DOGE) 2014 event timeline
|Date||Block number||Event type||Expected block reward||Comment|
|14th Feb||100,000||Mining reward change||250,000||500,000||Random reward between 0 & 500,000 DOGE|
|17th Mar||145,000||Hardfork||250,000||250,000||Difficulty re-targeting period reduced to 1 minute from 4 hours. Randomness removed from block reward.|
|28th April||200,000||Mining reward change||125,000||250,000|
|15th July||300,000||Mining reward change||62,500||125,000|
|11th Sept||371,337||Hardfork||Merged mining with Litecoin enabled|
|2nd Oct||400,000||Mining reward change||31,250||62,500|
|14th Dec||500,000||Mining reward change||15,625||31,250|
Source: Dogecoin blockchain, Dogecoin Github, BitMEX Research
As the table above indicates, on 17th March 2017, Dogecoin changed the difficulty adjustment algorithm, reducing the target time to just 1 minute (1 block), in order to try and alleviate some of the disruption caused by the hashrate volatility.
Eventually, in September 2014, Dogecoin activated its merged mining hardfork. Merged mining is the process by which work done on one chain can also be considered valid work on another chain. Dogecoin can therefore be thought of as an “Auxiliary Blockchain” of Litecoin, in that Dogecoin blocks contain an additional data element pointing to the hash of the Litecoin block header, which is considered as valid proof of work for Dogecoin.
The merged mining system is considered the ultimate solution to the hashrate oscillation problem, ensuring stability, even in the event of sharp token price movements.
Implications for Bitcoin Cash
In our view, the Bitcoin Cash community is unlikely to want to implement merged mining, perhaps for political reasons, in the medium term. Some in the Bitcoin Cash community see Bitcoin as an adversary chain, rather than one which should coexist peacefully. Allowing merged mining can be considered as the ultimate peace arrangement between two chains. Initially some in the Dogecoin community were also unhappy about merged mining, but the community eventually realized it was the best solution to their hashrate oscillation problem.
However, Bitcoin Cash has recently fixed the EDA issue, which we first highlighted as a potential problem that requires a fix, in early September. Perhaps the new one day rolling difficulty adjustment, combined with more price stability, may solve the hashrate oscillation problem, such that no more fixes are required. If this doesn’t solve the problem, perhaps alternative difficulty adjustment schemes could be tried, before merged mining may slowly make its way onto the agenda.