OPEC : Oil :: Miners : Bitcoin

Jihan Wu, CEO of Bitmain the world’s largest operator and producer of mining equipment, made an apt comparison between the Bitcoin scaling issue and the oil market.

OPEC in their quest to maintain high oil prices sowed the seeds for American shale oil. The high oil price allowed engineers to explore and drill for more expensive shale oil. Shale oil’s extraction price continues to decline as technology improves. As the supply of oil increased, prices fell, and OPEC’s hold on the market withered.

According to Jihan, Bitcoin miners are like OPEC. A small number of players control the majority of the hashrate. Bitcoin transaction volumes have increased, but the network can only process a finite amount of transactions. Therefore, transaction fees rose alongside the price.

Miners are happy. Some users are not. As a work around, some developers (core) altered the Bitcoin protocol allowing it to process more transactions without the need for a larger miner produced hashrate. If these off-chain scaling solutions are successful (e.g. The Lightning Network), miner’s earnings from transaction fees could decline.

On the margin, either you view Bitcoin more as a store of value akin to gold, or a payments network. If Bitcoin is more a store of value, the price of transactions is of little concern. Gold is rarely used for day to day commerce. It is used to store large amounts of wealth, and as a settlement currency for large notional transactions. Therefore the velocity of gold is low.

If Bitcoin is more a decentralised payments network, then the price and speed of a transaction is paramount. Bitcoin must be able to compete with credit card networks such as Visa and Mastercard if it is to become a real payments solution. Currently Bitcoin is clunky and expensive and is no match to these incumbents.

If neither SegWit nor a block size increase reaches consensus, Bitcoin will continue to travel down the road to becoming another form of money good collateral that is expensive in small quantities to move. To many miners this is a perfectly acceptable solution as long as the price remains high. Given that blocks are full, transaction fees are high, and the price continues to rise, users view Bitcoin more a store of value than a payments protocol.

The question is, can another cryptocurrency become a store of value, and be cheap and fast to send. Should another coin achieve this feat, it will become a major challenger to Bitcoin. To date, no coin is within striking distance of Bitcoin. Many claim that Ether will unseat Bitcoin, but it does not command the same global mindspace as Bitcoin.

Will a group of miners engage in a contentious hard fork, I don’t know. But I do know humans. Humans are lazy and greedy. Regardless of the temper tantrums thrown on various social media platforms, miners care about their bottom line. Doing nothing will not harm them in the short to medium term.

A Bitcoin hard fork will not be as cute and cuddly as Ethereum’s. The Ether market cap was barely $1 billion when the DAO disaster necessitated a face saving hard fork. Bitcoin is worth $17 billion. The amount of money invested in mining equipment, exchanges, and wallets tailored for Bitcoin is orders of magnitude larger than for Ethereum.

A failed hard fork that leaves a minority chain commanding a double digit percent of the network hashing power will not be viewed kindly. Unlike Ether and Ether Classic, the sum of the newly formed majority and minority chains will be drastically lower than the pre-fork value of Bitcoin. Ether never positioned itself as a store of value or a payments protocol. It is fuel for decentralised applications.

Bitcoin’s value is its relative stability vs. other cryptocurrencies. Disrupt that stability and its status as the reserve currency of crypto will evaporate. The challenger that does emerge will certainly not use Bitcoin’s Proof of Work algorithm. If successful, the challenger will render all Bitcoin ASIC mining equipment worthless.

Is Jihan going to stake the future of his Billion dollar mining company on a hard fork that could go pear shaped? No chance.