Are the mining incentives of bitcoin compatible with the existence of a competing Proof-of-Work chain?

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Scenario A: A chain split occurs due to a bug or contentious rule change (i.e. the miner incentives aren't changed in any way).

Both coins initially start out with the same difficulty (and won't change for another 2016 blocks, in the worst case), but their market price will vary.

A rational economic miner will only mine the chain with the highest reward, which is the chain with the higher market price. Users of the lower value chain can offer high fees to compensate, but this is costly.

Scenario B: A hard fork chain split occurs where one chain has decreased difficulty and/or higher block rewards (not touching the 21 million limit, but pushing the release schedule forward).

Unless the new chain has a really low market value, miners are highly incentivized to mine it. It will be hard for the old chain to compete.

The question for both scenarios: How will the scenario play out? Can both chains coexist or will the less popular chain die from a negative reinforcement loop (lower value -> less blocks mined -> even lower value) and be forced to do a PoW hard fork?

And if both chains can't coexist, does that mean that any chain that tries to out-compete bitcoin for the same PoW is a threat to the network?

Ruben Somsen

Posted 2017-07-04T14:20:12.943

Reputation: 33

Question was closed 2017-07-19T04:14:23.950

Why would "less blocks mined" lead to "lower value"? If anything, you would expect a currency with a slower supply increase to have a higher price. Anyway, because of difficulty adjustment, "fewer miners" -> "fewer blocks" only in the short run. In the long run the number of blocks stays the same. – Nate Eldredge – 2017-07-04T15:21:18.093

Scenario A also only exists in the short run. In the longer run, the lower-priced chain will see its difficulty fall below that of the other chain, so the returns on mining could converge again. – Nate Eldredge – 2017-07-04T15:24:13.533

@NateEldredge If less blocks are being mined, the network becomes less useful, fees will go up, etc. I am unsure whether less newly mined coins being available makes up for that, so I suspect it will negatively affect price. And to your second point: I believe there's a limit to how much difficulty can drop in any given period, but even if it drops to a point where the other chain becomes cheaper to mine on, now the other chain stops moving forward. Will an equilibrium eventually be reached or will the hash rate keep moving to the more profitable chain every time the difficulty adjusts? – Ruben Somsen – 2017-07-05T19:41:34.620

Answers

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Both chain in your scenarios can coexist because the current value of a coin (and the current mining reward) isn't the only factor miners are taking into consideration when they have the choice to mine two different coins.

They also put their personal conviction into consideration when choosing what to mine. If they prefer the change brought in chain A, why would they mine chain B that doesn't have it ? (Mining chain B in case of a HF would be being against chain A in that case)

So yeah both chain A & B can coexist as long as the differences between them are big enough. If not their would be no incentive to choose to mine the chain with the least value.

Seccour

Posted 2017-07-04T14:20:12.943

Reputation: 26

Thank you for your thoughts. That is an interesting perspective, but I am personally not convinced that a lot of miners will choose their ideology over money. They run a business and need to be profitable. Even if 50% of the value is on one chain and 50% on another, that is still drops their returns to half. I don't expect ideology to be high on their list at that point. – Ruben Somsen – 2017-07-05T19:20:44.777

And why should miners pay for their ideology and not users? If miners can earn 50% more on chain B, maybe users should be the ones paying higher mining fees to compensate for that opportunity cost. – Ruben Somsen – 2017-07-05T19:23:53.590

Asked: 2017-07-04T14:20:12.943

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Active: 2017-07-04T19:22:21.653