Will forks and alternative block chains cause hyper-inflation of decentralized digital money?

Great effort has been put into Bitcoin's concept of money supply and that there will never be more than 21 million units.

However, it's relatively easy to fork it and create alternate block chains. SolidCoin, IXCoin, IOCoin etc are much less worth, but they can easily be traded against Bitcoin. Does this increase the over-all supply of Bitcoin-like money to well beyond 21 million units? Some believe yes, and that this is one reason already for the recent price drop.

Also, the concept of open and decentralized P2P money is still young. Chances are that a lot of other such currencies will pop up in time. Is there a risk that Bitcoin will be thwarted by an inflation of other currencies, rendering it and all other open, "free", decentralized money worthless and useless?

EDIT: One thing to consider in this context is that the number of traditional currencies will always be limited as there are only so many nation states on this planet (and they are consolidating, e.g. Euro), but the number of decentralized digital currencies is potentially unlimited.

herzmeister

Posted 2011-08-30T22:22:12.410

Reputation: 3 227

I worry about what happens when one digital currency is obsoleted by another. Nobody is going to want to trade units of the new future system for units of the old system if the old one is being discontinued or abandoned by the market, and since there's no convertability built into the digital currencies, if the new ones are too different to be backward compatible, I fear that every time this happens, everyone holding the old currency will be stuck with useless bits. – Michael Northcott – 2013-08-30T21:39:32.373

Answers

It depends entirely how much those alternate block-chains get utilized. In the recent examples of ixcoin and i0coin, a small portion of btc miners and users switched over, sold their stash and went right back to bitcoin. It's essentially a case of network effect - whichever block-chain has the most users will be the most attractive to new users, and those new users themselves contribute to that effect. Bitcoin is by no means beyond the "tipping point" where forks can no longer threaten it, but short of a fork with some superior feature or another it remains the preferred fork and probably will for some time. Even namecoin hasn't touched bitcoin's user-base much despite having a definitive use built into the protocol.

David Perry

Posted 2011-08-30T22:22:12.410

Reputation: 13 848

that's a change that can be rolled into the official client at some point -- theoretically, yes, but the logistics of convincing everybody to change their client are nightmarish. The non-upgraded clients will reject blocks from the upgraded clients and automatically fork the blockchain without any human intervention. – eldentyrell – 2011-09-30T20:16:58.397

3I also think most people forget that "fork" doesn't mean "permanently branched away from" - for example, if enough people decide that SolidCoin is better because of the more frequent retargets, that's a change that can be rolled into the official client at some point. Forking the block chain is permanent, forking the project to experiment with new features isn't. – David Perry – 2011-08-30T22:43:20.973

It is likely that blockchain-based currencies like Bitcoin are a natural monopoly. It is most beneficial for users to own and accept in trade the most popular currency, as they will have the greatest number of opportunities to do business with it. This is referred to as a network effect.

There are also additional costs and risks associated with owning and accepting less popular currencies, so most people are unlikely to do so. This makes it unlikely that alternative blockchains will gain much traction. Few people will deal in both simultaneously, and even fewer will abandon the more popular blockchain entirely for a less popular one.

In order to overcome these obstacles, an alternative blockchain currency would have to have significantly valuable features that the incumbent lacked. Even this might not be enough to compel large numbers of users to switch, and it becomes more unlikely as the incumbent grows larger. If the alternative did gain enough popularity, it would probably displace the incumbent entirely.

The most recent batch of alternative blockchains are just clones of Bitcoin with tweaked paramaters and no additional features. It's unlikely that they played a role in the recent price drop, though one could further investigate this by comparing the changes in the market cap of each currency.

Chris Acheson

Posted 2011-08-30T22:22:12.410

Reputation: 1 803

In order to overcome these obstacles, an alternative blockchain currency would have to have significantly valuable features that the incumbent lacked -- FWIW the only example I know of is NameCoin, since BitCoin can't be used as a DNS or PGP-key registry. – eldentyrell – 2011-09-30T20:27:22.580

A competing digital currency will have to convince people that it is better and worth more than bitcoin. That's unlikely to happen if it shares all the properties of bitcoin since bitcoin would have a lead in terms of adoption and infrastructure (but with enough marketing muscle might happen). Should the value of the competing currency rise high enough relative to mining difficulty, then miners can make more money by mining the new coins and then selling them in exchange for bitcoin. This caps the upside potential of the new coin to the same potential that bitcoin itself has. And there is a high downside risk of your investment going to zero. For speculators, this is not likely to be very appealing and if it's not appealing to speculators, it's not likely that a new coin could get very far off the ground before being abandoned. However, if the new coin offers some new innovation or is perceived to have some other advantage that will cause it to surpass bitcoin, then this dynamic could be inverted.

Stephen

Posted 2011-08-30T22:22:12.410

Reputation: 593

No.

Either alternate block chains are successful, or not. If they are not successful, the point is moot. If they are successful, then Bitcoin holders will diversify into these alternative crypto currencies. The total number of "coins" throughout the chains doesn't really matter, it's their combined monatary worth ... say in dollars.

It's not important whether Bitcoin itself is successful, or some mix of its clones. An easy an interoperable way to trade with the set of successful crypto currencies will emerge.

ripper234

Posted 2011-08-30T22:22:12.410

Reputation: 25 192

@Michael McGowan: But is that because they don't appreciate the benefits of doing so or because it's too difficult? With crypto-currencies, it's not difficult at all. – David Schwartz – 2011-08-31T10:27:05.963

I think it is important to those who own a large number of Bitcoins whether or not Bitcoin itself is successful... – Michael McGowan – 2011-08-30T22:47:41.027

@Michael - I believe most Bitcoin holders should/will eventually diversify their investment over other coins, proportionally to the "market share" of these coins, thus making this point moot. – ripper234 – 2011-08-30T22:51:06.827

You could probably make the same diversification argument about traditional currency, but most Americans I know own exactly 0 Euros, Great British pounds, etc. – Michael McGowan – 2011-08-30T22:53:31.877

@Michael McGowan - that's a shame. See also http://bitcoin.stackexchange.com/questions/115/is-there-an-easy-way-to-diversify-your-bitcoin-holding-among-the-other-popular-fo

– ripper234 – 2011-08-30T22:54:15.777

Alternate block chains are as different to bitcoins as the Yen is to the Dollar. These other currencies do not influence the liquidity of bitcoins. They affect the bitcoin market only in so far as people begin using them. As low as it is merchant uptake of bitcoin is far greater then any other block chain currency, and it is likely to continue to lead since that is where most of the infrastructure effort is focused.

Bitcoin's value as a tool online is it's features. Unless other currencies provide different features that are compelling it is unlikely they will compete. If a new currency does show new features that are compelling then perhaps people will buy units of that currency, but that still does not dilute bitcoin in any way. Bitcoin is inflationary now due to the introduction of new coins being added to supply per design, this will slow and eventually stop, nothing outside of bitcoin effects this, so bitcoin will never be in danger of hyper inflation.

Joshua Kolden

Posted 2011-08-30T22:22:12.410

Reputation: 3 816

All other things being equal, the value offered by a currency to a user increases as its user-base grows due to the network effect. Therefore, it is reasonable to assume that unless another P2P currency possesses significant technological advantages over Bitcoin, Bitcoin's first-mover advantage likely makes alternate block chains uncompetitive in the main p2p currency space.

It's impossible to determine whether Bitcoin will become the de facto digital currency, and if the network effect is a significant competitive factor, multiple digital currencies existing does not preclude it from happening.

Amin

Posted 2011-08-30T22:22:12.410

Reputation: 1 452