Necessities for funding plan to work

Here are some of my thoughts about the funding proposal. I will mostly just explore the statements already given by Bitcoin.com here and here.

Who is paying for it?

There has been many ideas floating around who is actually paying for it. Would it be the miners (hashers), the pools or BTC paying for it? Some people suggested on Reddit that this is completely free. It’s not that easy, and I will explain it.

The old saying goes, “There is no such thing as a free lunch”. And this is correct in this case as well. At a first glance, it would appear that the miners would pay for it, and the mining pools would act as collectors. Initially, the miners will take a small hit and they will start mining BTC instead.

Due to the unique properties in bitcoin, when miners leave the network, the difficulty goes down. In practice, this means that kilowatt hours (kWh) needed to produce one BCH will go down. So even if the miners will be paid less BCH by the pools, less kWh will b required to produce the coins. The net effect is that miners will end up paying the same amount of USD for producing coins.

That doesn’t sound like sound economic theory, one would argue. Well it does, because what really happens is that we are mortgaging the PoW security of the chain. The BTC chain holds a mortgage loan on BCH that will increase the difficulty on BTC and lower it on BCH.

Some people asked on Reddit, “If it’s free, why don’t you just allocate 80% instead? Why stop at 12.5%”. The answer is simple. Because taking too much mortgage debt is dangerous. We need to balance it. Financing something with a mortgage is the most normal and common thing to do, but it has to be reasonable.

Because bitcoin has this unique feature with difficulty adjustment, the mortgage can be considered repaid when the coinbase allocation stops after six months. When this will give an immediate boost to BCH since BCH suddenly will be more profitable to mine and PoW security returns to the BCH chain.

If it turns out the mortgage we take out is more than the network can handle, the initiative should be abandoned.

Is this a tax? An initial glimpse at it makes it look like one, but if you dig deeper into the game theory, how bitcoin works; it's not that simple. Tax is a dirty and bad word among bitcoiners, and the hate for taxes have somewhat blinded people. The gross effect could be called a tax, but the net effect is more like a PoW mortgage. I don't think we should focus on the semantics, rather focus on what the consequences are, and if they are worth it.

Why can’t it be a voluntary contribution?

All mining is always voluntary. Each mining pool vote with their hashpower and decide which block to mine. The truth is that just because you mine a block, it doesn’t mean you will get paid for your effort. The other mining pools needs to voluntarily choose to put 99 more blocks on top of yours before you can use your coins.

After 12.5% is shaved off the block reward, 5.46875 BCH remains. Each miner (hasher) will be paid from that. Any mining pool trying to do this alone will just have all their hashrate leave. It’s like a boxer cutting off his leg to lose weight. You would just create a disadvantage for yourself. For the game theory to work, all pools needs to do it. If not, the difficulty won’t go down and we won’t be able to mortgage the PoW. Either everyone does it, or no one. There is no middle ground.

For this to be voluntarily, the amount would be much lower and it would need to be a configuration on the pool account where each miner can choose to get paid less and the mining pool would allocate coins directly to a development team.

Are the miners actually supporting it?

The main person who wrote this proposal, Jiang Zhuo'er owns most of his hashrate. He is both a miner (hasher) and runs a mining pool. Not all pools own their hashrate, but we have spoken to some of our customers mining on Bitcoin.com that are positive. We also acknowledge there are miners against the proposal. Please keep in mind that this proposal can only work if a majority hashrate supports it. We are not doing this to enrich a few individuals, but to strengthen Bitcoin Cash as a whole.

Without majority hash support behind it, this effort could risk a chain split.

How can we make sure this is not permanent?

We have stated that it must be temporary and reversible. This is important, and there are a few things that needs to be in place for this. To make sure it is temporary and reversible, we need checks and balances. This can not be added as a consensus rule in the nodes everyone runs, because then it would not be reversible. This is a soft fork that only miners need to do. Exchanges and wallets should follow the longest PoW. That way, this proposal can only work as long as the miners mine on pools supporting this proposal. This adds accountability towards the mining pools. It also makes sure that mining pools have an incentive to dissolve the initiative if they lose majority hashrate support. Because newly mined coins require 100 confirmations to mature, it creates an incentive to mine on the longer chain the exchanges are on and salvage the coins mined rather than sticking to the initiative.

The mining pools should have their own special client that enforces the soft fork. The allowed addresses and the rules must be decided beforehand. After the rules are set, they can't change. There has been worries that miners will take the opportunity to change the rules as they go. That’s why it’s important to do this as a “code once, deploy once” effort. If it turns out something doesn’t work according to plan, the initiative should be dissolved and we return to normal.

Does this make BCH less decentralized and more censorable?

No. It doesn’t. There is a fear that the mining pool initiative would get full the power over BCH, and they would be able to decide everything from that point on. It won't be the case and I think it's very far fetched. It does not make it less decentralized or more censorable than today. The only difference would be that we allocate money to developers. Already today, mining pools know how to contact each other in case of emergency. The mining pool operational staff rarely talk to other pools and this proposal won’t change that. There won't be central control room, because it's not a requirement for this to work. The argument that it would be a slippery slope towards centralization is just a strawman. Any pool that would get a block orphaned would quickly comply to avoid getting more blocks orphaned, so it would not lead to less pools. Since this would be a one time rule change, no infrastructure for censorship would be established. Bitcoin.com and any other pool I know of would refuse to setup infrastructure to censor transactions.

What about the Hong Kong company?

I’m frankly disappointed in some of the community members about this point. Hong Kong is not a shady place for a company, and it’s not China. Anyone suggesting that China would be able to take control over the development funds needs to read more about Hong Kong law and how Hong Kong works. The easiest way to offend someone from Hong Kong is to call them Chinese. It would also not hold any fiat, just BCH. Even in the very unlikely event of a company takeover, it does not guarantee private key take over.

That being said. Roger doesn’t like the Hong Kong company idea, I don’t like it, and it’s very likely that this part of the proposal will be scrapped. It's not because it's a Hong Kong company, but because it's a company. I agree with Roger, we don’t really need a company for this.

How will the funds be distributed?

It's still in the works. We are still discussing it. There have been suggestions about establishing a list of addresses belonging to several developer teams and letting the mining pools distribute coins directly to those addresses and cutting the middleman that would be the Hong Kong entity. That way no single entity receives all the funds, and if one recipient gets corrupted the pools can just fund another development group.

Each development team that wants to get funded should state what they plan to do, how many developers they plan to hire and how much money they need. If all the goals were to be fully funded early, the funding initiative can be dissolved early.

We fully acknowledge the contention and are seeking ways to avoid conflicts of interests, establish checks and balances, and a proper power balance.

Bottom line

This proposal was suggested in order to strengthen the Bitcoin Cash community by properly funding it. If it turns out at the effect would be the opposite, we will not go forward with it. If it turns out halfway through that things are not working out, it will be dissolved.

Bitcoin.com will never risk another chain split, because this time it will be our actual friends that would be leaving. That’s why we want as many people on board as possible. For this to work, we need the miners (hashers) on board and we need the community. We need the community to follow up on how the funds are used, help recruit the right developers and voice your opinion on what we need to build to make Bitcoin Cash the best kind of money in the world.

Funding is a real issue we need to solve. This is one suggestion that I believe would work if done right, but I also acknowledge that this could be done wrong. That's why we need checks and balances, and avoiding conflict of interests.

For now, it's back to the drawing table.

Emil Oldenburg
CTO, Bitcoin.com