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Bitcoin Cash: The Race to Becoming the Dominant Chain Before the Next Halving (3.5 Years)

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Avatar for IMightBeAPenguin
Written by   54
1 year ago

Note: I've made this article because I feel that mass adoption is extremely important for moving BCH forward (I know, obvious) given the advantage we have with the new DAA fix. With ASERT being put on Bitcoin Cash, we can expect that BCH's halving comes an entire month after the BTC halving. If there is a severe accumulated drift on the BTC chain, this difference can potentially be even bigger. We could even see a difference in confirmation times by more than 2 months, which would put BCH in a good position. I feel that given this information, the importance of adoption is VERY urgent.

Recently, I made an article that discussed the economics of big-block Bitcoin, and how fee revenue could work, given transaction volume and individual transaction fees. The surprising part about the math done on this is the conlcusion: Bitcoin Cash can become the dominant chain while still retaining a lower price per coin. This would actually end up making Bitcoin Cash much better than Bitcoin because the increased velocity (adoption) would add value to the network, and make the coins be worth a significantly higher amount in BTC than the current exchange rate. I think it will be VERY hard to get an increase in value such that 1 BCH > 1 BTC, but I definitely think it will be possible to get Bitcoin Cash at slightly higher than pre-fork highs.

I think a good goal to put forward is Bitcoin Cash being 25% higher than the peak of the bull-run in 2017. This would put Bitcoin Cash at being worth 0.30-0.35 BTC per coin. This gives an acheivable target for BCH to reach, while still relying less on price to be successful. In my opinion, it's close to over for BCH if this goal can't be reached because there is plenty of time to even get millions of users on BCH before the next halving. After that, it is entirely possible (and likely) that Lightning will work off of centralized hubs, while people don't care that they are essentially participating in centralized finance, so it is urgent (and I mean very urgent) to get A LOT of adoption on the network. From what the market has shown, BTC's network effects are very strong, and that makes it likely to go up in price (thus increasing the block reward by a substantial amount).

Assuming that the price of BTC will double every 18 months (nice), this will give BTC a price of $60k per coin. While it is hard to know what the price will be in the future, and it is hard to imagine (in our perspective) anything significantly higher than the ATH so far, it is entirely possible for BTC to take off even with its ridiculous limitations. Assuming that transaction batching is used almost purely for LN channels and transactions are expensive, but "bearable" at $0.025/byte of data, miners will collect $42,500 in fees for every block. This puts the total block reward at $417.5k pre-halving, and $230k post-halving. If BCH can manage to reach a value 0.325 BTC per coin (which will be hard, but nevertheless is possible), that leaves >$110k to be made in transaction fees.

If transaction fees are $0.35 on average (I'll talk about this later), that would mean that BCH would have to have 320k transactions per block, equating to 3 times the level of PayPal adoption at 540 transactions per second. Blocks would be 150 MB on average. This is all assuming that the cost of running a node tend to effectively $0, while people are willing to actually pay for transactions (there is a genuine fee-market instead of an artificially imposed one). This increase in throughput assumes a 0.7% increase in on-chain adoption daily (assuming 10k daily transactions on average on the BCH blockchain). This means that by ~2024, a fee market will have to be established, and the velocity of money will have to be higher than it is right now by almost a factor of 5,000x.

Over the last 3-3.5 years, Bitcoin Cash's transaction count has only doubled from 9k to 18k per day. That translates to a disappointing 0.06% increase in daily adoption of on-chain transactions. That absolutely won't cut it, and this project is pretty much guaranteed to fail if adoption is and continues to be this slow. We aren't even a tenth of the rate of growth of adoption that we need to have for succeeding to be plausible. This begs the question: Why has adoption been so slow? There's no denying that it has been, and BCH hasn't gone global yet (or even close to), but this is something that can be easily fixed to get back on track.

Part of the reason adoption has been slow is not because of ABC, but because of the community's small efforts towards increasing adoption. Increasing adoption hasn't been much of an effort beyond enthusiasts, and Bitcoin Cash does not particularly stand out in any way. While it is easy for the BCH community to see how it stands out, it is not for the rest of the crypto community, and pretty much everyone else. Even for its main stated use-case, it doesn't have anything special going for it. The special use-case right now is peer to peer cash, which many other coins can do a lot faster and cheaper. The reason some coins have succeeded in the market while others have not is because they have bothered going in a specific direction that gives them a narrow market to compete against. BTC is known as "digital gold" (despite how stupid this is, it definitely works), ETH is known for being the best at smart contracts, LINK is known for DeFi and oracles, XMR is known for being a privacy coin AND peer to peer cash, and so on.

A serious effort has to be made (I don't mean flipstarters, but something that is serious, and beyond a few enthusiasts) to bring mass adoption for Bitcoin Cash. With the current fees, it will basically be impossible for Bitcoin Cash to compete with Bitcoin on volume alone, which is why a fee market is bound to form in the future when mining isn't as profitable. This begs the question: How is it possible to bring a sustainable and genuine fee market on Bitcoin Cash that can compete with Bitcoin while still keeping lower individual transaction fees? Surprisingly enough I have an answer to this question: Facilitate all possible types of payments to get the largest marketshare. Currently, Bitcoin Cash has its limitations. Those limitations are the binary level of security between 0-conf, and 1 or more conf transactions.

This means there are only two types of transactions: faster, but less secure, or slower, but more secure. I think Storm is the potential game-changer here. It offers an option for people to have faster and more secure transactions. I think this needs to be worked on because it really gives Bitcoin Cash the killer use-case of being cash, and opens up the potential for a lot more revenue to be made by miners (further increasing the hashrate of the chain). With a transaction type that is faster, but also more secure, it will make sense for said transactions to be more expensive than a "normal" 0-conf transaction. Normally with Bitcoin Cash, businesses and people can't "instantly" settle transactions worth thousands of dollars, so this brings an additional use-case into the mix that can bring A LOT of fee revenue. If people want to move $5,000 to an exchange, why would they use Bitcoin Cash when they can use another coin that is faster and cheaper?

On top of this, businesses will eventually need to find a way to make transactions that are worth thousands of dollars without having to wait 10 minutes for each transaction to confirm. Storm provides this use-case without trading off orphan rates or anything else (to my knowledge). With this in mind, Bitcoin Cash's use-cases would look like this:

With this economic model, Bitcoin Cash can and will have all the economic benefits of Bitcoin without any of the drawbacks. It will get fees from being both a settlement layer, and peer-to-peer electronic cash. Normal daily transactions would be done through 0-conf with doublespend proofs, while high-value transactions that want near-instant settlement would be done through weak blocks/storm. The fees for instant/weak confirmations would be much higher than regular transactions ($1-$5 per transaction). Normal 0-conf transactions would still be pretty cheap (<$0.01-$0.25 per transaction) and would be included in the "strong" block. Anything that is a microtransaction can be done on second layers because miners won't miss out on any revenue when transaction fees are extremely low. Second layers will work better for microtransactions, because routing won't be an issue. Transactions that are a few pennies are almost guaranteed to route because they're unlikely to be restrained by channel capacities.

The other important part of this equation is the price of Bitcoin Cash relative to Bitcoin. If Bitcoin Cash wants to reach the value of 0.3-0.35 BTC, and the current value is 0.015 BTC (this is assuming a pessimistic case because of the future ABC split), the price relative to BTC will have to grow by a factor of 0.25% per day. While this isn't impossible, it will be very hard, and a lot of effort will need to be put into increasing BCH's value. This means a quarterly rate of growth of 25% compounded. This translates to roughly 2.5 times increase in BTC price per year relative to the last year.

So, in other words: This isn't entirely hopeless, and if we play the cards just right, it is entirely possible for Bitcoin Cash to really take off...

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Written by   54
1 year ago
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Comments

If transaction fees are $0.35 on average (I'll talk about this later), that would mean that BCH would have to have 320k transactions per block, equating to 3 times the level of PayPal adoption at 540 transactions per second. Blocks would be 150 MB on average. Very informative always i read from this author... Im your fan now

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1 year ago

Nice..... subscribe

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1 year ago

How nice is the article? Can you further explain?

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1 year ago