The Bitcoin Chain Death Cycle In 2018

Chain Death
Chain Death
Cryptocurrencies have struggled to gain their footing in 2018 following a barrage of regulatory concerns, hacks, and high-profile scams. While many headlines suggest that this is the beginning of the end for cryptos, the tremendous amount of institutional wealth flowing into the space suggests otherwise. It may get much worse though, before it gets better.

Still, it is important for any investor to recognize the hurdles ahead.

Many cryptocurrencies, including King Bitcoin, still face blockchain destroying vulnerabilities. While the recent additions of the Lightning Network and SegWit removed some of the most daunting concerns of a potential ‘Chain Death,’ the threat still exists, and it’s more than just Bitcoin at risk.

Bitcoin vs. Bitcoin Cash

Last year’s Chain Death Spiral fears stemmed from the battle between Bitcoin and the Bitcoin Cash hard fork / airdrop. Following the August fork, miners migrated between the two coins, testing the profitability of each. As miners switched between the two cryptos, however, a vulnerability in Bitcoin’s protocol became apparent.

With its younger sibling, Bitcoin Cash (BCH) soaring to over $4,000 per coin, miners abandoned Bitcoin, sapping a tremendous amount of hashing power in the process. With the loss of hash power, Bitcoin transactions took ages to complete, and fees soared, posing an existential threat to the entire Bitcoin blockchain. This chain death scenario could repeat itself again, if Bitcoin Cash proponents get their way. Keep in mind that Bitcoin.com favors Bitcoin Cash as does @Bitcoin on Twitter.

What is Chain Death?
At its core, Chain Death is a vulnerability relating to a cryptocurrency’s difficulty adjustment protocol.

Using Bitcoin as an example, the average amount of blocks generated between difficult adjustments is 2016. At this time, the difficulty to solve a block will increase or decrease based on the hash rate of the network. When the network loses hashing power, it may become too difficult for miners to solve a block, resulting in a loss of profitability, increase in confirmation times, and soaring fees. An event such as this could potentially trigger a mass exodus that could lead to Chain Death.

Bitcoin Hash Rate vs Difficulty
In the chart above, you can see where the hash rate dropped below the chain’s difficulty levels.

While there are numerous factors that determine mining profitability, including the coin’s value at the time, extreme discrepancies such as this, could have dire consequences for a coin.

Chain Death refers to the negative feedback loop created by this event. When miners leave, transaction times and fees increase, which will drive users of the cryptocurrency away, as well, which could result in a further hit to mining profitability.

When the Chain Death Spiral reaches a critical level, essentially the coin, and your investment, has the potential to fall to zero. In stock terms, this equates to bankruptcy.

Other Chain Death Scenarios
Many cryptocurrencies have failed, but few because of inherent vulnerabilities in their underlying blockchains.

Verge (XVG), despite bouncing back in recent days, suffered what many thought could have been a Chain Death scenario. Hackers targeted an exploit in the crypto’s blockchain which allowed them to ‘create’ a ‘controlling stake’ in the hashrate of the blockchain. The exploit allowed the hackers to perform a ‘>51% attack,’ granting the attacker the capacity to mine at nearly 1,560 XVG per second.

“A mining exploit was found that allowed for scrypt blocks (one of our five algorithms) to be submitted with very low difficulty,” the team told reporters.

Verge moved forward with a hard fork, to the dismay of many critics. And though prices have bounced back, some investors have grown wary of the team behind the project.

While the likelihood of such attacks remains, both Bitcoin and Verge’s stories are lessons for the books. Before investing in any cryptocurrency, due diligence is a must. Recognizing vulnerabilities, when possible, will be the best way to preserve your investments. Many smaller coins could succumb to chain death while some new winners emerge and take all network share.

Comments

  1. I really appreciate this post. Well described. Thank you so much...

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