Bitcoin Cash Will Take a Security Hit with Its First Halving
It’s no secret that Bitcoin Cash (BCH) has not been the most widely used cryptocurrency since its launch in August 2017. Outside of a brief bubble around the time that the hard fork associated with the New York Agreement failed, there hasn’t been much activity on the network. In fact, the Dogecoin network is more active than the Bitcoin Cash network according to a variety of metrics.
There may be more problems on the horizon. Roughly one year from now, Bitcoin Cash is scheduled to experience its first halving (or halvening) event, which will have the side effect of weakening the security of the network. A halving event is when the block subsidy is cut in half, and it’s part of Bitcoin and Bitcoin Cash’s algorithmically-controlled monetary policies.
It should be noted that the key issue outlined in this piece also applies to Bitcoin SV. This article is analyzing Bitcoin Cash simply because it’s the most prominent Bitcoin spinoff that uses SHA-256 as its proof-of-work algorithm.
Bitcoin Cash’s Issuance Rate
When Bitcoin Cash originally launched, it used a new difficulty adjustment algorithm (DAA) to make sure that the network did not come to a screeching halt. This new difficulty adjustment algorithm had the side effect of increasing the monetary base at a rate faster than in Bitcoin, as the rate at which blocks were mined became erratic.
This irregular behavior on the Bitcoin Cash network led to a sharp decline in the Bitcoin hashrate, as miners saw that it was more profitable to mine on the Bitcoin Cash network due to what effectively became a larger cumulative block subsidy in the form of more rapidly-generated coins. This had the side effect of slowing down the rate at which new blocks were mined on the Bitcoin network for a brief period of time. You can read about this particular event in more detail here.
Eventually, the Bitcoin Cash network adopted a new and improved difficulty adjustment algorithm to get their blocks back to the originally intentioned ten minute intervals.
The Unsecure Bitcoin Cash Becomes Even Less Secure
Next year, Bitcoin Cash will face a problem somewhat similar to the one it created for Bitcoin back in 2017.
Since Bitcoin Cash had a higher issuance rate during its earliest days of existence, the network is on pace to reach its first halving over a month before Bitcoin’s next halving.
To be clear, the block subsidy is only part of the overall block reward, with the rest of it coming by way of transaction fees.
All things being equal (transaction fees, price, etc), a lower block subsidy should lead to a decline in security because the decreased value of the block reward lowers the incentive for miners to use their hashing power to secure the network.
As SegWit2x showed, miners follow the money. Bitcoin Cash is already relatively unsecure in terms of its share of the SHA-256 hashing power on various cryptocurrency networks, and next year’s halving could make matters worse.
According to fork.lol (at the time of this writing), Bitcoin Cash miners will be looking at an estimated $1,970 block reward after the halving. Bitcoin miners will receive an estimated $32,939 per block after that network’s respective halving, but as mentioned previously, there will be over a month between the Bitcoin Cash and Bitcoin halvings.
Before Bitcoin’s halving takes place, miners will still be receiving an estimated $64,471 per block. This means the reward for mining on the Bitcoin Cash network will be roughly 3% of the reward for mining on the Bitcoin network.
The above estimates are based on the past 30 days of activity on the Bitcoin and Bitcoin Cash networks. Estimates based on the past 7 days of activity show the Bitcoin Cash block reward would be around 2.15% of Bitcoin’s.
It’s important to remember these estimates are based on the state of the networks today. An increase in the transaction fees earned by miners on the Bitcoin network, which has happened in the past, would make matters much worse for Bitcoin Cash.
Obviously, an increase in the Bitcoin Cash price would be helpful for that network’s security in the aftermath of the halving. In the past, the Bitcoin price has rallied around halving events, but it’s important to remember that Bitcoin Cash behaves differently than Bitcoin.
Of course, the real issue is not where the Bitcoin Cash and Bitcoin networks will be relative to each other at the time of the Bitcoin Cash halving. Instead, it is the fact that the Bitcoin Cash block reward will decline by roughly 50% while the Bitcoin block reward remains the same (again, all things being equal) for around 40 days.
In other words, the halving could just make an existing problem worse. If someone were to attack the Bitcoin Cash network, next year may turn out to be the perfect time to do it, depending on where the Bitcoin Cash network is relative to Bitcoin at that time.