Get Ready for a Wave of Bitcoin Forks

By TIMOTHY B. LEE

On August 1, a dissident faction of the Bitcoin community created a new payment network called Bitcoin Cash. There are lots of Bitcoin-derived spinoff currencies, of course, but this was unusual because it branched off from the existing Bitcoin blockchain. The result was the cryptocurrency equivalent of a stock split: everyone who owned one bitcoin before the split suddenly owned a “cash” bitcoin after the split.

Today, the value of Bitcoin Cash in circulation is about $20 billion. That makes it the third most valuable currency, after only the original Bitcoin and Ethereum. And this appears to be newly created wealth. The value of vanilla bitcoins didn’t fall significantly on the day of the split, and it has since zoomed upwards so that the value of all conventional bitcoins is now around $150 billion.

With that kind of money on the table, it was inevitable that others would try the same trick. In early November, another group of Bitcoin developers publicly launched the Bitcoin Gold network. This version of Bitcoin swaps out Bitcoin’s current mining process—where people compete for bitcoins by computing SHA-256 hashes using custom-designed mining hardware—with a memory-hard algorithm that, designers hope, will make it resistant to acceleration by custom hardware. The creators say they want to re-democratize Bitcoin mining, once again making it possible for anyone to earn Bitcoin Gold with their home PCs.

Like Bitcoin Cash, Bitcoin Gold split off from the main Bitcoin blockchain, so everyone who owned a normal bitcoin before the fork got a “gold” bitcoin after the fork. But the Bitcoin Gold team added a controversial twist: after the fork, it rapidly mined approximately 100,000 bitcoins for itself before opening the network to the public.

Bitcoin Gold is now worth around $270 per bitcoin, so the team essentially created a $27 million endowment for itself, which it says will support development of the Bitcoin Gold project. The Bitcoin Gold network as a whole is worth $4.5 billion, making it the sixth most valuable cryptocurrency after Ripple and Dash—and slightly ahead of the earliest successful Bitcoin fork, Litecoin.

The question now is who is going to try this trick next. The answer is: a lot of people. In recent weeks, a bunch of different people have announced plans to create new currencies. There’s Bitcoin Silver, Bitcoin Platinum, Bitcoin Diamond, Bitcoin Uranium, Bitcoin Cash Plus, and Super Bitcoin.

Most of these forks will fail, but a few might succeed

It’s hard to tell how many of these projects are serious. Bitcoin Uranium, with a ticker symbol BUM, sounds like it’s probably a joke. Others have little more than a post on the Bitcoin Talk page and on Github.

But with so much potential free money on the table, it’s practically guaranteed that we’ll see more efforts to fork Bitcoin in the coming months. The Bitcoin Gold team created a currency worth $4.5 billion—and kept $27 million for its own use—with a few months of work.

The Bitcoin Cash approach has a couple of advantages over starting a new cryptocurrency from scratch. The obvious one is that using the Bitcoin name causes people to pay attention.

The more subtle advantage of the Bitcoin Cash approach is that forking the main Bitcoin blockchain instantly creates a big constituency for the new currency. Even before the Bitcoin Cash network launched, customers were bombarding Bitcoin exchanges with questions about whether they would support the new currency. The reason is that the new, forked coins go to whoever actually controls the private keys for bitcoins on the Bitcoin blockchain. If you have your bitcoins deposited with an exchange, then the exchange controls those keys, and so only the exchange can unlock the corresponding Bitcoin Cash.

In theory, exchanges could simply pocket the money themselves, but that would cause a huge uproar and cost them a lot of customers. So most exchanges have pledged that if they access the coins, it will only be to turn them over to whoever owned the corresponding bitcoins at the time of the split. For example, Coinbase, one of the largest Bitcoin services, has said it will allow people to withdraw Bitcoin Cash on January 1.

If a bunch of exchanges announce support for a new currency—or at least the ability to withdraw balances—that amounts to a de facto endorsement of the currency. And if an exchange does the work to allow customers to withdraw a Bitcoin variant, they might go all the way to supporting it for deposits and trading, too.

Of course, the fact that Bitcoin Cash and Bitcoin Gold were relatively successful doesn’t mean that other forks will be. Both projects have fairly compelling stories to tell about why their technology is unique and potentially better than conventional bitcoin.

Bitcoin Cash was created by the “big block” faction of the Bitcoin world that believes the main Bitcoin network isn’t dealing adequately with growing congestion. Bitcoin Gold changed Bitcoin’s mining algorithm to try to make the Bitcoin mining industry more decentralized.

Most of the newer Bitcoin forks involve some combination of larger blocks and different mining algorithms. Some are also experimenting with shortening Bitcoin’s 10-minute gap between blocks in the blockchain, which could potentially allow for faster transaction times. But none of the ones we’ve seen so far have a rationale as compelling as those first two Bitcoin forks.

And these forks will only achieve a non-negligible value if people believe they have a good shot at developing a healthy community over the long term. Forks that are seen as pure money grabs are likely to sink quickly.

There’s also a real danger that some of these forks will be scams. When a new Bitcoin fork is created, people have to use their private keys from the existing Bitcoin blockchain to access the newly created fork bitcoins. Someone could create a new Bitcoin fork in hopes of tricking people into revealing the encryption keys for their vanilla bitcoin holdings. This is why prominent Bitcoin developer Gavin Andresen recommends that people move their bitcoins to new addresses before they try to cash out corresponding coins from Bitcoin forks.

But there are probably some other variants of Bitcoin that could catch the public imagination and develop a loyal following. So over the next few months, we can expect to see a steady stream of announcements from people creating yet another Bitcoin variant.

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