Why the Bitcoin Cash ‘Dev Tax’ is a Colossal Mistake

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The proposal to create a special “developer tax” could split the Bitcoin Cash community, and do more harm than good. Peter Rizun, the chief scientist at Bitcoin Unlimited, commented on the intention to bring miners under a centralized authority.

Block Reward Ownership Challenged by New Bitcoin Cash Model

Currently, Bitcoin Cash (BCH) mostly follows the letter of the Satoshi Nakamoto White Paper, where the block reward is owned by the miner who discovered it. But the proposal coming from a group of Chinese miners suggests to take 12.5% of the reward, which will be sent to a Hong Kong domiciled company. This is the first big mistake, as it recalls the idea of centralizing an otherwise voluntary project with relatively large global support.

The other problem is that the lowered block reward will in its turn generate a new type of token, which will be distributed and controlled by a new Hong Kong based company.

The Hong Kong company would then raise capital by disposing of its newly issued tokens, for example, by selling them to investors.  A market for these tokens is guaranteed if key exchanges cooperate by running software to enforce the issuance to the Hong Kong company (e.g., blocks that did not issue tokens would not be considered legitimate BCH by the exchange). The proceeds from these token sales would then be used to fund further work by these developers to grow this BCH enterprise

This tokenization approach opens up a serious can of worms. as Bitcoin Cash will have to rely on exchanges once again following its agenda. After causing havoc with its initial hard fork, and with the hash war against BSV, exchanges will now have to absorb yet another technological demand coming from Bitcoin Cash.

In effect, after the halving of the block reward, miners will receive less than the 6.25 BCH block reward. The Hong Kong company will receive the portion of taxed BCH, and subsequently give miners a new token which they can sell at a cooperating exchange instead. The currently unknown Hong Kong company will then sell the taxed BCH to crypto investors and use the money to fund developers.

bitcoin cash.

The trouble is, issuing a token may also bring new issues, first of all a potentially unstable market price. Then, the token may be met with tough securities laws, and to be avoided by certain exchanges and investors.

But Bitcoin Cash is also angering the Bitcoin community by breaking one of the central tenets of mining – the ownership of the block reward. SHA-256 miners, who connected to the open blockchains based on profitability, may now be locked out. Some may decide to abandon BCH altogether. Worse, discontented miners may not be able to revolt, as the tax would be included into the protocol level.

This leaves rogue miners with two paths of actions: either another hard fork to continue Bitcoin Cash with its old rules. The other possibility is to see miner fractions attempt 51% attacks. But another BCH fork would be the biggest disaster, putting stress on the entire crypto ecosystem once again, while possibly tanking the BCH market price. The BCH price sank in a similar manner once the asset had to fight for its ticker in November 2018, and BCH is taking more than a year to recover its previous price positions above $400.

The plan to generate a tax and possibly fund Bitcoin ABC hinges on the idea that minority miners will give up on the blockchain once the halving arrives. Dedicated miners, however, will remain loyal, and see their rewards rise slightly to offset the task. But it remains to be seen if most miners agree with the shift in protocol, and accept the leadership of a new business entity.

New Funding Mechanism Initially Proposed for Six-Month Term

The other part of the plan is that the funding mechanism will initially last for six months. The plan was proposed first by Jiang Zhuoer of BTC.Top. But the planned forks every six months may mean BCH continues to levy a tax in the coming years and decide to extend the scheme. The decision thus means BCH will always be a contentious asset, going through decision crises a couple of times a year.

The plan also gains proponents within the wider Bitcoin Cash community, with their chief rationale being the necessity of survival before the project can afford true decentralization. The idea remains controversial, but there are warnings that the criticism comes mostly from BCH detractors or Bitcoin maximalists.

Whatever the case, the chief idea of the proposal is to prevent any miners from organizing and opposing the process. In effect, Bitcoin Cash will become centralized enough to prevent a miners’ revolt. Thus, even if the community is rumbling, the proposal may pass and introduce a new asset structure to BCH.

Following the news, the BCH market price managed to recover by more than 12%, reaching $359.63, despite the doubts the plan may discredit the project.

What do you think about the Bitcoin Cash “miners tax”? Share your thoughts in the comments section below!

Images via Shutterstock, Twitter @JiangZhuoer, Diagram by Peter Rizun

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