Economics of Forks

To understand the economics of forks, one must first understand that monetary
value is primarily a social consensus. It is tempting to equate a cryptocurrency
with its rules and its ledger, but currencies are actually focal points: they draw
their value from the common knowledge that they are accepted as money. While
this may seem circular, there is nothing paradoxical about it. From a game
theoretic perspective, the perception of a token as a store of value is stable so
long as it is widespread. Note that, as a ledger, Bitcoin is a series of 1s and 0s.
The choice to treat the amounts encoded within unspent outputs as balances is
a purely social consensus, not a property of the protocol itself.
Changes in the protocol are referred to as “forks”3
. They are so called
because, in principle, users have the option to keep using the old protocol. Thus,
during a fork, the currency splits in two: an old version and a new version.
A successful fork does not merely require software engineering, but the coordination
of a critical mass of users. This coordination is hard to achieve in
practice. Indeed, after a fork, two ledgers exist and users are confronted with a
dilemma. How should they value each branch of the fork?
This is a coordination game where the answer is to primarily value the branch
other users are expected to primarily value. Of course, said users are likely to
follow the same strategy and value the branch for the same reason. These games
were analyzed by economist Thomas Schelling and focal points are sometimes
referred to as “Schelling points”[6].
Unfortunately, there is no guarantee that this Schelling point will be the most
desirable choice for the stakeholders, it will merely be the “default” choice. A
“default” could be to follow the lead of a core development team or the decrees
of a government regardless of their merit.
An attacker capable of changing social consensus controls the currency for
all intents and purposes. The option to stick with the original protocol is widely
irrelevant if the value of its tokens is annihilated by a consensus shift.4
Core development teams are a potentially dangerous source of centralization.
Though users can fork any open source project, that ability offers no protection
against an attacker with enough clout to alter the social consensus. Even assuming
the likely benevolence of a core development team, it represents a weak point on which an attacker could exercise leverage.