BCH developer fee explained: Tax or security?

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The BCH proposal to subsidize development with a 12.5% cut of miners’ block rewards has seen mixed reactions from those inside and outside the BCH community. Two main issues have arisen: Does the fee represent a “tax” that affects miners whether they mine BCH or not; and is it a security that could present legal problems in the future?

How the BCH developer fee initiative works, in theory

It should be noted that the developer service fee concept is nothing new to BCH. The community heard it first in mid 2018 at a one-day event in Hong Kong. However it was never implemented, and was mostly forgotten until BTC.TOP CEO and investor Jiang Zhuoer published a more specific plan on January 23, 2020.

12.5% of all BCH block rewards would be channeled into a Hong Kong-registered corporation between May 15 and November 15, 2020. That company would be responsible for selling the BCH coins and using the proceeds to fund key ecosystem development—unspecified at this stage, but (main protocol development team) Bitcoin ABC and (popular desktop wallet) Electron Cash have popped up in mentions. The plan’s effectiveness and popularity would need to be assessed before miners agree on whether to continue the initiative or not.

Also notably, that period covers the “halvening” on the BSV, BTC & BCH networks, which will happen around mid-2020. The 10-minute block reward, now 12.5 coins, will drop to 6.25 coins—which it does every four years in accordance with Satoshi Nakamoto’s original logarithmic coin-issuance plan.

The plan’s named backers were Zhuoer himself, Jihan Wu of Bitmain, Antpool and BTC.com, ViaBTC’s Haipo Yang, and Bitcoin.com owner Roger Ver. Others within the community have weighed in since, some strongly in favor and others strongly against, while some have agreed in principle but debated the nature of its structure.

So is it a tax? And if so, do non-BCH miners pay it too?

One prominent issue is whether the developer fee represents a “tax.” That’s a triggering word in BCH’s libertarian-heavy community, so semantics matter.

Bitcoin.com addressed the question directly in an editorial with a subheading “It is not a tax.” Ver’s company said the key difference is that “a tax is a coercive instrument by state actors which must be paid under threat of legal penalty, including fines and jail time. Under this proposal, no such threat exists.”

Since miners are free to mine BCH or not, the developer fee represents voluntary free market activity in keeping with Bitcoin’s principles, the article added.

That hasn’t stopped the plan being referred to as a “tax” in various social media posts and opinion pieces. But of special interest here is the impact on non-BCH miners. Bitcoin.com’s article also noted:

In practice, the majority of the funds will not come through as an additional cost for existing Bitcoin Cash miners. The costs will be shared across the entire SHA256, which means much of it will be paid for by BTC miners and through the minor decrease in hash rate on Bitcoin Cash. What matters most is the real cost born by Bitcoin Cash miners, which will be negligible.

Even Zhuoer’s initial description said, “To ensure participation and include subsidization from the whole pool of SHA-256 mining…”

So, if the rules apply only to BCH miners, how do other SHA-256 miners (in this case, nodes mining BSV and BTC) still have to pay? And do they have a choice?

The math behind this is estimated and the effects indirect. Basically, it goes like this: a percentage of miners would choose to mine on a more directly profitable SHA-256 blockchain. But increased miner competition would result in hashing difficulty rising on BSV and BTC and falling on BCH, in theory leveling-out the profitability problem.

That means yes, effectively BSV and BTC miners would find themselves subsidizing BCH development. There isn’t much they can do about that, and BCH supporters see this as a positive.

Therefore, the developer fee doesn’t meet the dictionary definition of a tax, which is “a compulsory contribution to state revenue, levied by the government.” It does, however, represent an unavoidable, flow-on cost burden to BSV and BTC miners if the estimates are correct.

Bitcoin entrepreneur and investor Calvin Ayre has made it clear he regards the developer fee as a tax, saying:

this is wrong…because this will affect profitablity across all three branches so is in fact a real tax and one for all miners on the three branches…this is for sure a tax.

— Calvin Ayre (@CalvinAyre) January 26, 2020

Tax aside, is the developer fee a security?

The other main concern is the exact nature and structure of the subsidy plan, mainly the role of the Hong Kong corporation and who gets to make the important decisions. Since “decentralization” and “accountability” are also trigger words in Bitcoin, this is as significant as the economics.

Bitcoin Unlimited is the second most popular BCH protocol development team, running on 702 BCH nodes alongside 732 running Bitcoin ABC at present, according to Coin.Dance. There are only 28 nodes running other versions of the protocol.

Bitcoin Unlimited chief scientist Peter Rizun has opposed the plan. His own editorial began with the words: “Despite the best of intentions, the developer service fee, AKA dev tax, will corrupt BCH. It represents a departure too far both from our core principles and from bitcoin as peer-to-peer electronic cash.”

He described the initiative as a “radical departure that hard codes a third-party into the protocol.” Participating mining nodes would “orphan” any BCH blocks that do not abide by the plan. To avoid a hard-fork to the protocol and risk another chain split, the code runs separately.

Rizun said the plan raises potential antitrust issues, and in fact contradicts the Bitcoin whitepaper which states block rewards are “owned” by those who mine them.

“Regardless of how well the raised capital is managed, at a distance the scheme is indistinguishable from a scam that takes money from investors in exchange for tokens (issued to the HK corp at zero cost and legitimized by colluding exchanges) with the promise of moon lambos in the future thanks to the hard work of its ‘world-class dev team’. This is only made worse by the fact that the colluding miners, exchanges, and developers benefit regardless of whether the tokens appreciate in value or depreciate.”

Moreover, he wrote, introducing the plan may cause BCH to pass the US Supreme Court’s “Howey Test” that determines whether or not an asset is an “investment contract” (and thus falls under securities regulations).

Maybe it’s all in the wording

Semantics and the exact wording of several of the developer fee agreement may indeed play a part here, but the concerns ring true. By introducing new “rules” regarding coin ownership and new economic incentives opens the door to greater risk of corruption. This could take the form of expanding the plan in various ways, or tweaking it to benefit favored groups, Rizun said. Deciding who to fund, and how much, could “become a politicized process.”

Others have voiced similar concerns.

Even if the risk of corruption is small, why introduce it at all? That’s something BCH leaders will ultimately need to decide.

Bitcoin ABC lead developer Amaury Sechet countered the argument with “It’s more like if you do not fund devs, your entire network will be corrupted. It’s unavoidable and follows from the incentive structure.”

You get the causality reversed. It's more like if you do not fund devs, your entire network will be corrupted. It's unavoidable and follows from the incentive structure.

And was proven in practice many time on many coins. https://t.co/AwGFebTI9n

— deadalǹ͔͜͡i͎̜͖͗̎͞x̛̳̠̤̥̦̉̊̕̕ the IT security guy (@deadalnix) January 26, 2020

BCH’s funding problem

Sechet, a key figure in the continuing development of BCH, has been a vocal advocate of the need to pay developers for the coin to compete with better-funded opposition, namely BSV and BTC.

Funding protocol development and other key ecosystem projects has been a struggle for Bitcoin Cash since the November 2018 hard fork that split the chain, producing BCH and BSV. BCH “won” the ticker symbol but BSV kept better-resourced investors like Calvin Ayre and nChain. The main corporate backers for BCH have historically been (with varying levels of commitment) Bitmain, Bitcoin.com, BTC.TOP and ViaBTC. With a message that’s unclear beyond “freedom” and “censorship-resistant,” BCH has struggled to gain other marquee investors.

On top of that, participants in the BSV ecosystem like the Bitcoin Association and nChain hold patents on many vital technologies driving blockchain development, Bitcoin or otherwise. Together with its focus on enterprise use cases and scaling to compete with existing corporate giants, BSV potentially has more appeal to the kind of large investors BCH and BTC will need in the future.

Large investment sources remain necessary to kick-start cryptocurrency and blockchain applications, given their need to gain mass appeal before turning a profit. BCH’s developer fee is one solution, but out of the gate it’s a troubled one. After all of the latest news surrounding this BCH Miner Tax to finance protocol developers, I think it’s an opportune time to ask everyone once again: Who won the Hash War?