Editorial 28 August 2018

Ed Drake

Why Wormhole will destroy Bitcoin BCH

Wormhole.cash launched several weeks ago promising to be a game changer by suggesting the inclusion of the OP_Return code would allow any organization or person to create a representative token. The tokens could represent bonds, stocks, loyalty points, and even fiat.

Project Wormhole is essentially a layer-2 technology that allows for the creation of smart contracts on Bitcoin BCH, something the crypto community has been requesting to be given them: a better option than Ethereum. CoinGeek, however, has seen no less than 4 independent white papers for on-chain smart contract and token payment platforms that layer on top of Bitcoin (BCH) in connection with the £5 million contest we are running for exactly this kind of solution. We know that you do not need to do risky untested protocol changes to get these features working on Bitcoin.

Wormhole promises to propel the Bitcoin BCH network forward, but in reality, it’s another attempt to deviate from the primary purpose of Bitcoin BCH, and on further inspection, it will destroy the value of the network.

The project produces a cryptocurrency, called Wormhole Cash (WHC) that emulates Ethereum (ETH), which will result in the Bitcoin Cash (BCH) network turning into a developer’s playground—that’s not a bad thing on the surface, but it opens the system up to a whole host of troubles by turning the ever-watchful eye of securities regulators and government agencies towards Bitcoin BCH. Below we explain the potential worst case scenario consequences of burning BCH. These are problems Bitcoin BCH as money hasn’t needed to worry about as it is not a security.

Bitmain‘s CEO Jihan Wu has been a driving force behind the push for Wormhole on BCH. It is therefore not surprising that his AntPool miners were the final group needed to enable SegWit on the BTC chain.

Burn addresses

Wormhole is made capable by using the OP_OPEN protocol with the Omni Layer assets platform; it’s the same method used with the notorious Tether USDT token.

To work securely, Wormhole needs three things enabled: (a) 1-minute blocks. to capture more confirmations faster; (b) pre-consensus and Canonical Transaction Ordering (CTO), which will allow Wormhole to have numerous competing “coins” and contracts; and (c) a high enough cap, about 32MB, which will allow the use of OMNI as a base layer but not so large that it would enable BCH to scale and be a global currency all by itself.

The use of burn addresses means BCH will become a layer 0-solution.

According to its Medium post:

“[… Wormhole] can also execute the issuing, transferring and burning of tokens. Since Wormhole is a protocol for BCH but operating separately from BCH, it uses an account/balance model that was best suited for a smart contract. Thus, we can successfully resolve the fundamental issue in BCH’s UTXO model.”

Here lies the problem. You do not “back” anything in a burn.

When you “back” a token, you effectively place the BCH in a vault where you can remove it at a later time. “Burning,” on the other hand, means you seek to destroy it—you take the investors’ money, set it on fire, and give them a worthless, unbacked coin.

Backed vs Based vs Burned

In legal terms, an asset-backed security (ABS), is funded by and secured over a portfolio of cash flow-generating assets. An ABS has physical assets that back its value to which investors have a right.

In comparison, holders of an asset-based instrument don’t have a right against the physical asset although an asset is said to generate the value upon which the investment is based. Instead, investors can claim against the issuer for the amount of their investment in the event of a default, however, the issuer is not required to sell any particular assets to repay its debt to the investors because no specific identifiable assets are secured for the benefit of investors. In other words, the investor takes the credit risk of the issuer rather than the credit risk of the asset as in an ABS.

And then there’s burned.

Unlike in the cases of asset-backed securities and asset-based instruments, investors in a coin that has burning as a feature have no enforcement rights; they can never redeem their BCH.

Picture this: You made an investment that gives you a right to a row of houses in a community, however, the neighbourhood rules provide that some of houses in that community will be destroyed. Your house, if it’s left standing, may be worth more assuming relative scarcity applies and demand for housing in that neighbourhood is unchanged (this assumes that despite there being fewer houses left after the burning, investors are still interested in housing in that area). But do you really want to live in a community where some of the homes on your street have been burned down and where this trend is only likely to continue? For how long do you expect demand to keep constant or even increase such that the price of your home continues to appreciate?

Applying this reasoning to Wormhole, for how long do you expect to maintain investor interest in WHC while the underlying asset is being destroyed? Alternatively, let’s assume that the value of WHC shoots through the roof as a result of all the burning. Again, this assumes demand for WHC remains constant, or even increases, while supply of its underlying asset (BCH) is slowly being reduced. In such circumstances, it is likely that nobody will want to sell their WHC as hodling is a preferred investment strategy. How will you generate transaction flow if no one wants to spend WHC because everyone expects it to be worth more if they hold on to it until tomorrow? Sound familiar?

So the question is: can you still call the kind of model proposed by WHC “peer-to-peer electronic cash”?

Note: Tokens on the Bitcoin Core (segwit) Chain are Referred to as BTC coins. Bitcoin Cash (BCH) is today the only Bitcoin implementation that follows Satoshi Nakamoto’s original whitepaper for Peer to Peer Electronic Cash. Bitcoin BCH is the only major public blockchain that maintains the original vision for Bitcoin as fast, frictionless, electronic cash.

Note: Tokens on the Bitcoin Core (SegWit) chain are referenced as BTC coins; tokens on the Bitcoin Cash ABC chain are referenced as BCH, BCH-ABC or BAB coins.

Bitcoin Satoshi Vision (BSV) is today the only Bitcoin project that follows the original Satoshi Nakamoto whitepaper, and that follows the original Satoshi protocol and design. BSV is the only public blockchain that maintains the original vision for Bitcoin and will massively scale to become the world’s new money and enterprise blockchain.

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