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BTC · 209w

Why that "free" money you're getting from BitcoinCash isn't free at all

Power laws and Network Effects: Why BitcoinCash is not a free lunch

Everyone in bitcoinland is in a tizzy about the pending airdrop of “BitcoinCash” (BCC) on August 1 to all bitcoin holders. The (highly illiquid and no doubt manipulated) futures market at ViaBTC is pricing in BCC at 14% of bitcoin’s current value — about $388 per BCC at time of writing — although it has traded between 8% and 21% in the last week. Bitcoin is rallying and altcoins are getting crushed as people race to get access to BTC in time for the big airdrop. (If you don’t know what BitcoinCash is, read this first.)

As far as PR goes, promising everyone “free money” is a great way to get attention to your project, even if it is not viable. However, there are holes in the free money story.

I’m writing this post to put concrete figures on the value of network effects and the damage done by a network split. While the decoupling of the big-block BCC from the Segwit-enabled BTC may ultimately prove healthy for the entire network, in the short term, it will be a damaging split if it attracts a substantial number of users. This can be argued from first principles. I’ll do that first, and then plug in some numbers.

The importance of Metcalfe’s law Notice how the connections increase nonlinearly with nodes

If you have paid any attention to bitcoin recently, you have probably heard the phrase “network effect.” This refers to the tendency of networks to gain value in a nonlinear way as more users join those networks. In fact, it can be formalized mathematically.

Metcalfe’s law, first defined in the 80s with reference to Ethernet connections, theorizes that the value of a network is proportional to the square of the number of nodes on the network.

It can be simply expressed as:

V = C * N², where V is value, C is a constant, and N is the number of users or nodes. Metcalfe himself used Facebook’s data to demonstrate the power of his law in 2013, and Zhang, Lui,...

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