UASF activated with minority hash power but majority user power (“user poser” = “long-term market demand”) – a didactic thought experiment explaining why a UASF is so powerful (provided that the market demand is really in favour of it)

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Imagine a UASF does not have majority hash power, but the majority of the market wants it. What will happen?

Well, first let's define what we mean with "majority":

  • Majority of hash power: I think this is clear to everyone: If current miners could decide for or against the UASF in question, the majority (as measured in hashing power) would opt at rejecting it – hence "majority of hash power"

  • Majority of users: We could also term it "majority of the market". What I mean by this is: If two alternative versions of Bitcoin are traded on a free market, the forces of supply and demand would generate a price for each of these coins. "Majority of users" for the UASF simply means that the coin with the SF activated achieves a higher price than the coin that rejects the SF.

Ok, now let's assume a UASF has market (=user) majority but miner (=hash power) minority. What happens next:

Wallets and exchanges are prepared to support the UASF and will reject the old, non-compliant chain, since they are in violation of the new (SF-defined) consensus rules. So we will have two chains: The old chain (used by users still running "old-protocol" wallets and nodes), mined by the majority of miners (=hash power) as the longer chain, and the UASF chain, supported by the minority of miners, as the shorter chain.

Now both chains' coins will be traded on the exchanges. As it will turn out, the UASF-chain's coins will be trades at a higher price (they are more demanded by the market) than the old-chain coins. This means that the miners who mine on the UASF-chain make more profit than the other "old-chain" miners, because less miners are mining on a more valuable blockchain, so they win double. meanwhile, the "old-chain" keeps on growing faster than the new UASF chain.

However, due to the imbalance in mining profit, some egoistic miners on the "old-chain" will decide to switch to the UASF-chain, because it is just more profitable. After a while, a new equilibrium has settled, in which mining on any of the two chains is equally profitable.

So how would the hash power distribution look at this equilibrium state? Well, quite clearly, the hash power ratio between old-chain and UASF-chain would be equal to the price-ratio between "old-coins" and "UASF-coins". Anything other than that causes a difference in mining profitability and entail a move of mining power from one chain to the other. Side remark: Exactly this can be observed in ETH/ETC case and it fits the theoretical expectation very accurately.

So, since we assumed that user (=market) majority favours the UASF, the UASF-chain will accumulate more hash power than the old chain, simply because of miners' selfishness to optimize their own profits. Now, as a result, the UASF-chain (which was slower and shorter than the "old-chain" in the beginning) will start to keep up and reduce its "distance", until it finally has the same length as the "old-chain". But it keeps on being faster (because it has more hashing power), so a short while later it is one block longer than the "old-chain".

NOW PAY ATTENTION: What happens now is this(!): Note that we are dealing with a SOFT fork! This means that the UASF-chain uses rules that are fully compatible with the rules of the "old-chain" (because that's the definition of a soft fork). So now that the UASF-chain is the longer chain, the old-chain re-organizes and switches to teh UASF-chain, so both chains are the same now!!!

SUMMARY:

If the mid-to-long-term market demand for the "UASF version" is higher than the market demand for the "old version", then it is an economical necessity (enforced by market forces of egoistically acting miners) that the UASF chain will become the longest chain, and then also the ONLY CHAIN! So there won't be any competition between competing chains (unlike it is the case for a HARD fork), and hence the SF mechanism is a forking mechanism that keeps the eco-system unified and avoids diversion and loss of network effect and user confusion via chain split.

FINAL THOUGHT:

Now, of course the miners all know the mechanism described above. If a UASF hits the market and market demand for it is considerable, they will think twice! They know that if they are mining for the "old-chain" now, and if after a while (maybe 1 day, maybe 1 month, …, maybe longer) the UASF-chain becomes the longest chain, they'll LOSE ALL THEIR PROFITS from the time of the UASF start until the point in time when the UASF chain becomes the longest chain! Are they willing to take that risk? Probably not, so they better mine on the UASF chain from the beginning, and so it is unlikely that the "old-chain" even starts off in the first place.

But wait! These "old-chain"-miners wouldn't lose all their revenues upon said chain-reorganization! They would sell their mined coins on the exchange markets immediately for USD or other fiat, so they do not have to fear any thing from a re-org after a while! So the one who would lose it all are the ones who own these "new coins". So whoever owns a "new coin" on the "old-legay-chain" would be HIGHLY incentivised to get rid of it quickly, like a hot potato! And this does not only apply to newly mined coins since inception of the UASF-chain and the chain-fork, but also to any transactions that happen after the fork on the "old-chain".

In other words: The coins on the "old-chain" completely lose their use case as HODL-coins foro long-term or even mid-term savings! They can only be used for short.-term transactions, and everybody would be incentivized to get rid of them as quickly as possible. And knowledge of these mechanisms would, of course, create an ENOURMOUS PRICE PRESSURE on the "old-chain" coins and deem them virtually worthless in a very short time!

Now, since the exchanges are pretty aware of everything I have just written, they won't even bother spending effort in supporting the "old-chain-coins". It is not worth spending time to open trading opportunities for a coin that is deemed to vanish from existence again within a very short time.

FINAL CONCLUSION:

If a UASF takes place and there is strong indication that markets will embrace it in majority, all major exchanges will readily jump onto this UASF-coin and won't care about the legacy coin. The "old-chain" coin will be dead virtually from the start.

So the UASF is, after all, a very safe activation mechanism, provided that the market wants it.

How can we know if markets want it? Well, via options trading/betting for example, and by users asking their exchanges their preferences.

submitted by /u/Amichateur
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Ticker

1 BTC = $25760.49 USD  (via Coinbase)
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