How to understand the economic effect of a chain split

Something like a chain split does not exist in other money types especially not in the paper fiat rectangle money types. Let me explain.

Good money have some characteristics, explored hundreds of years ago, but well after money came in to common use, because in my opinion the ascent of money is due to the way the human brain works, with regards to observing the society around each individual, looking forward with saving and investment, and the most advanced human ability: To look forward and predict how other people in society will act in the future, the economic meaning of the word speculation.

Of the money characteristics, we choose only one for this purpose, the fungibility, which means that each unit is just like any other of the same unit, they are interchangable.

Now, when it comes to a fiat money type, for instance mexican peso, the 500 pesos rectangle is quite different from a 100 pesos rectangle, so they are not fungible in the first place. What exists is a virtual unit, called the peso. The different denominations are pegged to that virtual unit by Banco de México. You can go to that bank and change a 500 to 5 100's for free. You don't normally need that, because any merchant regard them as equal, give proper change, and also sometimes helpfully splits a large bill into smaller for you. But you can not expect that, not even in any bank, if you come with a truck full of small notes they want to be paid for the service. You can only demand it at the central bank. Since the central bank has the ability to create new and destroy old at will, they are able to defend that peg indefinitely.

So for the purpose of understanding a chain split and create something that could be like it, for the fiats, we need to simplify the situation quite a bit: Say

• we have only one type of bill
• and no central bank.

People happily trade these bills for merchandise, a bit problematic with only one denomination, say 20 pesos, but it is doable (most fiats have a smallest bill or coin, if you need to trade smaller, you can't, but merchandise can be lumped together to alleviate it).

Then comes the split.

On a signal, a message from above or what have you (!), every holder of the note cuts it in two parts, one part has the number, now to be called Number-Scale (there is a scale on that note), the other half called Benito-Face (the name of the guy).

Then, next you go to a merchant, and you see that all the prices have approximately doubled (since all money now are halves). You ask him what he prefers, Scales or Benitos, and he either says it doesn't matter or he prefers the Scales because those also have serial numbers on them, maybe he thinks that they are less counterfeitable or something. You give him Scales.

After some time, some people have mostly Scales, other people have mostly Benitos, therefore the value starts to diverge. Remember, there is nobody to peg the value together.

The two money types have slightly different properties as indicated above. As a consequence, or maybe by random, the liquidity will start to differ, and higher liquidity begets more liquidity, one of those money types will mostly take over trade and holding, the other type will mostly fall into irrelevance.

To understand it requires you to swallow those huge assumptions for the purpose, and some ability to think abstractly. It never happens in the fiat world, but I think it is a model that can explain the economic effect of a chainsplit producing two slightly different types of cryptomoney, like the Bitcoin Cash split in August 2017 and the Bitcoin Satoshi Vision split in November 2018.

And I offer a smiley to everybody who read all of that!

submitted by /u/ErdoganTalk
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source https://www.reddit.com/r/btc/comments/azb3yh/how_to_understand_the_economic_effect_of_a_chain/