Chain Split Valuation

Chain split valuation is the economic assessment of how the value of a derivative contract should be apportioned between the original chain and a newly forked chain. When a blockchain splits, the derivative instrument faces an identity crisis, as it must determine which version of the asset it represents.

Market participants often disagree on the legitimacy of the two chains, leading to significant price volatility and divergence. The valuation process must account for the differing network effects, developer support, and liquidity of the two chains, which often results in one chain being valued significantly higher than the other.

Derivatives platforms must decide whether to provide exposure to both chains, only the dominant one, or a weighted combination. This valuation is further complicated by the fact that the original contract may not have been designed to handle multiple instances of the same asset.

Consequently, the derivative provider must establish a fair market value for the new chain, often using a combination of exchange spot prices and oracle-based consensus, to prevent arbitrageurs from exploiting the price discrepancy.