So, to recap: SHA256 is replaced with running merkel roots. Whoever is able to fire up the most instances can assign themselves 79% of all new coins, and is able to double spend.
Dishonest hatchers will not lose their reputation in this case. Honest hatchers will reject the double spends, but the honest ones are only 1% so the clients won't know. All the clients will see are 99% of the amazon nodes telling them the double spends are valid.
Keep in mind a little something... when network is first started and runs with honest nodes for some time, nodes will build their reputation off the amount of available transactions... as network runs on, transactions will being going first to most trusted nodes before they reach untrusted nodes. If someone comes into the network with a million hatchers... this will be way more hatchers than is needed to meet the transaction volume of the network, so those hatchers will likely never even be asked to process a single transaction.
As the network matures, it becomes hardened. New hatcher nodes that are not required to fulfill the transaction volume become redundant and would be ignored.
In this way, hatchers meet network demand perfectly. You cannot go firing off a billion-gazillion nodes as hatchers and expect them to be used by the network when there are only a few trickling transactions that need to be verified.
I wonder though... if perhaps you created a 3rd class of client, a "monitor", and allowed these monitors to do extra work in verifying that the network was secure.... like spot check the work of hatchers or something? Perhaps they could gain trust if they find a dishonest hatcher and report it to other hatchers? and perhaps they could also be rewarded with pay-outs if they find dishonest hatchers.
Of course you can fire up a billion hatchers. If they hardly have to do any verification, there is no downside to firing them up and essentially getting free lottery tickets for more coins. Just do a difficulty adjustment like bitcoin so that anyone who wants to win monies has to do a lot of work. You need to just copy the bitcoin code, change the algorithm to the tree search, and make the difficulty adjustment work with the tree search. Then at least you can beat litecoin. Just don't botch the launch. Litecoin completely failed at being a CPU algorithm, and that was its initial draw. Litecoin only has something like 25 merchants. If you sign up that many merchants plus launch as a CPU currency and cut out all the GPU farmers and do a somewhat fair launch, you will crush litecoin fast and take its whole market cap.
