Bitcoin experiences existential crisis at Baltic Honeybadger Bitcoin conference
Bitcoin mingled with the spectre of its own mortality over canapés
Pierre Rochard has done more than almost anyone else to make the Bitcoin Lightning Network more accessible by creating the point and click Node Launcher. He also runs Bitcoin Advisory, and recently took to the stage at the Baltic Honeybadger Bitcoin conference to pick at one of the more troubling parts of the Bitcoin whitepaper, according to an article in Trustnodes.
The reason this particular snippet is so troubling is because, with the full benefit of hindsight, it's possible to look at this and say, "Actually, Satoshi was wrong about that."
Those kinds of heretical thoughts do not sit well with the most devout Bitcoin maximalists.
Basically, in its current form, Bitcoin rewards miners with newly minted coins. But when Bitcoin gets closer to its 21 million maximum supply limit, miner rewards drop off and are instead supplemented by network transaction fees.
Miners being well paid is non-negotiable. The security and viability of the entire Bitcoin network security is strictly dependent on ensuring that miners are well paid.
As the theory goes, Bitcoin's usage will increase over time and with more people using the network, there will be more total transaction fees, ensuring that miners are still well paid even after the block rewards drop off.
Sounds fine on paper, but here's what Satoshi may have overlooked: Bitcoin transaction fees are binary. Either there is sufficient network capacity and fees are low or there is insufficient capacity and fees are high and continually growing.
When there's sufficient network capacity, Bitcoin transaction fees tend to range from about ten to twenty cents (US). When there is not sufficient capacity, fees will jump to well over a dollar in just a few hours and keep on rising until congestion eases up.
So, about 20 or 30 years from now, the following situation may arise:
- If there is consistently sufficient network capacity, there is no way for transaction fees to viably replace block rewards – they'll simply be too low. Even with literally the entire planet using Bitcoin, there's a finite amount of space per block. This puts an upper limit on the number of transactions that can be packed into a block and, therefore, the amount a miner can earn.
- If there is not consistently sufficient network capacity, Bitcoin transaction fees will just keep growing well beyond the point of usability.
Running the numbers
The year is approximately 2050. Bitcoin is worth $1 million each, the current Bitcoin block reward is 0.1 BTC as intended and everyone uses Bitcoin.
Now, back in 2019, you'll ordinarily fit about 2,600 Bitcoin transactions into a block. Let's assume that this has improved massively by 2050, one way or another, until you're fitting 100,000 transactions per block.
Now, let's assume Bitcoin fees somehow magically end up being exactly 20 cents per transaction in 2050 – around about where they are now. This is still low enough to ensure that people are still willing and able to use Bitcoin for transactions as desired – because all other cheaper payment systems have been eliminated in this hypothetical future – but still high enough to ensure that miners are going to be paid unrealistically well.
So even in this unrealistically generous version of the future, you have miners making only $120,000 per block, which is still mostly from the remaining block reward and only a little bit from transaction fees.
Back here in 2019, at current Bitcoin prices miners are already making more than that. At current Bitcoin prices, they're making around $128,000 per block. This is quite problematic because in this version of the future, Bitcoin is being used as the global payment system, but it's also very cheap and easy to attack.
It's no secret that Bitcoin's mining economics are innately broken and doomed to fail without some serious changes. The Bank for International Settlements tastefully dubbed this "doomsday economics", and people have been pointing at this problem for years now.
But while Bitcoin's broken economics are straight up factual, the extent to which this will actually matter depends largely on what happens in coming years and decades and on how other developers shape up.
For example, if the Lightning Network takes off (it won't though), that would considerably change the picture for Bitcoin and affect what the best move is going forwards. Similarly, a look at factors such as how Bitcoin is used would suggest different potential courses of action around larger block sizes and so on.
Proof of stake presents another question mark. When asked about this Bitcoin question, some Ethereum core developers speculated that Bitcoin would end up transitioning to a hybrid proof-of-stake model of sorts, where those strict mining rewards aren't actually necessary for the security of the network.
But within the Bitcoin community, there appears to be a gradually forming thrust towards ongoing inflation and the removal of the 21 million cap.
In his presentation, Rochard suggested that it may potentially not be an entirely terrible idea, while Bitcoin developer Peter Todd has also suggested ongoing inflation as a kind of "security tax".
In my @WhatBitcoinDid interview I mentioned how Bitcoin should have had a 0.1% or 1% monetary inflation tax to pay for security.
Something I didn't mention - and should have - is I think the 21 million BTC limit is so fundamental it's more likely Bitcoin will die than change it.
— Peter Todd (@peterktodd) March 22, 2019
But as he said, the principle of 21 million is so fundamental to the Bitcoin ideology that the coin might die rather than change it.
In the end, maybe all that can be done is to cross that bridge when it comes and hope the Bitcoin community doesn't tear itself apart over whatever course of action is decided. Or, someone who's hoping for some hard fork freebies might cross their fingers and hope Bitcoin does tear itself apart again.
Disclosure: The author holds BNB and BTC at the time of writing.