Even without a mining subsidy, these two factors will protect Bitcoin into the future

This opinion editorial is by Dillon Healy (a member of The Bitcoin Conference’s institutional partnerships team). It concerns Bitcoin’s future security budget. This is mainly due to the fear that miner revenue won’t be sufficient to provide adequate security in the future, post-block subsidy. Bitcoin miners play an important role in the security of the network by proposing blocks that nodes accept, verify and update to the Bitcoin ledger. Competing against other miners for the right to add a new block to the blockchain, miners use a lot of computing power to create the proof-of work consensus algorithm and win the right the propose a new block. The block reward consists of two components: the transaction fees and the block subsidy. The block subsidy, currently 6.25 bitcoin, is the amount of bitcoin that is minted in each block. This subsidy of bitcoin is reduced by half every four years due to the halving. Block subsidy currently accounts for the majority of total miner revenues. The concern is that the transaction fees portion of the miner rewards won’t be raised enough to compensate for the loss in the block subsidy. This will result in decreased security and increased attacks since miners are no longer incentivized. My view is that those who are concerned about this are misunderstood Bitcoin’s long-term game theory and incentive mechanisms. This will lead to decreased security for the Bitcoin network and increased attacks. Some people advocate for tail emissions to increase Bitcoin’s 21 million supply to solve the security budget (settlement lastity) problem. This is alarming. The solution, if you can call that, is already in the Bitcoin adoption curve and incentive structure. There are two parts to this equation: one, transaction fees scaling with Bitcoin adoption as a security measure, and two, Bitcoin mining becoming an auxiliary tool. This issue is often raised by someone who doesn’t understand why transaction fees will rise or advocates for proof of stake (here’s one example). Ironically, increased transaction fees could be a natural defense reaction to an attack by a bad actor mining blocks to stop users transacting. If there are no blocks being mined, the mempool could be filled with Bitcoin transactors who are raising fees and competing for the next block. Riot Blockchain and Blockware Solutions published an amazing report that explained how similar attacks and others would be met with naturally-occuring defence mechanisms from the Bitcoin immune. Most resulting in much greater transaction fees. “Under an empty block attack, or other attacks attempting stop users from transacting. It is in the self interest of Bitcoin users to increase their transactions’ fees in order to get into the next blocks. The mempool will have more transactions pending the longer an attack lasts. Transaction fees can rise from 1 sat/vbyte up to 1,000+ sats/vbyte. If a block has a maximum size of 1,000,000 vbytes, the reward could be as high as 10+ BTC or close to 0 BTC. The system is antifragile and an empty block attack would be met with an interminable market-based counterattack of high transaction charges. The attacker would be likely to be deterred by this counterattack. Another example of fees being raised as a result the network protecting itself is when miners attempt to censor merchants. This is a detailed example. “If a majority miner refuses to accept transactions from merchants, then the censored merchants will either raise their fees or cease transacting at all. Merchants who are unable to move their bitcoins will lose any value during the time they are being censored. It can be deduced that merchants who are being censored will pay a higher confirmation fees proportional to their censorship duration, up to the theoretical maximum amount of the transaction. There are many reasons why transaction fees could rise due to Bitcoin adoption, especially as a medium for exchange. As Bitcoin adoption rises, there will be more competition to add transactions into Bitcoin’s limited block space. This will lead to increased transaction fees and a greater demand for scaling solutions. These scaling solutions will continue to be offered by the market — popular solutions include exchanges batching transactions, Lightning Network, and other Layer 2 or Layer 3 developments that can bundle thousands of Bitcoin transfers into a single transaction that settles on-chain. It is reasonable to assume that most normal user transactions will take place on additional layers or sidechains once you have understood Bitcoin’s adoption curve. These more efficient-bundled transfers, as well as transactions that require greater security or institutions that move large amounts of value, will be settled on-chain. Image source. The final settlement would require a higher transaction fee. The incentive for Bitcoin miners to use stranded, unutilized or excess energy has been a significant development in the mainstream. Bitcoin mining is a new and innovative way for society to access untapped or untransportable energy. This energy can be immediately sold to the Bitcoin network via mining. One of the most exciting innovations in this sector is the merging of ocean thermal energy conversion with Bitcoin. This article is very in-depth and explains how OTEC and Bitcoin can improve energy production and efficiency. “Bitcoin has potential to help unlock between two and eight terawatts clean, continuous, and year-round baseload electricity — for one million people — by harnessing ocean thermal energy. This transforms the oceans of Earth into a huge renewable solar battery. It does this by combining warm tropical ocean water with deep cold seawater to make a conventional heat engine. This simple idea can be easily expanded to a global scale by Bitcoin’s unique appetite to purchase and consume stranded electricity from the pilot plants and prototypes that will be needed to prove it works. OTEC is also able to harness virtually unlimited amounts of cold water to cool co-located ASIC miner, making it the most efficient and ecological way to mine Bitcoin. This is just one example that shows how mining can become more efficient over time. With increased efficiency comes decreased network security because miners are less likely to go offline. Bitcoin miners can work in tandem with businesses and industries, and provide enormous benefits to otherwise routine business practices. One example is that ASICs that mine Bitcoin generate heat. This heat can be used to boil water to create steam. Condensing the water again can be used as a form purification. Finally, these ASICs that generate heat need to be cooled by fans. Combining mining with industries or businesses that produce cool air is another amazing idea. Cross mentioned carbon capture facilities that integrate huge fan banks into their business operations. Combining these fan banks and a mining operation subsidizes ASIC cooling costs. Simply adding Bitcoin mining to many unrelated industries or businesses that need heating or cooling will increase efficiency and decrease costs. Bitcoin mining is already heating greenhouses, distilling whiskey, and monetizing stranded energy. It will soon be absurd to not use your business’s naturally-generated heat or waste energy on Bitcoin miners. If your business has huge fan banks, it will also become absurd to not point them to ASICs. All of this results in more positively-incentivized miners over time which maintains network security and has the potential to counterbalance the shrinking block subsidy.The combination of Bitcoin’s adoption naturally leading to increased transaction fees over time and Bitcoin mining shifting into an auxiliary tool for a wide range of independent industries demonstrate how the long-term security of the network is something to be optimistic about.This is a guest post by Dillon Healy. These opinions are not necessarily those of Bitcoin Magazine or BTC Inc.

 

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