On April 19th the block reward was halved from 6.25BTC to 3.125BTC. This process is repeated every 210,000 blocks (about every 4 years). It limits the issuance of BTC to 21M because around 2140 the reward will be zero; a halving will make it less than a satoshi.
Long before 2140 the block rewards will have shrunk to become insignificant compared to the fees. Below the fold I look at the significance of the change to a fee-only Bitcoin
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As I write the average fee per transaction is $3.21 while the average cost (reward plus fee) is $65.72, so transactions are 95% subsidized by inflating the currency. Over time, miners reap about 1.5% of the transaction volume. The miners' daily income is around $30M, below average. This is about 2.5E-5 of BTC's "market cap".
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To maintain deterrence miners' daily income will need to be about $50M, Each day there will be about 144 blocks generating 56.16BTC or about $5.5M, which is 11% of the required miners' income. Instead of 5% of the income, fees will need to cover 89% of it. The daily fees will need to be $44.5M. Bitcoin's blockchain averages around 500K transactions/day, so the average transaction fee will need to be around $90, or around 30 times the current fee.
One might think that, were BTC to proceed properly moonwards, this problem would go away. Lets repeat the calculation assuming BTC = $1M in 12 years. Miners' daily income would need to be around $500M. The daily rewards would be about $55M, so the fees would need to be $445M, the same 11%. Thus the average fee would need to be around $900. The problem scales with the "price".
It seems probable that withdrawal of the 95% subsidy on transactions will cause some problems. Indeed, there is considerable economic research making this point, including:
- In 2016 Arvind Narayanan's group at Princeton published a related instability in Carlsten et al's On the instability of bitcoin without the block reward. Narayanan summarized the paper in a blog post:
Our key insight is that with only transaction fees, the variance of the miner reward is very high due to the randomness of the block arrival time, and it becomes attractive to fork a “wealthy” block to “steal” the rewards therein.
- More generally, the analysis of 2018's The Economic Limits Of Bitcoin And The Blockchain by Eric Budish essentially concludes that, for safety, the value of transactions in a block must be less than the sum of the mining reward and the fees it contains.
- In 2019 Raphael Auer of the Bank for International Settlements published Beyond the doomsday economics of “proof-of-work” in cryptocurrencies:
The key takeaway of this paper concerns the interaction of these two limitations: proof-of-work can only achieve payment security if mining income is high, but the transaction market cannot generate an adequate level of income. ... the economic design of the transaction market fails to generate high enough fees. A simple model suggests that ultimately, it could take nearly a year, or 50,000 blocks, before a payment could be considered “final”."
So basically at some point the public blockchain has to become at least a semi-private blockchain. Presumably controlled mostly by financial corporations (such as banks) which cover the cost of running the network with sundry fees charged to clients for a variety of services.
ReplyDeleteOr transition to a proof-of-stake system, which is effectively the same thing as the above but substituting billionaires and private equity firms for the banks.
Either way the anarcho-capitalist philosophy behind the origination of bitcoin is thoroughly dead, for bitcoin at least.
Karthik Sankaran makes an interesting point in Bitcoin, Inflation Risk, and Credit Risk:
ReplyDelete"one of the first BTC transactions involved someone paying 10,000 BTC for 2 pizzas in 2010. So if a pizza was say 20 dollars, that made the value of one Bitcoin back then 20/5000 USD or 4/10 of a cent. The price is (as of this writing) 70K USD, which means an extraordinary appreciation of roughly 35 million times.
...
But now imagine that I was someone who had borrowed BTC back then. I would be so screwed, even if I had gotten the loan interest free. But importantly, not only would I be so screwed, so would the person who had lent me the money, because there is no way I could repay the money today."
And:
"My point here is that Bitcoin as designed is a numeraire that is intentionally deflationary. Taken at the word of its apostles, its claim to be an inflation hedge lies in the fact that its fixed supply means that the price of pretty much everything in the world will drop in terms of bitcoin. But while that might make it a good hedge against inflation (taken at its word), its very design makes it extremely difficult to hedge against the default of pretty much anyone you ever lend your BTC to. You have to hang on to it rather than lend it, because the likelihood that anyone ... that you lend it to will be able to return the BTC amount you lent them is extraordinarily low. ... As designed, it is meant to be hoarded, because lending it creates immense exposure to credit risk, which is a risk inherent to and inescapable from its design. This in turn, IMVHO, creates certain obstacles to its ever forming the basis of anything remotely like a broad-based monetary system."