- The larger the bitcoin network, the safer it is.
- In the long run, a natural evolutionary security trade-off will occur between block subsidies and transaction costs. As bitcoin network effects increase, miners' demand for block space increases, reducing the need for block subsidies. This is happening in the current situation and the future trend is optimistic.
- Bitcoin's block space is a scarce and unique commodity. The demand for block space will continue to increase.
- The price elasticity of Bitcoin traders is high. Even with a significant increase in transaction costs, the demand for Bitcoin block space will increase.
According to Bitcoin's hard-coded monetary policy, the number of newly minted bitcoins in each block will decrease over time, eventually reaching 0% in 2140 (this policy is also known as the anti-inflation model). At the time of this writing, more than 83% of Bitcoin was dug up, and the current annual inflation rate (ie, the rate of increase) of Bitcoin is only 3.8%. By 2040, more than 99% of Bitcoin will be dug up . Let's take a look at Nakamoto's explanation:
In this sense, Bitcoin is more like a typical precious metal. The supply is predetermined and the value changes, rather than changing the supply to keep the value constant. As the number of users grows, so does the value of each bitcoin. It has the potential to enter a positive feedback loop; as the number of users increases, the value of Bitcoin rises, which will attract more users to enjoy the benefits of added value. ”
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Nakamoto believes that it is impossible to set a “suitable” inflation rate for Bitcoin (because of the “Local Knowledge” problem), and this will also introduce a political attack carrier, so Nakamoto Satoshi Decided to remove human decision making from this process. Whenever monetary policy changes or is modified, human governance will re-engage in the system to invalidate the current money supply, which will eventually lead to a reduction in the social expansion of the network and increase the risk of network fragmentation and disagreement. Therefore, Nakamoto believes that a predictable monetary policy is crucial : Bitcoin focuses on long-term stability and transparency, which gives investors and developers confidence.
In other words, Bitcoin's fixed monetary policy effectively and directly solves a property issue : if there is no fixed monetary cap, it is impossible to determine how much currency share a particular holder has in total; as a result, Over time, a changeable supply policy almost always weakens an individual's ownership of a currency holding share. Since the bitcoin supply cap solves this property issue, these currencies tend to appreciate.
This article does not delve into the monetary policy of Bitcoin, as the author believes that this will take a long time to discuss.
So why is this fixed monetary policy important? Block rewards can encourage miners to protect their networks. As bitcoin's inflation rate (ie, the rate of increase) tends to zero, miners will only be able to earn revenue through transaction fees . Some people worry that it is impossible to provide enough compensation for miners on the basis of transaction fees, and that security and trust are crucial when storing large amounts of wealth.
As the price of BTC rises, the value of block rewards also increases, which encourages miners to introduce more hashrates in the mining process. The higher the net computing power of the cryptocurrency network, the higher the cost of 51% of attacks . This attack budget protects the bitcoin network from 51% of attacks.
In the early stages of the Bitcoin network, block subsidies earned by Bitcoin miners were much higher than transaction costs. Due to Bitcoin's anti-inflation monetary policy, bitcoin's block subsidy will fall by about 50% every four years (that is, we call the mining award halved: the initial mining reward is 50 BTC, in November 2012, the first mining award for Bitcoin was halved to 25 BTC, and the second mining award in July 2016 was halved to 12.5 BTC. Bitcoin is expected to be 5 in 2020. The third mining award in the month was halved to 6.25 BTC.
Declining block subsidies tend to cause volatility and price increases: if bitcoin demand remains the same (or increases), then the reduction in bitcoin supply means that the market is in short supply, leading to price increases. This effect can bring new speculators, which is one of the beauty of Bitcoin design, because supply shocks raise awareness of Bitcoin. As Nakamoto said:
In the long run, there will be a natural evolution between the two sides: as the network effect becomes greater, miners' demand for block space will increase, reducing the need for block subsidies. . Although we don't know why Nakamoto has so clearly defined the distribution plan for Bitcoin, we can speculate that the mining award will be halved every four years, which leaves enough time for relevant planning and construction work. You know, for the same long time, the entire country of the United States has given each president four years to promote the development of the entire country.
From the modeling provided by Awe & Wonder in the image below, we can see that in about 2030, the transaction cost of Bitcoin will begin to show an important part of the block reward (see the yellow dotted line in the figure below). When transaction costs account for more than 50% of the block awards over the long term (by year), Bitcoin has evolved to rely more on transaction costs (rather than block subsidies) to continue to operate .
- Threshold: Bitcoin is considered safe at a certain level of security spending;
- Stock: Security spending should be tied to the value of Bitcoin itself;
- Flow: The transaction cost relative to the transaction volume must be large;
The author believes that the best measure of security is the percentage of stock, which eventually reaches a threshold level. Stocks are more meaningful than flows because as ASICs (dedicated mining chips) decrease in efficiency, miners will increasingly focus on long-term operations. Ultimately, bitcoin security will reach a certain threshold level, and even the richest countries will struggle to break this threshold.
In the current value of the US dollar, hundreds of billions of dollars will be an adequate security budget, because it is very difficult for a government to spend such a huge amount of money to launch a 51% attack on Bitcoin. In addition, the government must Publicly respond to such attacks because their citizens (taxpayers), businesses and banks will invest in Bitcoin.
It's worth noting that 51% of attacks don't "kill" Bitcoin because you can't easily reverse historical transactions.
Finally, if in the worst case scenario that sustains a 51% attack, then the UTXO set (that is, the set of transaction outputs not consumed) must be preserved . If the SHA256 algorithm has to be abandoned, give up. In this case, Bitcoin may switch to another mining algorithm that already has a mature market – this will invalidate mining equipment in all countries. What the author wants to say is that this will be the last effort, although there is no guarantee that it will succeed, but the consequences of this situation may prevent a country from trying such an attack.
It's worth noting that the PoW mechanism not only minimizes 51% of attacks, but also achieves other goals (see below) and improves network effects, while also ensuring that the cost of creating BTCs is very high.
- Allow nodes to reach a consensus on a single global state;
- Ensuring that it is very difficult to forge BTC;
- Define the cost of each BTC and use that cost as a proxy for bitcoin value.
The price of this land is determined by the demand for the transaction, as the supply of land is fixed and known. The basic premise is that if the Bitcoin network is used (that is, there is a transaction requirement), the miners who verify/protect the network will be rewarded .
Some people think that the block space of the altcoin can replace the block space of Bitcoin. However, we have many ways to overturn this assertion. Bitcoin is a high-quality real estate (for example, no matter how cheap the land in Midland, Texas, it will never have the vision or social network of San Francisco, so its demand is destined to be less ). The unique value of the Bitcoin block space lies in its cost of security, redemption, volatility and coordination .
01. Security costs : Bitcoin is the most secure cryptocurrency network (this is due to its cumulative total power). This will create a market for safely high stakes transactions, such as central banks, governments, businesses and other large value paying users, who will be willing to pay very high transaction fees. This is why other blockchains (such as Verblock) use the strong security of Bitcoin for chain trading.
02. Exchange costs : When both the sender and the receiver of the transaction wish to use Bitcoin as the storage value but need to transfer it, if the sender converts the BTC into a certain altcoin, then send the altcoin To the recipient (the fee will be lower), then the recipient will convert the altcoin into BTC, which will cause friction in the process. There is an indifference between the exchange fee (between 0.1-4%), the spread (the lower the liquidity of the altcoin, and therefore the lower price) and the transaction costs of the two BTC and the altcoin involved. Point), if this point is exceeded, it is better to send the BTC directly and pay a certain amount of BTC fee. If Bitcoin is a very good way to store value, it will also increase the trading within BTC for this reason.
03. Volatility costs: People tend to ignore the cost of volatility. The cost of volatility depends on your holding period. Altcoin usually has higher price volatility than BTC, which makes its volatility will make users bear higher transaction costs as the size of the transaction increases. Please see the example below:
- LTC: $10 Transaction Value + 10% Volatility + 0.01 Fee = $1.01
- BTC: $10 Transaction Value + 1% Volatility + 0.20 Fee = $0.30
- LTC: $100 Transaction Value + 10% Volatility + 0.05 Fee = $10.05
- BTC: $100 Transaction Value + 1% Volatility + $1.00 Fee = $2.00
As can be seen from the example above, higher price volatility leads to higher transaction costs.
04. Coordination costs : Not all kinds of cryptocurrencies will survive. There will be a limited competitive block space market in the world. This is because our thinking is limited, we will not be willing to think about more than 250 cryptocurrency names, more than 250 transaction fees and corresponding more than 250 different prices in mind, and whenever we want to make value When you transfer, you have to choose the cheapest price. Our brains can only support the understanding of the value of two or three cryptocurrencies, and to a certain extent, we can easily use them interchangeably. In addition, because Bitcoin's HODLers have a strong preference for trading BTCs, multicoiners will be forced to trade in Bitcoin. For example, Square, Bakkt, and Fedility currently only support Bitcoin transactions.
Finally, Bitcoin core software is competing with traditional mature ecosystems. This adds to the value of Bitcoin's unique block space as there are more developers and businesses researching and relying on Bitcoin code.
In view of all the above factors, the number of cryptocurrencies in the future will be limited, and the block space and transaction volume will also be limited. This means that the cost of transferring value will be distributed among the surviving blockchains in proportion to the value and security requirements. In other words, the higher the demand for a certain value and its security, the assigned to that chain. The transaction transfer cost (ie transaction fee) is also higher . But in the end, each altcoin provides a lower security model and a higher risk.
However, the author believes that a large part of cryptocurrency payments are generated by people's curiosity, although the author has no data to support this (and this is quite subjective). Be aware that using cryptocurrency payments is more difficult, more expensive, and slower than traditional payment methods. Nonetheless, the base layer of Bitcoin is building the strongest foundation for a new global monetary system, rather than creating another payment platform similar to Venmo.
Another concern is that as bitcoin transaction fees become higher, users will avoid trading to avoid paying transaction fees. In reality, however, we see that this is not the case (see the picture below): as the volume of transactions/transactions increases, transaction costs also increase .
—— Ari Paul
The fee that Bitcoin traders need to pay is largely determined by the nature of the type of payment sent, ie bitcoin is a non-tamperable value storage means (SoV). At the time of the most congested bitcoin network in 2017, the average transaction cost was $38. During this time, we witnessed the fact that transaction costs were higher than block grants. Let's compare the cost of trading SoV:
01. Wire transfer currency
For US banks, the average domestic wire transfer fee is $30-40, and the average international wire transfer fee is $65-80 (whether it is transferred or transferred).
02. Offshore Bank (7 trillion market)
“Monthly offshore bank account maintenance fees range from $20 to $100. Wire transfer fees typically range from $25 to $75.” Source:
03. Real estate (250 trillion market)
“From April 2017 to March 2018, Chinese buyers purchased 40,400 apartments for a total price of $30.4 billion. The average cost per purchase was $439,100.” Source:
04. Physical gold delivery (7.5 trillion market)
ETC (Ethernet Classic) development team member Donald McIntyre asked the Bundesbank to provide information about the transfer of 300 tons of gold (then $12 billion) from New York to Frankfurt by the Federal Reserve Bank of New York. In three years, the cost was $4.8 million.
For a smaller amount of gold delivery, insurance, shipping costs, or physical protection costs during the pick-up/delivery process may be required, and the estimated cost is at least between $10 and $100.
Increase transaction density
Nic Carter, co-founder of cryptocurrency analysis firm Coinmetrics, gave a presentation at MIT (MIT) highlighting two ways to increase trading demand: increasing the economic or semantic density of transactions. Semantic density refers to letting other blockchains embed data in a bitcoin blockchain, such as Veriblock. Economic density is about increasing the transaction type of Layer 1, as follows:
01. Privacy protection
—— Lucas Nuzzi
02. Layer 2 (such as Lightning Network)
With Bitcoin's progress in scalability (Layer 1's Schnorr signature algorithm, Layer 2's lightning network, etc.), the Bitcoin network will become more efficient, driving the use of the chain. The Jevon paradox intuitively predicts this – as the car's fuel efficiency increases, the mileage of the car will increase each year. Layer 2 will support a large number of low-cost small transactions, while Layer 1 represents a higher cost settlement layer for large transactions .
With Lightning Network-based services and Lapp (Lightning app), a significant portion of the operational costs of these businesses and Lapp will be managed payment channels. This will ensure that there is a continuing need for Layer 1 settlement when these operators adjust the rebalances of both parties in the payment channel and optimize the channel's volume & connectivity. On the chain, block space is an extra cost, so the transaction needs to pay a fee to register the transaction in the block space; under the chain, liquidity is an extra charge, so the transaction will be based on the transmission through the channel The amount is charged (because this involves a re-adjustment of the balance of the two parties). In other words, there are different charging models for chain trading and chain trading, and they complement each other. In the chain, transaction costs are constant regardless of the value of the transaction; under the chain, transaction costs are priced according to the percentage of the transaction value . There is a crossover point between the cost of the chain trade and the chain trade. At this intersection, high value transactions on the Lightning Network will require a higher cost than trading on Layer 1.
We have seen that lightning networks are increasing the usage of Layer 1, even at highly experimental stages. A block was created in February 2019, of which 25% of transactions were based on lightning network channels. This is detectable because the Lightning Network uses Segregated Witness (SegWit) for ductile repair, and all open Lightning Network channels are isolated witness transactions. *
– Lucas Nuzzi
Experience has shown that in the next few decades, total transaction cost will slowly increase and be equal to block subsidies . Based on these data, the fear that transaction costs will not replace block subsidies is undoubtedly overstated.
The chart below shows a trend graph of transaction costs (yellow line) as a percentage of block subsidies (the future will tend to 100%, ie transaction costs completely replace block subsidies).
—— Nick Szaboq
A reasonable concern is that cash flows will fluctuate in future security models that are purely supported by transaction costs. Transaction costs are market-centric, which means they fluctuate as supply and demand changes. The basic assumption is that the cash flow from transaction costs will be unstable, making the network less secure. In this regard, Dan Mcardle summed it up very well:
Miners like steady cash flow, which is why they join the pool. Instead of playing short-term games to win a certain block, they will socialize mining rewards.
The worst case scenario is that the transaction costs for mining are not stable, but this does not actually destroy the entire system, but the transaction confirmation will take longer before the transaction costs increase to a certain extent. Due to the need to take the time preference, the entity (enterprise or individual, etc.) will increase the handling fee to respond to the problem of too long confirmation time.
In addition, in the past few years, block subsidies have been very unstable in terms of real value, but the mining industry still maintains a strong and stable momentum – even if the value of block subsidies falls by 80%. This “unstable” has not yet affected the entire Bitcoin network, and as the market matures, the mining industry will continue to become more resilient to large fluctuations in transaction costs .
In the future, miners may auction the “land” in future blocks ahead of time, which may stabilize their income (just like farmers selling agricultural futures). The basic premise is that if the use of bitcoin continues to increase, the free market for future block spaces will correctly price the block space .
Finally, if this is a major problem that the market cannot fix naturally, we can make some minor changes in the Bitcoin protocol to make the miner's transaction fee income more stable. However, this will make the underlying protocol more complicated, and the game theory behind the Bitcoin protocol has not yet been fully studied.
This experiment has been going on for 10 years. The environment experienced in the past is severe, but all the data shows that we have every reason to believe that it will continue to prosper.
Remarks: The original text is too long. In order to facilitate reading, the translator is abridged to the original text.
Author | Dan Held
Compile | Jhonny