Decrease in block subsidy
However, bitcoin’s emission rate through block subsidy is decreased by 50% every 4 years, until it stops around 2140. This directly impacts how much BTC miners are paid for their work through block subsidy.
Some argue that Bitcoin is doomed to fail because block rewards won’t be enough to pay miners to secure the network, as the block subsidy keeps decreasing and eventually stops. Here is how the change in block subsidy and BTC inflation rate will look like across the next few years:
I find this to be a flawed vision of Bitcoin’s future. Of course, Bitcoin could fail because of the decrease in block subsidy, but there are a lot of other paths where this is either fixed, or doesn’t even become an issue.
In this article, I look into what I found to be the most common misconceptions about this, and explain my views around them. Most of the article has been inspired by “A model for Bitcoin’s security and the declining block subsidy”, October 2019, from Hasu, James Prestwich, and Brandon Curtis, and various discussions on twitter from Eric Wall, Dan McArdle, Alex Berge, Jordi Alexander, and others.
“Bitcoin needs block subsidy to pay for security”
Most critiques of Bitcoin’s future point to the current state of block rewards earned by miners.
For the first 12 years of its existence, Bitcoin transaction fees have represented a very low share of the total block reward compared to block subsidy. Though fees have spiked on some occasions, it is likely that they wouldn’t be enough to finance Bitcoin’s security on its own today.
This is often extrapolated by saying that with block subsidy decreasing, miners won’t have enough revenue to pay for a healthy level of security with only fees in the future.
At this point, it seems natural that fees don’t represent a bigger share of the reward if they don’t need to. As they progressively do, a healthier market for blockspace* with more fees being paid to miners has ample time to develop.
*Paying fees for a bitcoin transaction is ultimately paying for the “space of your transaction in the block”, as block size is limited. This is why you often hear about a “blockspace market”.
In fact, this market has already started to emerge. Each halving has been followed by an increase in the share of transaction fees in block rewards (chart 1). It started at 0, plateaued at ~0.25% around 2014, and hasn’t dropped back below 1% since 2016. It was ~2% in early December 2022 (chart 2). In the meantime, Bitcoin hashrate kept increasing.
The interesting thing to notice here is not just that the share of fees in block reward increased after each halving. It also seemed to reach new lower bounds depending on the strength of the adoption waves following these halvings. In other words, we see a fee market emerging when there is adoption.
As Hasu points in his paper, in a world where Bitcoin block rewards are fully made up of transaction fees, transactors would be paying for holders’ security. Though the opposite has been true since Bitcoin’s birth and hasn’t posed any issue, it seems irrational.
We can’t say if this will be a problem or not yet, but I certainly maintain some doubts about how sustainable such a situation can be.
“Bitcoin needs to increase mining revenues to grow hashrate and stay secure”
When thinking about the future of Bitcoin mining, people often look at mining revenues and disregard global profitability. Since Bitcoin’s birth, mining revenues have risen mainly thanks to the quick increase in bitcoin’s price. This has largely counterbalanced the decrease in block subsidy, but is now slowing down.
However, mining profitability can also grow through cost savings. We have already started witnessing this with more efficient ASICS (x5 between 2017 S9s and 2021 S19s), or large energy purchase agreements.
Another way to increase mining profitability through cost savings is to find much cheaper energy sources that other consumers cannot exploit. There are actually many such energy sources available in remote places (gas flaring, untapped hydropower, …) that only miners can harness. Indeed, Bitcoin mining is, to my knowledge, the only consumer able to consume energy anywhere it is available and extract transferable value from it.
As miners globally move towards those cheaper energy sources spread out around the world, mining is becoming more decentralized. This makes hashrate harder to monopolize, and Bitcoin ultimately harder to attack despite having no necessary impact on total hashrate. The predictable decrease in mining revenues pushes miners towards those cheaper, decentralized energy sources. This leaves them with a similar level of profitability and increases Bitcoin security through mining decentralization without necessarily impacting hashrate.
We are currently witnessing this happening in real time. Some of the largest US miners have either already filed for bankruptcy (Computer North, Core Scientific) or are looking for lenders of last resort, while smaller mining facilities are being developed in remote places like rural Kenya or El Salvador.
Putting together a potential market for blockspace, a decrease in mining electricity cost coupled with its decentralization, and the underlying long-term trend in BTCUSD price, there are many scenarios in which Bitcoin can stay secure without altering its issuance schedule.
In case this is not enough, introducing a perpetual issuance rate is not impossible. Though most bitcoiners are profoundly against this, I believe it could even provide some benefits to the long-term stability of Bitcoin.
“There will never be more than 21 million bitcoin”
The 21 million limit is the most famous aspect of Bitcoin. With time, it has become an icon that most don’t even dare to question. However, it is theoretically possible to remove the limited supply cap for another alternative, and some think it might be a good solution.
Bitcoin is software that can be modified, as it has been in the past through multiple hard forks. Of course, a change of this depth would be technically and socially difficult. It would have a profound impact on Bitcoin’s culture, but is not impossible.
It is also widely believed that bitcoin derives its value from its fixed supply. Though it might be true in pure financial terms, I think the real value for the network lies in having a predictable issuance rather than a fixed one. Predictability is what lets holders and transactors plan for the future, bringing stability over time.
An opposite example is Ethereum’s recent change in issuance. Its dynamic inflation rate depending on the network activity is likely to maintain volatility in the long-run.
I think having a perpetual issuance has a few advantages.
- Bitcoin future security budget wouldn’t rely only on the network’s activity (transaction fees), but also on a constant and predictable revenue stream through coin issuance. This would give more predictability to miners’ revenue, and Bitcoin security over time.
- By participating to the security budget through miners rewards, a perpetual issuance would also reduce the network’s reliance on transaction fees for security.
- Contrarily to a popular argument, an increase in money supply wouldn’t affect the loss of purchasing power of Bitcoin users as a whole. Under a perpetual issuance scenario, this loss would be rebalanced between transactors and holders, instead of putting it all on transactors paying transaction fees.
The most critical advantage I see from the three listed above is the first one. Offering more predictability to miners revenue could probably be overcome by developing options on Bitcoin blocks fees, but this solution would likely have to be off-chain. It is certainly better to have this embedded in the system rather than reliant on an external, off-chain market.
In the end, adding a low, predictable issuance rate to Bitcoin could 1) make it more sustainable in the long-run, and 2) keep its core difference with Ethereum by introducing even more stability and predictability. It is undeniable that this would impact Bitcoin’s image as a store-of-value, though it shouldn’t prevent it to keep a leading spot in the list of the scarcest assets.
How to introduce this perpetual issuance is something I haven’t explored enough to have a proper opinion about, but I’m confident we will see more research around this in the coming years.
Looking into Bitcoin’s future
When thinking about this and seeing debates on Twitter, I can’t help but think people have an overly negative view of the situation. Yes, there are still challenges for Bitcoin to thrive, but they still have all chances to be overcome. There is still time, and we are already seeing a lot of people thinking and talking about this.
I’m convinced Bitcoin will find a way to survive and thrive as a “peer-to-peer electronic cash system”, as it has for more than 10 years already.