Bitcoin is a Peer-to-Peer Electronic Cash System.
Its value to me as a person — as an end user ⼈ — is that I can use it, like cash, to pay someone. Like cash, I am free to create a transaction any time I want, with no-one else overseeing or handling the process.
Compared to cash, the unique value of Bitcoin is that I can use it on the internet. Compared to other electronic payment systems in existence today (e.g. Visa, PayPal), the unique value of Bitcoin is that no-one oversees or handles my transaction, no-one can stop me making it if they don’t like what I’m doing, and it’s cheaper.
This is the utilitarian value that Bitcoin offers its end users ⼈. This is why an end user ⼈ chooses to use Bitcoin as an electronic cash system.
Back to this in a minute.
Note (Jan 2021): This article was written some time ago and over-emphasises the use of Bitcoin as petty cash rather than as gold, which is also ‘cash’ in the sense of being a bearer instrument that can be transacted without oversight.
The economic questions raised are nonetheless exactly the same, regardless of whether we’re talking about petty cash or gold, and have since been more fully developed and explored.
I wouldn’t write it like this now. I’m leaving it up in its original form because it is what it is.
The Bitcoin network is secure so long as a sufficient amount of Work ⛏ keeps getting done by miners.
That is: the security of the Bitcoin ledger is guaranteed, and the integrity of new transactions is maintained, and the utilitarian value that Bitcoin offers end users ⼈ is still there, as long as miners are forever outputting enough Work to make a 51% attack infeasible.
- Miners do the Proven Work for the financial Reward 💰.
- Miners will stop doing the Work if the Reward is less than the Cost ⚡️ of doing it.
- Therefore: there must always be sufficient Reward 💰 to cover the Cost ⚡️ of the Work ⛏ which secures the ledger.
Back to this in a minute.
Miners currently receive 12.5 BTC (~$100k) from The Almighty Protocol (TAP) for every block mined; every chunk of Work completed; every page of useful transactions written. Plus Transaction Fees 🧻 from those transactions.
But this 12.5 BTC Reward from TAP does not last.
- It halves every 4 years, again and again… then stops altogether.
- So in the future miners will only receive transaction fees for the Work which secures the ledger.
- Therefore: Bitcoin transactions must always have a Fee.
Specifically: they must always have sufficient Fees 🧻 to provide sufficient Reward 💰 to cover the Cost ⚡️ of the Work ⛏ which secures the ledger, so the integrity of new transactions is maintained, and the utilitarian value that Bitcoin offers ⼈ is still there.
So here’s the ~120BTC question…
What if this Transaction Fee means that Bitcoin isn’t the best way for end users ⼈ to pay someone?
What if this Transaction Fee means that end users ⼈ will choose to not use Bitcoin as an electronic cash system?
What if there’s an electronic money system available to end users ⼈ which charges no fee to make the same transaction?
- If ⼈ wants to send $1000 to someone, ⼈ wants them to receive $1000 not $999, or $999.50.
- So why would ⼈ decide to use Bitcoin? Ideological purity? Doubt it.
- Bitcoin has lost its utilitarian value.
So then what happens?
⼈ doesn’t use Bitcoin.
⼈ doesn’t create a Bitcoin transaction.
If people and businesses ⼈ aren’t creating any transactions, they’re not creating any Transaction Fees. That means miners aren’t getting sufficient Reward 💰 to cover the Cost ⚡️ of their Work ⛏.
So miners stop doing the Proven Work which secures the ledger.
The network adjusts of course…
As miners disconnect their hashing hardware, the Difficulty of the Work drops. But how far can the Difficulty drop before the network is no longer secure against a motivated 51% attacker?
There is a floor below which the Difficulty of the Work must never drop based on the price-performance of the hardware that’s available in the world. Especially given all the decommissioned ASICs lying around.
And, at the same time, there’s a ceiling above which the Transaction Fees must never go in order for Bitcoin to remain useful to ⼈ as an electronic cash system.
Note: the Difficulty has to remain high enough to secure Bitcoin against the potential for an attack by a motivated attacker at all times. It’s not enough to say that miners are disincentivized from undermining the currency that they’re mining, since the secondary or “knock on” effects of undermining the integrity of the Bitcoin ledger may have far more value to the attacker than the cost of the attack.
What does the world do when news breaks that you can no longer trust the integrity of new Bitcoin transactions? And can you profit by that?
- Bitcoin’s lasting security is tied directly to its utility as an electronic cash system.
- If it does not work for ⼈ as an electronic cash system in a future-proof way, it is ultimately not secure.
This is a game that plays out over time.
The trading game is fun for some end users ⼈ while the clock ticks. But eventually, once TAP stops subsidising the game with a Reward for the Work that secures the ledger, it may be game over.
The game is currently being subsidised to the tune of ~$100k every 10 minutes (12.5 * $8,000).
$14.4 million per day.
$100 million per week.
$5.2 billion per year.
(A nice win for chip manufacturers and energy companies (and the banks who finance them 🤔)).
This $5.2 billion subsidy from TAP is what guarantees the security of the Bitcoin ledger today, and the integrity of your transaction if you create one right now. But Bitcoin’s long-term survival is predicated on a hypothetical future where high volumes of Bitcoin transactions are created, generating enough Fees to keep it secure.
Practically speaking: this means for Bitcoin to survive, the future must not contain a better payment system; a payment system which better serves end user ⼈ needs; a payment system with lower or zero fees, or you can be sure people and businesses will use that instead.
I wouldn’t bank on it.
A payment is really just securely moving information from one place to another. From a technological point of view, it makes sense that the future of payments will be frictionless (whether it’s decentralized or not), and that in the world of electronic payments, the transaction fee market is entering a Race to the Bottom.
In short: the future “ceiling” for Bitcoin’s Transaction Fees is actually zero, which plainly doesn’t work.
Maybe this is all wrong. Maybe a true hodler on their way to the moon could pause from their journey and show me where I’ve gone wrong. But if not…
- Best case: Bitcoin gets forked and its continued operation is subsidised by governments in the most catastrophically ironic bailout in human history.
- Worst case: Dead. Left kicking around the web, confined to e-history as The Great Pyramid.