Bitcoin Security Without Mining Subsidy – Bitcoin Magazine

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This is an opinion piece by Dillon Healy, a member of the Institutional Partnerships Team at Bitcoin Magazine and The Bitcoin Conference.

One topic that has received increased attention lately is the concern over Bitcoin’s future “security budget”.

This stems mainly from the fear that the miners’ earnings will not be sufficient to provide adequate security in the future, after the block grant. Bitcoin miners play a crucial role in securing the network by offering blocks of transactions that nodes verify, accept, and update in the Bitcoin ledger. Competing with other miners to offer this new block to the chain, miners use intense computing power to complete the proof-of-work consensus algorithm and earn the right to offer the new block.

For this service, the winning miner receives a block reward, consisting of two elements: block grant and transaction fee. The block subsidy is the amount of new bitcoins minted in each block (currently 6.25 bitcoins), this subsidy of new bitcoins released from the total supply of 21 million is halved approximately every four years with the halving. The block grant currently accounts for the vast majority of miners’ total income.

Simplified, the problem is that the transaction fee portion of the miner rewards will not be increased enough to compensate for the loss of the block grant, which will lead to decreased security of the Bitcoin network and increased likelihood of attacks as minors are no longer incentivized. participate. My take, however, is that most who worry about this misunderstand the long-term game theory, incentive mechanisms, scalability, and adoption potential of bitcoin.

That being said, this is a topic that should probably be discussed more publicly and not ignored as a non-issue. There are people advocating for the addition of tailings, creating a 21 million bitcoin supply increase as a solution to the security budget issue (finality of settlement), which is of concern.

I believe the solution (if you can call it that) is already built into Bitcoin’s incentive structure and adoption curve. There are two parts: first, transaction fees increase with the adoption of Bitcoin and as a security measure and second, Bitcoin mining shifts to an ancillary tool.

Transaction fee scale

When this issue comes up, it’s usually from someone who doesn’t understand how or why transaction fees are going to increase, or who argues for proof of stake (here’s an example). Ironically, one of the reasons for the increase in transaction fees could be a natural defensive reaction to an attack by a malicious actor exploiting empty blocks to prevent users from transacting. If empty blocks are mined, the mempool will fill with Bitcoin transactors who increase the fees, competing for access to the next block. Riot Blockchain and Blockware Solutions released an incredible report outlining how this attack and similar attacks would confront natural defense mechanisms of the Bitcoin immune system, most resulting in much higher transaction fees:

“Under an empty block attack or other attacks attempting to prevent users from transacting, it is in the interest of Bitcoin users to increase their transaction fees to access the next block. empty blocks (the longer the attack lasts), the more pending transactions there are in the mempool. Transaction fees could climb from 1 sat/vbyte to over 1,000 sats/vbyte. The reward for a block could range from nearly 0 BTC to 10+ BTC assuming the current maximum block size is 1,000,000 vbytes The system is antifragile, and an empty block attack would be met by an endless counterattack based on market high transaction fees.And knowledge of this counterattack would likely deter the attacker from this attack in the first place.

Another example of increased fees as a result of network defense would be a reaction to miners attempting to censor traders. This example is covered in more detail in this article:

“If a majority miner does not accept transactions from merchants, censored merchants must either raise their fees or not transact at all. If a merchant cannot move their bitcoins, they effectively have no value for the length of time they are censored We can infer that due to personal time preference, a trader who is censored will be willing to pay higher confirmation fees commensurate with the length of time they are censored, until the theoretical maximum in which the fee is the entire transaction.”

In addition to the natural defensive incentives that would cause transaction fees to increase, there are also countless arguments for transaction fees to increase as a result of the adoption of Bitcoin, particularly as a means of exchange.

As adoption increases, competition to add transactions to Bitcoin’s rare block space will increase, which will increase current fees, which will then create additional demand for scaling solutions. . The marketplace will continue to showcase these scaling solutions as requested – some popular solutions now include transaction-batch exchanges, the Lightning Network, and other Layer 2 and 3 developments that can ultimately aggregate thousands of Bitcoin transfers in a single transaction that settles on-chain.

When you understand Bitcoin’s adoption curve, it’s entirely reasonable to assume that the majority of normal user transactions will occur on additional layers or sidechains. Final settlement of these more efficiently aggregated transfers will occur on-chain, as well as transactions requiring increased security or institutions transferring large values. The final settlement would warrant much higher transaction fees.

Source of images

The second path that should reduce concerns about miners going offline and reducing overall network security is through increased efficiency and more recent awareness that Bitcoin miners can act as an auxiliary tool for other business practices. A much overlooked development in the mainstream lately has been the inducement of bitcoin miners to chase stranded, wasted, or excess energy.

Bitcoin mining offers a unique and novel proposition for society, where untapped or non-transportable energy can now be sold instantly to the onsite Bitcoin network via mining. One of the most exciting innovations in this sector is the merger of Ocean Thermal Energy Conversion (OTEC) with Bitcoin.

There is an incredibly detailed article on how OTEC and Bitcoin can improve energy production and efficiency here:

“Bitcoin has the potential to help unlock between 2 and 8 terawatts of clean, continuous, year-round baseload energy – for one billion people – by harnessing ocean thermal energy, which is transforming the oceans of the Earth into a huge renewable solar battery.

“It does this by combining warm tropical surface water and cold deep seawater to create a conventional heat engine. This simple idea is perfectly suited to be scaled up on a planetary scale by Bitcoin’s unique appetite for buying and consuming energy locked in from the prototypes and pilot plants that will be needed to prove it works. Additionally, by harnessing virtually unlimited amounts of cold water to cool co-located ASIC miners, OTEC could very well be the most efficient and environmentally friendly way to mine Bitcoin.

This is just one example of how mining can become even more efficient over time, and with increased efficiency comes continued network security as it makes less sense for miners to go offline.

Image source: Makai Ocean Engineering

Bitcoin mining is also becoming an auxiliary tool for other industrial processes. Bitcoin miners can partner with different industries and businesses and offer huge benefits to seemingly normal business practices. A mind-blowing example: the ASICs used to mine Bitcoin generate heat, this heat can be used to boil water and create steam, re-condensing water is a form of purification, and ultimately this can result in a distillation of water that has been subsidized by mining, as discussed in a recent interview with Troy Cross.

Those ASICs that generate heat must also be cooled with fans. Another mind-blowing concept is to combine mining with businesses or industries that naturally create fresh air. One example that Cross talked about was carbon capture facilities, which incorporate huge fan banks as part of their normal business operations. Combining these fan banks with mining subsidizes the cost of ASIC cooling.

As these innovations expand, simply adding Bitcoin mining to countless unrelated industries and businesses that generate cooling or need heating will improve efficiency and reduce costs. Bitcoin mining already heats greenhouses and distills whiskey, while monetizing stranded or wasted energy.

Over time, Bitcoin mining will continue to be associated with industries that make mining or normal business operations more profitable. Eventually it will be ridiculous not to use the heat naturally generated by your business or the energy wasted on bitcoin miners, or if your business has huge banks of fans it will become ridiculous not to direct them to ASICs . All of this results in more positively incentivized miners over time, which maintains network security and has the potential to offset the decrease in overall subsidy.

The combination of bitcoin adoption naturally leading to higher transaction fees over time and bitcoin mining becoming an ancillary tool for a wide range of independent industries shows how long-term security network term is something optimistic.

This is a guest post by Dillon Healy. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

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