As there is more and more discussion about the time when Bitcoin will mostly rely on transaction fees, i wanted to discuss some thoughts.
I think there are three possible scenarios in the future:
- Bitcoins price will keep increasing forever.
- Bitcoins price stabilises at some point.
- Bitcoins price falling till zero.
Bitcoins price will keep increasing forever. - Unlikely if we’re taking thiers law into account(explanation below), Fiat will likely be replaced one day. Bitcoin can only rise to infinity as long as fiat operates like now, but then fiat would implode - so we will either see a Bitcoin standard in some countries, or new legal tender soft moneys replacing current fiat; This will likely differ from country to country, but Bitcoin will likely not rise forever as fiat is too unstable and becoming worthless.
In this scenario mining compensation would be fine and mining stays decentralized, similar to now. The constant increase in price makes it possible for less competitive players(with higher energy costs, worse locations) to stay profitable and keep mining. No intervention needed.
Thiers’ law states that good money will drive out bad money. Thiers’ law is the complement of Gresham’s law, which states that “bad money drives out the good”.
Thiers’ law is most applicable when a currency loses so much value that it is no longer accepted as a means of payment by merchants. In most countries, legal tender laws make it illegal to reject the local currency as a means of payment, but these laws become ignored and obsolete under conditions such as hyperinflation.
While Thiers’ law and Gresham’s law seem contradictory, they are not. When citizens are free, they tend to accept and use good money, characterized by its ability to store value and serve as a medium of exchange. When they are denied the choice, usually by legal tender laws, individuals will hoard the good money and spend the bad money as rapidly as possible.
However, legal tender laws can only protect bad money for so long. Eventually, the bad money will degrade to near worthlessness, and citizens will ignore legal tender laws. During Zimbabwe’s hyperinflationary period, many citizens resorted to using U.S. dollars despite their prohibition, and many foreign currencies circulated in the Weimar Republic during the 1920s.
Bitcoins price stabilises at some point. - This scenario is most likely to me. Either trough a Bitcoin standard emerging, when fiat fails and we start to use Bitcoin as unit of account, then we simply use Bitcoin directly without an exchange rate. Or when Bitcoin hit a huge marketcap and were starting to see other investments outperform Bitcoin, for example when Bitcoin only increases 1% a year but stocks would increase 7% a year, then we would we see a massive stabilisation in the price of Bitcoin and the high volatility phase is mostly over, because for this to happen the market cap needs to be huge and would be hard to still influence.
This scenario comes with some special implications that will likely fundamentally change the economics behind mining. We will see a highly competitive mining market that will only have razer thin profit margins. Most less competitive miners will get beat and mining wont stay economical for them. Mining will probably centralize to the locations with near zero, or below zero
1 energy costs.
This in turn means that the contribution margin is always positive, no matter how small the block reward is, and thus it will always profitable to mine in certain locations. This can likely vary during the day, and mining wont happen 24/7 in every location anymore, so it would likely be combined with some other energy related economic activities. Having such a competitive market would actually help the security of the network. We still need a lot of miners, but in different locations now, as mining would mostly only be profitable for a limited time during the day when energy prices are this low. So different time zones are needed, which in turn helps decentralization. Mining margins being really thin, would be a key to success here, as mining would need to become more distributed over the world to still be profitable. But this only works under the basis that asics costs are cheap and theyre highly available, because otherwise it would take long times for miners to break even in this model and we could see too much centralisation. The network would still be secure, as attacks from the outside will be multiple times more expensive than the „security budget“ itself, as electricity prices near or below zero are limited around the world. The initial design can work even with lower rewards, if were able to reduce asic costs in the future and make them more available. Not even a tail emission could influence the distribution of mining in this scenario and the same players would simply run more machines, but it would create softer money which opens up the possibility to compete against Bitcoin in the hard money category again. Transactions fees only can actually work and i think it will. We have a long time now to work on improving the asics market.
Additional thought:
If asics are cheap there might also be more altruistic miners again, and the generated heat could be used in some productive way.
[1]
https://www.cleanenergywire.org/factsheets/why-power-prices-turn-negative
Bitcoins price falling till zero. - To me this scenario is basically impossible, except if major mess ups happen and Bitcoins monetary properties were changed fundamentally for whatever reason. As it stands now, Bitcoin is the hardest and most immutable money in the world, so it would keep its spot, as there will only be one hardest money. Governments cant even possibly compete and bring out a harder money, as their solution will always be mutable. They’re more interested in soft money anyways, as they can simply print more of it. So theres only one real spot for a winner in the hard money category and that is Bitcoin. There is no real second or third spot, as you have to compete against absolute scarcity. And to stay this way you need to be immutable, no shitcoin or government issued money will be able to compete against this any time soon. And Proof-of-Work requires hashrate which is limited around the world, so it would be hard to even compete against Bitcoin in immutability, good luck getting that hashrate even when choosing PoW. So they have to compete for the soft money spot, and there the government has the upper hand trough legal tender laws.
In this scenario nothing could secure the economic incentives for mining to work and Bitcoin would have failed, not even a tail emission would make a difference here.
