Bitcoin’s Security After the Block Subsidy: Who Will Pay for the Network?

[Gragebox]

When people talk about the long term Bitcoin debate they tend to gravitate to price, adoption, regulation, ETFs or institutional accumulation. These discussions are often productive but there’s an equally, if not more significant question, deserving far more attention than it currently receives, what happens when block rewards fall off a cliff to near irrelevance in contributing to Bitcoins security?

Miners are compensated in two ways. The block subsidy and the transaction fee. As this block subsidy diminishes Bitcoiners will require more transaction fees as a % of total compensation just to retain an economic justification for doing work to secure the network.

This leads me to a pertinent thought.

What if Bitcoin gets very expensive and the vast majority of economic activity on average users shift on chain activity to a second layer, custodial or other offchain mechanisms? We could potentially have very high per BTC valuation whilst not a substantial number of users compete for a finite block.

That is to say that Bitcoin will certainly not fail, scarcity of blockspace could make individual txs more valuable. The question that remains however, is: Will Bitcoins future security be subsidized through mass on-chain activity, few, large high value settlement, or some novel approach we’ve yet to imagine.

I personally think this question would hold a greater value than any prediction on Bitcoins short term price.

[Upgrade00]

That is to say that Bitcoin will certainly not fail, scarcity of blockspace could make individual txs more valuable. The question that remains however, is: Will Bitcoins future security be subsidized through mass on-chain activity, few, large high value settlement, or some novel approach we’ve yet to imagine.

We can only predict what will happen at the time when mining reward is not sufficient to cover the cost of transactions. It's still a long way away plus, it will happen over a long period of time that it will not be an easily noticeable change that keeps the network secure, rather series of events over years.

I'm leaning to us having fewer, costlier fees and another layer like lightning takes majority of everyday transactions freeing up the network. But that or an alternative second layer will need to get adopted enough to cover the gap.

[notocactus]

These discussions are often productive but there’s an equally, if not more significant question, deserving far more attention than it currently receives, what happens when block rewards fall off a cliff to near irrelevance in contributing to Bitcoins security?

It will be an era for transaction fees as main income for Bitcoin miners and Satoshi visioned this sixteen years ago.

You have to know that Bitcoin block reward has two main parts: Bitcoin block subsidy and Bitcoin transaction fees.

Right.  Otherwise we couldn't have a finite limit of 21 million coins, because there would always need to be some minimum reward for generating.  In a few decades when the reward gets too small, the transaction fee will become the main compensation for nodes.  I'm sure that in 20 years there will either be very large transaction volume or no volume.

[bitmover]

Hal Finney also answered that in 2010.

Actually there is a very good reason for Bitcoin-backed banks to exist, issuing their own digital cash currency, redeemable for bitcoins. Bitcoin itself cannot scale to have every single financial transaction in the world be broadcast to everyone and included in the block chain. There needs to be a secondary level of payment systems which is lighter weight and more efficient. Likewise, the time needed for Bitcoin transactions to finalize will be impractical for medium to large value purchases.

Bitcoin backed banks will solve these problems. They can work like banks did before nationalization of currency. Different banks can have different policies, some more aggressive, some more conservative. Some would be fractional reserve while others may be 100% Bitcoin backed. Interest rates may vary. Cash from some banks may trade at a discount to that from others.

George Selgin has worked out the theory of competitive free banking in detail, and he argues that such a system would be stable, inflation resistant and self-regulating.

I believe this will be the ultimate fate of Bitcoin, to be the "high-powered money" that serves as a reserve currency for banks that issue their own digital cash. Most Bitcoin transactions will occur between banks, to settle net transfers. Bitcoin transactions by private individuals will be as rare as... well, as Bitcoin based purchases are today.

If people move to 2nd layer solutions if the fee is too expensive, only big transfer between banks/ecchanges and other big players will happen on-chain.

[Faisal2202]

If people move to 2nd layer solutions if the fee is too expensive, only big transfer between banks/ecchanges and other big players will happen on-chain.

I can't agree more with this, thanks for sharing it. I read this opinion of Hal for the first time, and now I can't unsee a lot of things which I thought maybe were wrong haha.

Like all these ETFs and other banks moving toward tokenization, adopting digital currency, and eventually all this will streamline what Hal said. So the miners won't make huge losses if I am not wrong, because if we see the volume which is high now, but the fee is low, it will be reversed in the upcoming time. Low volume but high fees. All these banks, when they have to move funds from one place to another, they will also have to pay a huge amount to the miners. By the way, it raises a lot of questions, like hashpower, technological advancements in rigs, etc. Well, I will just search. But miners will eventually find a way, maybe to monetize their mining operations. Don't know, just shooting in the dark haha.

[Ambatman]

This has been talked about quite alot in the forum.
Subsidy
The truth is we can only speculate and can't really tell
But one thing I'm sure of if Bitcoin is still going strong when subsidy is way lower compared to fee percentage
Then there's nothing to worry about since we already crossed the growing phase.
 

What if Bitcoin gets very expensive and the vast majority of economic activity on average users shift on chain activity to a second layer, custodial or other offchain mechanisms? We could potentially have very high per BTC valuation whilst not a substantial number of users compete for a finite block.

Fewer transactions doesn't necessarily mean weaker security
What matters is fee revenue
If the fee is high enough it can mitigate the impact of fewer transactions.

[Gragebox]

We can only predict what will happen at the time when mining reward is not sufficient to cover the cost of transactions. It's still a long way away plus, it will happen over a long period of time that it will not be an easily noticeable change that keeps the network secure, rather series of events over years.

I'm leaning to us having fewer, costlier fees and another layer like lightning takes majority of everyday transactions freeing up the network. But that or an alternative second layer will need to get adopted enough to cover the gap.

I believe this transition probably wont be abrupt, as the bitcoins block reward decreases very slowly over time and for quite a few years. This gives time for miners and users (and the network) to prepare and adapt to fee economics.

I also believe Layer 2 solutions such as lightning could play a part. If most small, everyday transactions occurred on another layer then the main bitcoin network could instead focus more on big transactions and settlements where users are willing to pay increased fees.

Regardless adoption will be key. However I do believe these layer 2 solutions will be widelyadopted. They allow the transaction numbers on the main chain to be kept at a somewhat sensible level (thus keeping the amount people are willing to pay for them down) while still supporting Bitcoins core security model. Really we will only see how this plays out over decades.

[legiteum]

What if Bitcoin gets very expensive and the vast majority of economic activity on average users shift on chain activity to a second layer, custodial or other offchain mechanisms? We could potentially have very high per BTC valuation whilst not a substantial number of users compete for a finite block.

In a sense we are already there since almost nobody uses Bitcoin to make "small" transactions. Most "Bitcoin" transactions today are people buying and selling it as an investment, and that is done through some kind of broker or app, which make massive buys and sells on behalf of many users at once.

Bitcoin is an investment, not a "currency" in the traditional sense. (You can use Bitcoin as a currency, but then again you can use shares of NVDA as a currency too if you really wanted to, but most don't do that because there are far better and easier ways to accomplish simple small transfers of money).

[Cryptomultiplier]

This has been talked about quite alot in the forum.
Subsidy
The truth is we can only speculate and can't really tell
But one thing I'm sure of if Bitcoin is still going strong when subsidy is way lower compared to fee percentage
Then there's nothing to worry about since we already crossed the growing phase.
 

What if Bitcoin gets very expensive and the vast majority of economic activity on average users shift on chain activity to a second layer, custodial or other offchain mechanisms? We could potentially have very high per BTC valuation whilst not a substantial number of users compete for a finite block.

Fewer transactions doesn't necessarily mean weaker security
What matters is fee revenue
If the fee is high enough it can mitigate the impact of fewer transactions.

The network can only be secured with cash flow and this means in other words that no matter how high the price of BTC at any time, transaction fees will act up and measure up to become sufficient for miners.
That being said, active fees generation will ensure long term security of the network despite block subsidy.

[Alpha Marine]

This is still 114 years away. From now till them, I believe there will be so much daily transactions that the fees will be enough to maintain the network. Miners would not make as much money as they do now, obviously, but they will make enough to continue confirming transactions.
My speculation is the miner would reduce, so the ones that will remain will share from the pool of network fees available, which would be relatively a lot.

Currently, the average network fees paid daily is 2.1-3btc.
I believe that by then, if network fees still remain around $1-$2, with the increased amount of daily transactions, miners will have a lot of incentives to remain in the network. There are over 600k transactions in the Bitcoin network right now. In a hundred years, I believe that number would increase by 5 at a minimu.

[Patikno]

What if Bitcoin gets very expensive and the vast majority of economic activity on average users shift on chain activity to a second layer, custodial or other offchain mechanisms? We could potentially have very high per BTC valuation whilst not a substantial number of users compete for a finite block.

What do you mean by "block subsidy" ? do you mean the reduction in the reward miners receive for solving a block ? If that is what you mean; I don't think it will affect the number of miners. In fact, if some miners drop out (stop participating in solving blocks), new ones will simply take their place. So, it means there won't be a shortage of miners; people might actually be drawn to mining, because the difficulty would decrease.

Well, if you are referring to the point when block rewards run out, I think there will still be miners interested in earning rewards from transaction fees. That is just my current understanding, of course, I could be mistaken. Correct me if I am wrong.

By the way, I think you need to read the following references :
➥  learnmeabitcoin.com - Block Reward (I would recommend reading this one instead)
➥  binance.com - Block Reward

[X-ray]

What if Bitcoin gets very expensive and the vast majority of economic activity on average users shift on chain activity to a second layer, custodial or other offchain mechanisms? We could potentially have very high per BTC valuation whilst not a substantial number of users compete for a finite block.

This won't be a problem because even a second layer will eventually anchor the final state to the Layer 1 and that produces transaction.

Even in the future after the subsidy is gone and Bitcoin will only make sense to be used for high value transaction such as settlements by banks and so on, then so be it.

The thing is, the block reward is going to be around for a long time. It will outlive most of us.

[pooya87]

This is one of the most common questions that has been asked a million times already.

It's still too soon to talk about it. So far the block reward reduction has been compensated by orders of magnitude due to the price rise. You see the miners are being paid in bitcoin but their income should still be measured in fiat because their expenses are in fiat (power bill, maintenance cost, etc.). And to this point reward has gone from 50 to 3.125 but price has gone from nearly zero (<$0.01) all the way to $60,000+ ($120k ATH).

That price rise has neither stopped nor has it reached its final potential. For the foreseeable future the price will continue rising and will cover all expenses the miners have + a good profit.

In the future, we have to see what happens to bitcoin. The total transaction fee can be a good income as well, specially if we increase the block capacity to include more of them without having to force a fierce competition to raise the cost of sending a transaction.

[Wind_FURY]

This is one of the most common questions that has been asked a million times already.

It's still too soon to talk about it. So far the block reward reduction has been compensated by orders of magnitude due to the price rise. You see the miners are being paid in bitcoin but their income should still be measured in fiat because their expenses are in fiat (power bill, maintenance cost, etc.). And to this point reward has gone from 50 to 3.125 but price has gone from nearly zero (<$0.01) all the way to $60,000+ ($120k ATH).

That price rise has neither stopped nor has it reached its final potential. For the foreseeable future the price will continue rising and will cover all expenses the miners have + a good profit.

In the future, we have to see what happens to bitcoin. The total transaction fee can be a good income as well, specially if we increase the block capacity to include more of them without having to force a fierce competition to raise the cost of sending a transaction.
 

No, it's actually OK to talk about it and make projections of different possibilities, because WHY NOT? The majority of people who want to avoid talking about it are the people who FEAR that their viewpoint that fees alone will secure Bitcoin, and they say it like it's already a fact.

It's laughable because Bitcoin is a decentralized network. It will be a hard lesson in game-theory, and incentive structures.

[joniboini]

Even in the future after the subsidy is gone and Bitcoin will only make sense to be used for high value transaction such as settlements by banks and so on, then so be it.

While I think in my lifetime I won't see that day, I'd feel a bit sad if someone like me can no longer use Bitcoin to pay for stuff because the fees are too big. That means merchants will opt for 2nd layer or whatever that will exist at that point. I guess if nothing changes it's inevitable, but I'd love to see a future where I can still pay my VPN for $5 without paying $10 (if 1 sat equals $10 at that time).

[hmbdofficial]

It will be an era for transaction fees as main income for Bitcoin miners and Satoshi visioned this sixteen years ago.

You have to know that Bitcoin block reward has two main parts: Bitcoin block subsidy and Bitcoin transaction fees.

from my understanding in an era which transaction fee will only be the main source of income for the miners, where the block subsidies are reduced to zero, will this not make transaction fee very high that it might even be grater than the value of the transaction? and if the transaction fees are so high will this not even discourage bitcoin transaction? and if the transaction fees are low, miner will also be discouraged. there has to be a balance which i am still wondering how its going to happen?

[Livingleged]

What do you mean by "block subsidy" ? do you mean the reduction in the reward miners receive for solving a block ? If that is what you mean; I don't think it will affect the number of miners. In fact, if some miners drop out (stop participating in solving blocks), new ones will simply take their place. So, it means there won't be a shortage of miners; people might actually be drawn to mining, because the difficulty would decrease.

Well, if you are referring to the point when block rewards run out, I think there will still be miners interested in earning rewards from transaction fees. That is just my current understanding, of course, I could be mistaken. Correct me if I am wrong.

If he says block subsidy there is nothing wrong with that, because it is the block subsidy + transaction fee that gives the block reward. But it’s only the block subsidy that get reduced by halving and that’s why I think he’s talking about the block subsidy, Not the reward.
And I also think when the block subsidy reduces significantly to zero, it’s should affect the number of miners participating in the network. Because the reward will only be from the transaction fees. Which I don’t think the block rewards will be as huge as it is now.

[SilverCryptoBullet]

Hal Finney also answered that in 2010.

This question is not new and it has been asked and answered many times so far.
What will happen to Bitcoin after all 21 millions are mined?
People did not do their searching for finding available questions and answers, mostly like that, or they did not satisfy with available answers because the future is uncertain, that is true, and many things will change with time for Bitcoin, its development and adoption as well as how Bitcoin miners will get rewards from mining.

If people move to 2nd layer solutions if the fee is too expensive, only big transfer between banks/ecchanges and other big players will happen on-chain.

If anyone are interested in 2nd layer solutions, they can follow up this thread.
Sidechain Observer - Bitcoin L2 Projects & current state of development.