Quick Figures on the size of Bitcoin Economy to Support Miners

[IveBeenBit]

First off, all figures are approximations, so let's not argue over small differences in what I estimate.

Assumptions:
* Mining is a specialized business with low profit margins.
* The mining market is pretty efficient.
* Transaction fees currently paid to miners are negligible.

Therefore, we can approximate the cost to run the network as being roughly equal to the block subsidy.

Currently, the block subsidy amounts to BTC1,314,000/year.
Current bitcoin price = $500

Total cost to run the bitcoin market for a year, including electricity, hardware costs, opportunity cost from tying up capital: $500 x 1,314,000 = $657,000,000 to support the network.

Bitcoin promises low transaction fees as one of its main features, therefore without a block subsidy, and with Tx fees @ 0.5%, the Bitcoin economy would have to be:

$657 million / 0.005 = $131.4 billion to support the miners at current rates.

This is roughly the GDP of Slovakia or New Zealand.

For comparison, Ireland's GDP is about $190 billion.

Currently, we can not send cheap transactions, but we do send heavily subsidized transactions that are paid for with the debasement of existing bitcoins.

Discuss.

[JoelKatz]

I see basically two questions:

1) Is it reasonable to expect transaction fees alone to ever provide enough mining revenue to keep the blockchain secure?

2) If the answer to 1 is no, will the Bitcoin community be able to come up with and implement a solution in time?

Altcoins basically collapse as soon as their block reward is too low to keep their blockchains secure. But it's reasonable to expect Bitcoin to continue to have a much higher volume of valuable transactions (and thus potentially more transaction fees) than any altcoin ever has.

I could see the Bitcoin blockchain being expensive and being used only for high value "settlement" transactions with most transactions denominated in Bitcoins happening off the block chain. That might be the solution. Though, arguably, that just makes the pool of potential fee-yielding transactions smaller.

[Dr.Zaius]

More people are starting to do the math and realize running the bitcoin network costs an absolute fuckload. Bitcoin developers have very low or limited knowledge of actual economics.

The problem with bitcoin's coin distribution is its based on the flawed quantity theory of money. Satoshi believed scarcity was the only property needed to set value. Coins are produced regardless if there is market demand for them or not. On the flip side, when market demand is strong we see extreme deflation(price rise) followed by extreme inflation(price collapse). No mechanism exists to respond to changing demand for bitcoin. Miner's tend to exacerbate the downside when they deplete fiat bid pools.

Miners are constantly on the ask side. Why wouldn't they be? They are realizing free gains.

People make the justification that the miner reward somehow helps strengthen the network. This argument falls flat on its face. What exactly is the price for securing the network in the first place? How is it set?

The problem lies within the fact as the real value of a BTC rises, it costs more to run the network. This is because the block reward is fixed.

At $1000 per BTC it cost 3.6 million per day to "secure" 60,000 transactions.
At $500 per BTC it costs 1.8 million per day to secure 60,000 transactions.

You see the problem here? The security subsidy is not even based on actual security, but the real value of 1 unit of BTC. This is called rent seeking. Users are forced to absorb rising costs. So not only does a BTC become more expensive, but subsidizing it's network does too. Bitcoin's price and it's users are under the whim of what miners decide to do. The same way economies of old were strangled by a perpetual gold shortage, bitcoin ecosystem will face perpetual shortage of supply. Well until miners and large holders exchange it(or lend) at grossly inflated margins(or interest rates).

Satoshi justified his coin distribution scheme because he believed "1 CPU 1 vote." He believed users and miners would be one in the same. The reality is you can never predict what technology does in the future. Hence, what has occurred is an oligarchy of miners who simply feed off of users.

[odolvlobo]

This is because the block reward is fixed.

The block reward halves every 4 years. At some point, perhaps in 20 years, transaction fees will exceed the block reward.

[marcus_of_augustus]

Bitcoin cost has never been consistently close to price, only temporarily.

Some insane profits have been made mining ... and I bet some are losing money also.

I don't think you, or anybody, can know how much it "costs" to run the network, the needed broad information is just not observable.