The reasoning for being unsure about subsidy solving the problem : there isn’t a clear “steady-state” solution to Bitcoin that isn’t vulnerable to possible consolidation.
In the long run, after all of the “supercycle” and “price discovery” periods and Bitcoin becomes a more boring asset, miners will be hedging using futures and derivatives and things like that - the expected profits are going to settle to a small and more predictable number. If you add a subsidy, the total revenue is a little higher, the profits might compress slightly slower - but if everything has settled down profits will compress and that’s when consolidation becomes attractive.
I reject the premise that fee behavior does doesn’t already show Satoshi’s plan as viable.
Bitcoin currently-- even now under an unfrothy market-- brings in more fees than inflation and fees combined in many altcoins (including the ‘large block’ spinoff BCH). The amount of security provided by blocks is a free parameter and users can adapt to different levels of security (e.g. by require different amounts of confirmation) based on their own risk factors and needs. But to even start with the argument I think you have to first demonstrate that bitcoin isn’t radically over-secured in hashpower terms today given the existence of apparently usable alternative systems with a tiny fraction of the security spend.
This isn’t to say that there might not need to be other measures that address capacity oversupply nor that none wouldn’t be possible, I can’t say-- but I agree with Sipa that these inflationary notions are a non-starter philosophically and morally. Particularly because anyone can create their own cryptocurrency with whatever rules they think are superior, and if its good people are free to adopt it. In such a world trying to impose such a radical change to the premise of Bitcoin would be inexcusable, and ultimately self defeating since if bitcoin doesn’t even have durability of its monetary policy why does it exist at all?
I’d add beyond that that none of these inflation proposals really address the fundamental problem with inflation (and economically equivalent schemes) is the cantillon effect: when you inflate the supply of money you enrich the recipients (and those economically proximal to them) at the expense of everyone else. The fact that security is a good and necessary thing doesn’t change this fact-- particularly when the scheme has no means to right size the security to a ‘correct’ value (a value that wouldn’t even be the same network wide, since not all users have the same security sensitivity).
Fleshing out a couple of details I wondered about:
I believe the cantillion effect here is ultimately to the benefit of ASIC manufacturers – in steady state, additional inflation pays additional reward to miners compared to a world without tail inflation; but mining has free entry, so if there are excess profits that just encourages more mining to occur. More mining means more hashrate, which is only possible via more purchases of sha256d ASIC hardware, so that’s what the inflation ends up paying for. Which is logical enough: “more security” is just another way of saying “more hashrate”, so if the limiting factor in hashrate is ASICs (vs storage for Chia or GPUs/CPUs for some more compute heavy PoW scheme), then the providers of ASICs are who you’d expect to benefit.
Fees on BCH seem to be essentially 0, so miner revenue is essentially just the subsidy which is about $745 USD, so call it 0.0116 BTC per block, or a bit above 1.16 sat/vb for a full block, so this checks out as far as I can see. Zcash is apparently ~$5700 per 10 minutes, so that would be a full block of 8.9 sat/vb txs, for whatever that’s worth.
I wrote the thesis about the diminishing block subsidy and its prospective solutions here!!
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Excellent write up!
I won’t pretend to understand everything, but what I do get from it is that miner revenue determines miner incentives.
Since miner economics matter, long term transition from subsidy to fees deserves careful analysis rather than being dismissed as already ‘solved’ by Bitcoin’s perfect design.
So far I’ve only seen one viable solution to Bitcoin’s security budget issue and that’s a second subsidy (unless you want to increase supply, tax holders, steal Satoshi’s coins or fork it making it something it’s not). I wrote an article on this subject here
https://medium.com/@marqs90/bitcoins-security-budget-dilemma-an-innovative-fix-emerging-from-the-shadows-e51309201f8d?sharedUserId=marqs90
Dear Greg,
I agree that Bitcoin has been over-secured until today and will be so for a few more halvings. However, I am not confident after 2040 halving (less than tenth of today’s budget if fee market stays the same).
There might not be a single correct value of security budget, but there should be a point where we start to see the network does not work as it has been (e.g. a major double-spend attack, more confirmation time than now etc.).
Today’s block subsidy mechanism which we are relying on is also neither optimal nor presenting correct value of security (yes the network is over secured now). We are in the journey where we discover minimum security budget the network needs.
when you inflate the supply of money you enrich the recipients (and those economically proximal to them) at the expense of everyone else.
I feel it is natural that holders (everyone) pay some small price for security while spenders contribute to less (hopefully net-zero or negative) inflation through the fee burning mechanism.
I also agree with an opinion that such a drastic change in the protocol should not precede with softer proposals such as the adaptive block size proposal by Jameson while I still think my proposal is the surest way to settle the issue. In that sense, we should start working on it earlier so that we can possibly try a few non-inflationary proposals to build a healthier fee market.
Dear fightfer,
Thank you for excellent summary of past incidents and your proposal to address the issue.
I do recognize a bunch of projects trying to supplement miners revenue and really hope any them become a serious source of miners’ revenue.
In parallel with those out-of-consensus-rule efforts, we should also make efforts to sustain a healthy amount of miner revenue at consensus level.