In today’s article, I am going to cover the basics of Bitcoin economics and why big blocks? To answer that question, let us look into Bitcoin incentives and how miners can have a sustainable future first.
A lot of people are under the perspective of miners are rewarded currently with 12.5 Bitcoin whenever they mine a block. We were also told that block reward will halve, and that supposedly creates more scarcity and Bitcoin was supposed to be more valuable that way. That is what we were told and it is how the miners are supposed to be rewarded for securing the network. It is why Ethereum doesn’t have a hard cap so that miners could continue to be paid in coin rewards. It is why BTC was capped at 1MB block size, all BTC miners will continue to rely on coin reward. Nothing new you haven’t heard. But wait a minute, full stop! Before we continue, we need to understand the design first. The best place to look of course is the Bitcoin white paper.
Section six incentive of the Bitcoin white paper detailed: “The first transaction in a block is a special transaction that starts a new coin owned by the creator of the block. This adds an incentive for the nodes to support the network, and provides a way to initially distribute coins into circulation.” From this we understand it was a method for incentive and distribution of the coins initially. Initially is the key word here. “Once a predetermined number of coins have entered circulation, the incentive can transition entirely to transaction fees and be completely inflation free.” This part clearly indicated that once the coins are distributed, the incentive is then on fees. This is the reason why coin reward was diminishing and time limited instead of a constant because it was meant to end when Bitcoin network becomes mature. Clearly by design, coin reward is not sustainable. Also, depending solely on coin reward subject miners to volatility of the coin price. As we have seen many mining companies went belly up simply because BTC crashed in price. So, why big block? Why not go with other solutions?
First of all, big block allows miners to validate large volumes of transactions. When a block can carry million transactions, even at merely 0.01$ per transaction, miners are looking at 10K$ per block of revenue that is entirely based on usage. These are fees paid to miners on daily usage of the Bitcoin blockchain. It is a source of stable income for as long as people everywhere globally are using Bitcoin on daily bases. Miners then are completely immune to coin price. This is crucial for miner’s future. Otherwise, what they face is the diminishing coin reward which ends at zero by design as time runs out as detailed in section six of the white paper. From the above we can arrive at an understanding that miners have to transition to fees or their revenue go to zero by design. This is the reason why block size has to scale up.
In conclusion, Bitcoin was designed to be global scale ledger. To sustain the system, it must scale up on chain with adjustable block size to allow miners to sustain their businesses based on usage of the network. Otherwise, when time runs out and no adoption, it ends at zero by design. This is why you hear some people say, Bitcoin will either be successful or it goes to zero, a binary outcome.
Disclaimer:
The information I share with you are free, and they are my understandings. What you do with this information is entirely up to you and not my problem. If you use any of my writings, all I ask is that you give proper credit. All this of course is thanks to Satoshi Nakamoto the creator. Without Satoshi, we wouldn’t have crypto at all.