Bitcoin needs on-chain transactions to survive, and so do miners

Satoshi created block rewards as a temporary way to bootstrap Bitcoin. He intended to have transaction fees replace block rewards as Bitcoin became adopted.

Satoshi never intended Bitcoin to be used as a settlement layer.

If Bitcoin is used as a settlement layer, transaction fees will practically vanish, and miners will have no longterm incentive to keep mining. Without miners, Bitcoin will lose its security and become worthless.

Block rewards won’t last much longer.

People underestimate how quickly block rewards will go down.

10 years from now, miners will only get 1/8th of what they are getting today.

Yes, you read that right. 1/8th. For miners to receive the same monetary block reward as today, Bitcoin’s price would need to be worth over $5,000 USD within 10 years. In just 20 years, it would need to be worth $20,000. And in 30 years, one Bitcoin would need to be worth a whopping $160,000 USD.

I’m bullish on the Bitcoin price, but I’m also realistic. The chances of Bitcoin being worth $160,000 USD are very slim. Which means that unless miners will get substantial transaction fee income, Bitcoin will have no future.

How much fee income exactly?

If we purely want to compensate for dropping block size rewards, we would need about 268 transactions per second (tps) 30 years from now (based on an average transaction fee of $0.05). Knowing that Paypal does about 120 tps, and VISA does between 1000–2500 tps, this is a very realistic goal.

The more pressing scenario would be a case where the current Bitcoin price of $650 would remain the same when the next halving happens 4 years from now. In that case, we would need to reach 135 tps within 4 years to compensate.

However, its fair to assume that Bitcoin’s price will reach $1300 in 4 years and hopefully $2600 in 7 years, to buy us more time to get our transaction volume up.

In any case, it is in the best interest of miners to get Bitcoin’s on-chain transaction volume as high as possible. Right now its ~2% of their income, but it could rise quickly over the years, substantially adding to their net profit.

At 1000 tps, transaction fee rewards would be $30,000 per block. At 10000 tps, it would be $300,000 per block. And if we ever reach worldwide adoption, fees could get into the millions. However, miners will lose that money if off-chain solutions such as Lightning Network are allowed to take over.

You can find transaction fee calculations here: https://docs.google.com/spreadsheets/d/1ggu_6dbMMSRaIuRoeAEWo9zv59gFYO0toU1z1YdVbuI/edit#gid=0

An additional graph showing the two versions:

Two Visions for Bitcoin image credit reddit user /u/Mengerian

Transaction volume has stopped growing due to the block size limit.

Currently, only those that are willing to pay the most, have their transaction included in the network (at the expense of someone else). The block size limit was put in place in 2010 as a temporary DDOS protection and was never ment to stay there, let alone be abused to turn Bitcoin into a settlement network.

Concerns

“Isn’t increasing the block size dangerous? It will lead to centralization!”

Right now we would need a 2MB block size to handle all demand. 2MB is something everyone can handle. Even substantially larger blocks would not prevent people from running a node at home. There are many improvements such as Xthin blocks, which will allow you to save significantly on your bandwidth usage.

Also, most people use mobile phones today, and its not possible to do full validation on these devices in the first place. That’s why SPV clients were created, as intended. And I have no doubt that many hobbyists, enthusiasts and also service providers in the likes of archive.org, EFF or wikipedia will run full nodes.

“But noone supports a block size increase!”

Actually, almost every major Bitcoin company wants a block size increase.

“But hard forks aren’t safe, we might end up with two coins!”

Reality check: anyone can split off Bitcoin in two coins today. It doesn’t require a hard fork to do that.

Also, in case of a hard fork, even if the minority chain would still have some miners on it, Ethereum has proven that the price of the “main chain” won’t crash. In fact, it remained remarkably stable and people made a nice extra buck selling off their “alternative chain” coins.

The more hard forks we do, the less likely any alternative chain will remain.

A much higher risk is the damage we are suffering from a) infighting & censorship b) limited transactions for over 6 months now c) killing the on-chain peer to peer cash system.

Conclusions

Worst case scenario for miners:

• Block size limit remains = limited number transactions per block
• Transaction volume sees no growth = miner fees based on “who can afford to be in the block”
• Block size is lowered in an unhealthy attempt to drive up fees
• Bitcoin is adapted to facilitate off-chain transactions
• Off-chain transactions replace on-chain transactions

People will be forced to use other solutions instead of Bitcoin for their p2p cash transactions. This will also completely alter or destroy the business model of many Bitcoin businesses.

• The income for miners will vanish, eventually eliminating the incentive for mining. Off-chain transactions would effectively compete with on-chain transactions.

Note: Miners could of course, still be ran by those that have a vested interest in Bitcoin. The question is, will it be anything comparable to today and who will this give the ultimate power to?

Hint: This will be where the really evil centralization happens, because only big players will be able to afford to run miners at a loss or as part of a centralized off-chain profit scenario.

Best case scenario for miners:

• Miners set the block size limit and keep it above market demand.
• Miners set fees = price discovery and competition. Note: this is the way Bitcoin functioned until 2016 when the blocks became full.
• On-chain transactions are the norm
• Fees will take over block rewards and the incentive/rewards for mining will become larger the more people use Bitcoin as a peer to peer cash.
• Bitcoin is not adapted to actively facilitate off-chain transactions. Off-chain transactions would effectively compete with on-chain transactions.
• Note: a case can be made that if Bitcoin is completely “locked down”, another cryptocurrency might fill this hole in the market. So it’s probably in the best interest of miners to allow “general” sidechains to exist. But in no case should Bitcoin be hot-wired to become a settlement network.

The last thing Bitcoin developers should be focusing on is off-chain transactions. Instead, the main focus should be on improving on-chain transactions: Privacy, security, bandwidth reduction, bug fixes, double spend protection, etc.