“Bitcoin reaching its upper supply limit is likely to affect Bitcoin miners, but how they are affected depends in part on how Bitcoin evolves as a cryptocurrency. If the Bitcoin blockchain in 2140 processes many transactions, then Bitcoin miners may still be able to generate profits from only transaction processing fees.” — Investopedia.com
The argument that there will be no incentive to mine and secure the Bitcoin network when the final bitcoin is mined in ~ 2140 seems reasonable at first glance. After all, with no bitcoins to mine, there would appear to be little incentive for miners to continue building blocks. But don’t fret, with a bit of unpacking, this argument ultimately looks tenuous and the future of Bitcoin appears as secure as ever.
If history has proven accurate and we’re lucky enough for it to repeat itself, the Bitcoin network will continue to expand over the next century. Greater adoption of the world’s first and only trustless, decentralized, and immutable ledger with a finite supply of digital assets will lead to higher transaction fees.¹ According to research by Blockware Solutions, as cited in a recent article in Forbes, Bitcoin adoption should hit 10% in the year 2030, and “After that, growth could become parabolic, eventually reaching 80% of the population in the 2050s.” Similar patterns have occurred with other innovations, like the “automobile, radio, internet, smartphone, and more”, where hitting that 10% mark moves the adoption phase from early adopter through to majority in an s-curve.
¹= Forks like BCH and LTC are arguably decentralized, but they never reached a precipitous level of adoption. BCH has 10% of the amount of nodes as the bitcoin network at 26,000, and Litecoin clocks in at 14,000 nodes.
Ordinals Showed Us Transactions Fees Can Trump Block Rewards
A recent spike in interest in the Bitcoin network provides a sufficient case study of what mass adoption, and therefore increased demand, could look like. During Ordinals Fever, transaction fees were higher than the block reward of 6.25 bitcoin. The mempool, which is where transactions queue up before going onchain, nearly quadrupled in size. These ‘spike fees’ go to the miners. Not only did the Bitcoin network absorb the increased demand, it incentivized miners to prioritize transactions that paid more, which led to the fees being high enough to surpass the block subsidy. In a bitcoinized world, transaction fees could surpass the block subsidy we see this decade.
As of last year, CoinDesk pins crypto adoption at around 15% of the U.S. population, but that percentage may include anyone owning $10 of bitcoin. That author argues a more realistic statistic would be individuals with more than 20% of their net worth in bitcoin, which drops adoption rates in the U.S. to just 2%. Whether or not people will be storing their net worth in bitcoin or ether remains debatable, and enjoyably so, but the question of whether people store part of their net worth in digital assets seems to be more of a when than an if. I don’t think many would argue that a fair portion of the dollar value of that net worth will go to the cryptocurrency with the highest market cap, which has always been bitcoin.
The Bitcoin Standard and World Reserve Currencies
In his book, The Bitcoin Standard, author Saifedean Ammous makes the case that bitcoin is the first hard money to ever exist, with all the properties of gold, but with more transferability and a truly limited supply. The book recounts the era of nationalized currency, when central banks gobbled up all the gold, and ended up issuing paper notes that were allegedly redeemable for sound money, but which ultimately led to a matter of trust between the issuer and the receiver. Sound money, as defined by Ludwig von Mises in The Bitcoin Standard, has two properties:
“The sound money principle has two aspects. It is affirmative in approving the market’s choice of a commonly used medium of exchange. It is negative in obstructing the government’s propensity to meddle with the currency system” — Saifedean Ammous
In other words, sound money cannot be manipulated by a third party, in particular a government, but in the world of crypto, any third party. Secondly, the market prefers it; this has been true of gold historically. Ammous expounds on Mises’ definition as such: “Sound money, chosen on a free market precisely for its likelihood to hold value over time, will naturally have a better stability than unsound money whose use is enforced through government coercion.”
However, after we left the gold standard, the temptation of governments to print more money than gold on reserve was too great, which led to the separation between sound money and fiat money. The age of fiat in the 20th century saw a steady inflation in all of the world’s most notable currencies: the U.S. dollar, the British pound, the euro, and the International Monetary Fund’s SDR.
“In the current monetary global system, national central banks hold reserves mainly in U.S. dollars, euros, British pounds, IMF Standard Drawing Rights (SDRs), and gold. These reserve currencies are used to settle accounts between central banks and to defend the market value of their local currencies. Should bitcoin’s appreciation continue in the same manner it has experienced over the past few years, it is likely to attract the attention of cental banks with an eye on the future.” — Saifedean Ammous, The Bitcoin Standard (2018).
The main point here about adoption is that central banks want to make money, and they lose value in most of the currencies they hold as reserves because of the ability of each respective government to print more of it — what we call inflation. This dynamic puts them in a constant game of inflation chicken, where they store their wealth in the currency that is least likely to lose value, such as the currencies listed above.
But imagine a central bank round table thinking about how to preserve wealth over the next century. The argument that they should at least own some bitcoin in the event that it gains greater popularity and cannibalizes the value of their reserves would be a reasonable argument for any capitalist-minded banker. Saifedean Ammous surmises that eventually central banks could all issue their own CBDCs, with their own adjustable rates and loans, but that end-of-day settlements between banks will take place in bitcoin, as it is the most secure, trustless, and expedient method to transfer value (Ammous, The Bitcoin Standard, pp. 210–216.) Central banks may run their own ledgers for all the micro-transactions of their customers, and then settle between one another on the secure network.
“Should it achieve some sort of stability in value, bitcoin would be superior to using national currencies for global payment settlements, as is the case today, because national currencies fluctuate in value based on each nation’s and government’s conditions, and their widespread adoption as a global reserve currency results in an “exorbitant privilege” to the issuing nation. An international settlement currency should be neutral to the monetary policy of different countries, which is why gold played this role with excellence during the international gold standard. Bitcoin would have an advantage over gold in playing this role because its settlement can be completed in minutes, and the authenticity of the transactions can be trivially verified by anyone with an Internet connection, at virtually no cost.” — Saifedean Ammous, The Bitcoin Standard (2018).
In the event that we reach a level of nation-state adoption as a form of settlement, transaction fees alone could be so high that they could greatly outperform the amount of bitcoin rewards earned by miners. Just think what Ordinal fever did to the congestion of the blockchain and the value of the transaction fees. With demand and adoption ever-increasing, the desire to secure the network for transaction fees alone would be more than profitable enough to continue to entice miners to keep hashing, block by block.
Bitcoin Halving Inversely Correlates Transaction Fees with Bitcoin Block Rewards
In an article from Decrypt, entitled What Will Happen to Bitcoin After All 21M Are Mined?, the author notes that today the Bitcoin transaction fee is just 6.5% of the value of the block reward because of the value of the bitcoins received with each block. But as each halving occurs, and adoption increases, there will be an inverse relationship between the transaction fee and the mining reward.
“Currently, transaction fees make up a small proportion of a miner’s revenues, since miners currently mint around 900 BTC (~$39.8 million) a day, but earn between 60 and 100 BTC ($2.6 million to $4.4 million) in transaction fees each day. That means transaction fees currently make up as little as 6.5% of a miner’s revenue — but in 2140, that’ll shoot up to 100%…”
The article cites ByBit CEO Ben Zhou, who said, “As rewards for mining decrease upon each halving, and long before the last bitcoin is mined, transaction fees will play a more and more prominent role….Transaction fees will likely grow in an inverse correlation to, and as a compensation for, the diminishing mining returns.”
As there is demand for the utility of bitcoin, such as settlement assurances (interbank) or store of value (digital gold), the transaction fees will rise in correlation with adoption, and bitcoin could become the world’s next hard money. However, it’ll only work if it’s moved daily by huge entities balancing their ledgers, or via rapid payment on L2 network like Lightning that settles on the L1, and cannibalizes monetary daily tnx volume.
Hiro Kennelly is a writer, editor, and coordinator at BanklessDAO, an Associate at Bankless Consulting, and is still a DAOpunk.
trewkat is a writer, editor, and designer at BanklessDAO. She’s interested in learning about crypto and NFTs, with a particular focus on how best to communicate this knowledge to others.
Tonytad is a graphic designer who has worked locally and internationally with organisations and firms on over 200 projects, which includes branding, logos, flyers, cards, and covers.
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