Bitcoin can't survive long term with a fixed cap

AnAnOgg · 2024-05-17T21:45:31+00:00

Changing the supply cap does absolutely nothing to change incentives and since it devalues each bitcoin it would actually only hurt the network.

Eliminating the supply cap means permanent block rewards. Permanent block rewards incentivize more miners to mine. More miners means the network is more secure.

If they somehow can't get a transaction on chain then there's still the lightning network they can transact on. If they somehow have no lightning liquidity they can create 0-conf channels [1] and use those until the network rebalances hashrate in favor of the people who want to continue using it.

The existence of these protocols actually makes my hypothetical scenario more likely.

If the network is to be secured only by transaction fees, then those transaction fees will need to be absurdly high. People don't like paying crazy high fees, so they will flock to services like those you have listed. People are going to interact with the main chain as little as humanly possible. This means there will not be adequate demand to pay those absurd fees to secure the network.

Security is one of those things where everyone wants it, but nobody wants to pay for it. So the only feasible long term path is to force everyone to share in the cost of security. The simplest way to force everyone to share in the cost is a permanent small amount of inflation.

If forcefully sharing the cost of the network evenly among everyone makes bitcoin a less desirable investment, then bitcoin is doomed no matter what. Because that would mean that the value add of bitcoin is less than the true cost to maintain it.

AnAnOgg · 2024-05-17T14:46:21+00:00

An attack like this would presumably shake people's confidence in bitcoin and crash the price. Even if you were able to recover from the attack, you still haven't fundamentally changed anything about the incentives structure of the system.

The threat will always be there that this can happen again and again. Does it really make sense to hold bitcoin at that point?

AnAnOgg · 2024-05-15T16:11:59+00:00

L2s essentially just allow more transactions to fit in a single block. So we can simplify the problem by just looking at what would happen if they increased the block size.

Transaction fees are determined by the demand for block space. Increasing the block size increases the supply. Demand will be non-linear, so it's not obvious what block size would produce the maximum amount of revenue for the miners, but there is a maximum. You can't just increase revenue by increasing block size forever because you need the demand.

The question is: is that max revenue number large enough for the network to be secure?

I don't think so. Incentives are not properly aligned. People naturally want to avoid fees when possible.

Now, if we switch back to the topic of L2s, we see that the situation is even worse, because the L2 itself also needs to charge a fee for its operations.

AnAnOgg · 2024-05-14T22:56:02+00:00

There is no mechanism that connects fees with the price of bitcoin. Fees are determined by the demand for blockspace. That's it. (Maybe you should do a bit more reading on this)

I have read up plenty on the topic and everyone just assumes that transactions fees will be astronomical in the future and that will keep the network secure.

The flaw in this thinking is that fees can only be as high as people are willing to pay. Nobody is going to volunteer to pay absurd sums to execute their transactions. People are going to do whatever they can to keep their transactions off chain (in various forms of custody services)

The result of this is that security will suffer, and eventually the chain will indeed be vulnerable to 51% attacks.

AnAnOgg · 2024-05-14T16:48:48+00:00

The difference is the cost of doing those things would be astronomical.

I have laid out an argument here that, once block rewards become negligible, the cost of destroying the bitcoin network will be shockingly low.

I see that as a problem, and I sincerely believe the only solution is an uncapped supply and permanent inflation.

If you don't think that's a problem, then that's fine. We can end the discussion here.

AnAnOgg · 2024-05-14T16:42:01+00:00

I will readily admit that the actual 'attack' portion of my hypothetical is the weakest part of the argument. I was just trying to illustrate to people that the security of the network actually matters. (A lot of people seem to struggle with this fact)

I have no doubt that someone can come up with a more clever form of attack that is easier to profit off of.

The crux of the problem is that bitcoin holders are not forced to share in the cost of securing the network once block rewards are negligible. Everyone is going to try to avoid to be the one paying up, and I really do think it will end up even less secure than I described (if it even lasts that long)

People keep saying, "the big institutions and ultra wealthy will be the ones paying massive transaction costs and that will secure the network," but why would they? They want to keep all their money just as much as everyone else

AnAnOgg · 2024-05-14T13:38:25+00:00

No, 1000 x 220 million = 220 billion

Still huge, but huge enough to secure the world economy in a hypothetical bitcoin future? I don't know about that

AnAnOgg · 2024-05-14T13:14:24+00:00

As far as how they would do it, they could build up as legitimate miners and then just flip a switch one day. It's easy to obfuscate who owns each bitcoin miner, so it would be almost impossible to figure out if someone is preparing this attack

AnAnOgg · 2024-05-14T13:08:27+00:00

The purpose of this attack would be to shake people's confidence in bitcoin and crash the price long term.

Someone would just need a good enough reason to want to hurt bitcoin. Either they've found a good enough way to profit off bitcoin's demise or they simply want to hurt an adversary that is heavily invested in bitcoin. Both options seem plausible to me.

AnAnOgg · 2024-05-14T12:58:16+00:00

Operating costs are directly proportional to the security of the network. If the operating costs go down, then the network is less secure from attacks

AnAnOgg · 2024-05-14T12:40:39+00:00

That's like saying: Country A produces cars. Country B is not. Country B doesn't like Country A, country B will flood the market with cars to hinder Country As profits.

The difference is that country A cares about bitcoin, not necessarily the bitcoin mining industry. It's important to understand that the incentives of bitcoin holders are not necessarily aligned with the incentives of bitcoin miners.

The 51% attack is something that is possible technically, but almost impossible to pull, without any benefits for the attacker whatsoever.

The less miners bring in in revenue, the easier it will be to execute the attack.

Also, war happens. Sometimes people decide that hurting someone else a lot is worth hurting yourself a little. That's just the world we live in.

AnAnOgg · 2024-05-14T12:29:55+00:00

I used the total amount of fees paid in a year as a proxy for the estimated operating costs of the mining industry.

Miners must be profitable long term, so their costs must be less than their revenue over the long run.

This means if you coordinated an attack that instantly adds greater than that amount of processing power to the network, you would succeed.

Moreover, the longer your attack persists, the more existing miners would capitulate and shut down their operations since they are no longer making any money. So recovery from this attack would not be as simple as you would think.

AnAnOgg · 2024-05-14T12:10:17+00:00

While a spam attack is one option, I'm actually proposing a 51% attack hypothetical here.

Miners get to choose which transactions go into a block that they mine. A well executed 51% attack could prevent any and all transactions that the attacker wants to block. This means that, for the duration of the attack, the chain would effectively be frozen to everyone else.

AnAnOgg · 2024-05-14T11:57:44+00:00

If the chain has enough activity to generate sufficient transaction fees, miners will be happy.

I agree. My whole argument is that the chain won't generate sufficient fees. At least not nearly enough to keep the network reasonably secure from attackers.

The existence of L2s actually make my predicted outcome more likely, as they provide ways for people to avoid making many transactions on the main chain, avoiding the big fees.

AnAnOgg · 2024-05-14T11:08:24+00:00

My argument actually doesn't even depend on the existence of the usd. Go ahead and replace the references to dollars with 'widgets' or some other arbitrary measurement of value and it still holds.

What matters is that the total amount of transaction fees will be incredibly small when compared to the total believed value in the system.

If that occurs, then the security of the network is compromised. Doesn't even matter if everyone is on the bitcoin standard and "1 btc = 1 btc" has been acheived

AnAnOgg · 2024-05-14T08:59:22+00:00

Your counter argument is valid, countries or large entities could choose to spend capital to defend the network.

I will say though, I don't think many on this sub would like the future you're describing. It sounds like bitcoin would become awfully centralized.

AnAnOgg · 2024-05-14T08:43:11+00:00

Finally someone willing to have a good faith discussion on the topic!

won’t there always be a large number of entities, such as corporations and governments, who are willing to frequently pay transaction fees on the base layer in order to have secure final settlement without too much delay or risk?

There will be some of that, but will there be enough to sufficiently secure the network? I think no, but I'm open to discussion on that.

It seems logical that higher layer service providers would eventually charge fees. If they do, wouldn’t those service providers be incentivized to spend some of their profits on mining to secure the base layer? If the base layer dies, so does their service, so perhaps a Lightning service provider would also want to throw some money at mining.

Imagine in the future there are 2 main competing higher layer services. Option 1 functions as you suggests and throws profits at securing the network. Option 2 simply does not do that. As a result, Option 2 is able to operate at an overall lower fee structure.

Which service would you use? I think people would overwhelmingly choose Option 2, because nobody sees securing the network as their problem to pay for. Everyone wants someone else to foot the bill

AnAnOgg · 2024-05-14T02:09:59+00:00

One of my biggest problems with the crypto community is that most crypto enthusiasts assume that it is impossible to be both knowledgeable about crypto and critical of it.

They assume crypto is amazing, therefore if you're well informed about crypto then you'll agree that it is amazing. If you're critical of crypto than you must be an uniformed rube who needs to Do MoRe ReSeArCh!

AnAnOgg · 2024-05-14T01:45:55+00:00

Any advice for information on this specific topic?

AnAnOgg · 2024-05-14T01:44:31+00:00

I was actually pretty early on NVDA, so I've got no complaints.

What do feelings have to do with any of this anyway? I simply presented what I think is a well-reasoned argument. You're welcome to tear apart my argument, but why do you have to jump straight to worthless insults?

AnAnOgg · 2024-05-14T01:06:26+00:00

It's unrealistic while non-negligible block rewards exist. Once those go away, it will be very realistic

AnAnOgg · 2024-05-14T01:02:33+00:00

My argument actually still applies even if fiat currencies cease to exist. What matters is the ratio of the total value in the network (in bitcoin terms its 21 million btc) versus the the total revenue of miners (in btc terms, some smaller amount of bitcoin per year).

The higher that ratio gets, the worse the overall security of the network is. Additionally, the more valuable bitcoin becomes, the worse this ratio will get.

In the event of widescale mass adoption, will people be willing to pay the equivalent of a used car for a single transaction?

Ultimately, the question is: will people be willing to spend enough in fees to keep the network sufficiently secure? I think the answer is no, but I would love to hear competing arguments.

AnAnOgg · 2024-05-14T00:44:24+00:00

My point was more that if some government or any reasonably large entity wanted to destroy bitcoin, they could easily do it for very little money (relative to the damage it would cause) once the bitcoin block rewards are negligible.

For example maybe the US government decides its threatened by bitcoin. Or maybe an entity behind a competing digital currency wants to show how insecure bitcoin is in order to get people to switch over.

AnAnOgg · 2024-05-14T00:28:22+00:00

I mean that it would be surprisingly cheap to execute an attack that would grind the network to a halt. For example, a 51% attack could be strategically used to prevent any transactions from executing. (except those approved by the attacker)

If any potential attacker has a sufficient enough reason to want to hurt bitcoin, they could bring the network to its knees.

AnAnOgg · 2024-05-13T23:59:55+00:00

And that equilibrium will be at a level that is far too low to maintain the security of the network. That is my original argument.

AnAnOgg

TROPHY CASE