Mr.Cai

Introduction#

Pessimists believe that Bitcoin lacks security in the long run, as the cost of a 51% attack is decreasing. Their logic is that the current security expenditure of Bitcoin is mainly funded by newly minted Bitcoins (block subsidies), and as the issuance of Bitcoin halves every four years, there are only three ways to maintain the same level of security expenditure:

1. Increase the number of transactions Bitcoin can process per second: Encourage more people to use Bitcoin, generating more transaction fees to maintain security expenditure, but the small block size and low TPS of Bitcoin make this path unfeasible.
2. Double the price of Bitcoin every four years: The issuance of new Bitcoins is halved every four years, but if the price of Bitcoin doubles every four years, it could still maintain security expenditure, which is also impossible. For instance, if the current price of Bitcoin is $30,000 and it has 116 years left until the end of issuance, or 29 halving periods, the price of each Bitcoin would rise to $160 trillion, which is absurd.
3. Increase the transaction fee rate of Bitcoin: Since it is not possible to maintain security expenditure by increasing the number of transactions or the price of Bitcoin, the fee rate can be raised. Pessimists believe that to maintain security expenditure, the fee rate will rise to an extreme level → driving users away from the Bitcoin network → transaction volume decreases → fees decrease → network security expenditure decreases → miner income decreases, leaving the network → Bitcoin security decreases → users further leave the Bitcoin network → a vicious cycle.

Regarding the logic of pessimists, I agree with the first two points, as the past block wars determined that the Bitcoin network adheres to a strategy of small blocks for decentralization, and the price of Bitcoin cannot reach astronomical figures like $160 trillion.

However, the third point has a fatal ambiguity: to maintain security expenditure, the transaction fee rate will indeed rise, but how high will it rise? Will it rise to an outrageous level that drives users away from the Bitcoin network?

This article will analyze the transaction data from all halving periods since Bitcoin's establishment and then make the most conservative inferences to attempt to answer the following questions:

• Historically, what has been the situation with Bitcoin's fee rates?
• As issuance decreases, will Bitcoin's fee rates skyrocket to a level that drives users away?
• Does Bitcoin possess long-term security?

What is the Effective Fee Rate#

If you can't measure it, you can't improve it.—— Peter Drucker

Typically, the actual fee rate paid by users for transactions (Real Fee Rate) is the actual fees divided by the transaction amount, i.e.,

However, the security expenditure of the Bitcoin network consists of two parts: the transaction fees paid by users to miners and the block subsidies provided by the Bitcoin network to miners.

Users are able to enjoy "low" transaction fees because the Bitcoin network subsidizes them, and as the subsidies decrease, users will ultimately have to bear all costs themselves.

Thus, we define the Effective Fee Rate:

The effective fee rate assumes that there are no block subsidies and that users bear all costs, providing a more effective reflection of the fee rate situation in the Bitcoin network.

Historical Effective Fee Rates of Bitcoin#

Annual Analysis#

This section analyzes transaction data from January 3, 2009, to June 12, 2023, involving 5,266 days (with 5 days of missing data), 793,661 blocks, and 850,615,471 transactions.

From historical data, it is evident that due to the issuance of new Bitcoins subsidizing miners, which bear the majority of the network's security expenditure, the actual fee rates paid by users are very low. The highest daily actual fee rate occurred on February 3, 2009, at 0.27%, while the highest annual average actual fee rate occurred in 2017, at 0.0108%.

Occasional fluctuations are caused by blockchain congestion, such as on May 7 of this year, when the hype around BRC 20 caused an abnormal spike in the actual fee rate near block 788695, even exceeding the block subsidy.

In the early years of the Bitcoin network, the number of transactions per block was very low, and each block generated a block subsidy of 50 BTC, leading to extremely high effective fee rates on certain dates. For example, on September 16, 2009, the total transaction volume was 1 BTC, while the block subsidy was 3,600 BTC, resulting in an effective fee rate of 360,000%.

However, as the Bitcoin network developed, such extreme situations gradually disappeared, and Bitcoin's fee rates became more reasonable. Since 2016, the annual average effective fee rate of Bitcoin has ranged between 0.02% and 0.1%.

Analysis by Halving Periods#

Previously, we analyzed the actual fee rates and effective fee rates of Bitcoin by year; now we will analyze them by halving periods.

As of June 12, 2023, Bitcoin has undergone three halvings, with the block subsidy decreasing from the initial 50 BTC to the current 6.25 BTC:

The security expenditure and effective fee rates of the Bitcoin network are shown in the following figure:

Bitcoin's security expenditure has increased from approximately $40 million before the first halving, to $1.8 billion before the second halving, to $16.2 billion before the third halving, and currently stands at $33.3 billion. Security expenditure has been rising year by year, but the growth rate is gradually decreasing, and the average effective fee rate during the corresponding halving periods has also gradually decreased, from an initial 0.09067% to 0.0386%.

A deeper analysis reveals that during the third halving period (from May 11, 2020, to June 12, 2023), of the 164,113 blocks generated, 93.11% had an average effective fee rate of less than 1%, 69.44% had less than 0.2%, 63.99% had less than 0.16%, 45.99% had less than 0.08%, and 31.44% had less than 0.04%.

Effective Fee Rates Are Not High#

From the historical data analysis, it can be seen that in the long run, Bitcoin's security expenditure is gradually increasing, accompanied by a significant long-term rise in Bitcoin's price. The changes in the effective fee rate, which is the most suitable measure of the Bitcoin network's fee rates, indicate that the rates during the recent two halving periods are between 0.0386% and 0.118%.

For traditional banks providing similar functions, cross-border transaction fees typically range from 0.1% to 3% (though traditional banks may have a cap on fees).

Additionally, the Bitcoin network offers features that traditional banks do not possess, such as permissionless, censorship-resistant, decentralized, and unlimited transactions, which are crucial for large transfers.

Since 2016, the average transaction amount during halving periods has been between 6 to 9 BTC. If priced in USD, the average transaction amount in this halving period is $298,288.9, indicating that large transfers are a common phenomenon in the Bitcoin network.

This also supports Lyn Alden's viewpoint: the Bitcoin mainnet is a tank-like payment method, not suited for everyday use.

Kind of like how a tank is designed to get from point A to point B through resistance, but is not well-suited for commuting to work every day, the base layer of the Bitcoin network is designed to make global payments through resistance, but is not well-suited for buying coffee on the way to work.

Imagine a cross-border transfer of $300,000, with fees ranging from $120 to $300—does that really seem excessive?

Predicting Bitcoin's Future Security in the Most Conservative Way#

With the introduction of the effective fee rate metric, we have already answered the first question posed at the beginning of the article: historically, what has been the situation with Bitcoin's fee rates? The answer is that while the fee rates are not very cheap, they are also not high.

We have also partially answered the second question: as issuance decreases, will Bitcoin's fee rates skyrocket to a level that drives users away?

Historical data indicates that even when there was previously no issuance of Bitcoin as block subsidies, the fee rates did not skyrocket, as the effective fee rate already considers block subsidies as a cost that users need to bear.

However, to fully answer this question, we need to analyze how the actual fee rates paid by users will change in the future as issuance decreases.

Conservative Assumptions for the Future#

Revisiting the pessimistic viewpoint: under the conditions that the price of Bitcoin does not double every four years and the number of transactions processed per second remains unchanged, if security expenditure is to be maintained, the fee rates will rise to an extreme level → driving users away from the Bitcoin network → transaction volume decreases → fees decrease → network security expenditure decreases → miner income decreases, leaving the network → Bitcoin security decreases → users further leave the Bitcoin network → a vicious cycle.

Predicting the future is difficult, and to enhance the reliability of the predictions, I will set the assumptions as conservatively as possible. Since pessimists believe that to maintain current security expenditure, Bitcoin's fee rates will skyrocket, I will assume that until the block subsidy drops to 0:

• The security expenditure and transaction volume of the Bitcoin network will no longer increase or decrease, using the security expenditure and transaction volume from the third halving period as a baseline.
• The price of Bitcoin will remain unchanged, using the average price from the third halving period as a baseline.

This will allow us to analyze how the actual fee rates (excluding block subsidies) of the Bitcoin network will change.

Results and Conclusions#

Since the third halving is approximately 319 days away (calculated from the draft date of this article, June 12, 2023), we cannot accurately know the specific transaction data for this halving period.

However, 80% of the halving period has already passed (319/(365 x 4)=0.8), assuming the growth rate of data remains the same as before, we estimate that the data for this halving period will increase by approximately 25% (0.8 + 0.8 x 0.25 = 1), which we consider to be the final data for this halving period.

Considering the recent two years of bear market, data such as transaction volume, transaction counts, and fees will be slightly lower than average, while the current market is gradually warming up. Estimating future data based on previous data is likely to underestimate the figures; for instance, assuming that Bitcoin's price will forever remain at $30,893 aligns with my intention for conservative assumptions.

The Bitcoin network is expected to stop issuing new coins around the year 2140, with 29 more halving periods remaining. Simulated data indicates that if, after 2024, the security expenditure in USD, total transaction volume in BTC, total transaction counts, and average Bitcoin price do not change, the actual fee rates paid by users will experience an increase over 28 years, rising from an initial 0.002% to 0.0382% by 2052, and then gradually approaching the effective fee rate of 0.0386% from 2024.

According to my calculations, although the actual fee rate increases by as much as 19 times, the final fee rate is less than 0.04%, so the pessimistic viewpoint is not as tenable, because even under the most conservative conditions, the actual fee rate of the Bitcoin network is still acceptable, and even cheap.

For those who require large transfers, censorship resistance, decentralization, and security, or for users who cannot access conventional payment services, this fee is negligible. Those living in politically and economically stable countries may not appreciate the role of Bitcoin; I can provide some examples:

• After the Nazis took control of Europe, Jews fleeing could not take their wealth with them.
• During the collapse of the Soviet Union, people could only take items worth $100.
• In countries like Venezuela, Syria, Iran, Nigeria, Eastern Ukraine, and China, people cannot take all their wealth due to foreign exchange controls.
• Putin has banned domestic opposition from accessing their bank accounts.
• Afghan women's income can be confiscated by male relatives because their bank accounts are not in their control.
• The U.S. Treasury sanctioned the mixing project Tornado Cash, prohibiting all U.S. individuals and entities from interacting with Tornado Cash or any Ethereum wallet addresses linked to that protocol.
• And so on.

Thus, we can finally answer the question posed at the beginning of the article: Historically, Bitcoin's effective fee rates are not high; under the premise of unchanged security expenditure, as issuance decreases, the actual fee rates paid by users are less than 0.04%, which is not excessively high.

As long as security expenditure can be guaranteed, Bitcoin's network is likely to maintain its security in the long run.

Viewing Development with an Open Mind#

Finally, I want to discuss one of the most important mindsets in technology and investment: an open mind.

Satoshi Nakamoto aimed for Bitcoin to become an electronic cash system accessible to everyone, while Vitalik Buterin envisioned Ethereum as a global computer, but both have not achieved their original goals due to capacity limitations.

Things develop and change; as long as the core remains unchanged, it is reasonable and correct to make adjustments in other aspects to respond to reality.

The soul of the Bitcoin network is a decentralized value transfer network, and electronic cash is merely one application of this network. The world does not lack electronic cash; it lacks decentralized networks, which is reflected in the white paper: bypassing centralized financial institutions.

The Bitcoin community has chosen not to expand on-chain to maximize decentralization and lower the threshold for running full nodes. After the hard fork, the original chain gained more recognition, as evidenced by its hash rate, market value, and ecosystem development, all reflecting that people value decentralization more.

Moreover, open protocols can more easily absorb progressive forces; developers and commercial companies are building new applications and infrastructure on the Bitcoin network. What attracts them? It is certainly not the performance of the Bitcoin network, as it is Turing incomplete; it is Bitcoin's brand and network effects, which ultimately guarantee these decentralized attributes.

The security of the network is a market issue. Although the previous analysis was based on the most conservative assumptions, I am personally more optimistic about Bitcoin. I believe that Bitcoin's future average price will exceed the $30,893 used in the assumptions, and the Bitcoin ecosystem will continue to develop, with infrastructure such as scaling gradually improving.

A thriving ecosystem represents widespread adoption of Bitcoin, reflecting a broad demand for Bitcoin. Miners are profit-driven; in such a lucrative market, they will not leave. They will compete and innovate, making the Bitcoin network safer, greener, and healthier.