Mr.Cai

Introduction#

Pessimists believe that Bitcoin lacks security in the long run, as the cost of a 51% attack is becoming increasingly low. Their logic is that the current security expenditure of Bitcoin is mainly funded by newly minted Bitcoins (block subsidies). 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 amount of newly minted Bitcoin decreases by half every four years, but if the price of Bitcoin doubles every four years, security expenditure could still be maintained. This is also impossible. For instance, if the current price of Bitcoin is $30,000, and there are still 116 years until the issuance stops, that is 29 halving cycles, 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.

I agree with the first two points of the pessimists' logic, as the previous block wars determined that the Bitcoin network adheres to a strategy of small blocks for decentralization, and the price of Bitcoin cannot rise to 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 cycles since Bitcoin's establishment and make the most conservative inferences to attempt to answer the following questions:

• Historically, what has been the fee rate of Bitcoin?
• As the issuance decreases, will the fee rate of Bitcoin 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 fee divided by the transaction amount, that is:

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. As the subsidies decrease, users will ultimately have to bear all the costs themselves.

Therefore, 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 Rate 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 newly minted Bitcoin subsidizing miners, which bears the primary security expenditure in the network, the actual fee rate paid by users is 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 led to 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 included in many blocks was very low, and each block would generate a block subsidy of 50 BTC, leading to extremely high effective fee rates on certain dates. For instance, 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 the 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 Cycle#

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

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 chart:

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 risen year by year, but the rate of increase has gradually decreased, and the average effective fee rate during the corresponding halving cycles 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%.

The Effective Fee Rate is Not High#

From the historical data analysis, it can be seen that in the long term, 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 true measure of the Bitcoin network's fee situation, indicate that the rates during the last two halving cycles were 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 access, censorship resistance, decentralization, and no limits, which are crucial for large transactions.

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

This also corroborates Lyn Alden's viewpoint: the Bitcoin mainnet is a tank-like payment method, not one 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 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 fee rate of Bitcoin? The answer is that while the fee rate is not very cheap, it is also not high.

We have also partially answered the second question: As the issuance decreases, will the fee rate of Bitcoin skyrocket to a level that drives users away?

Historical data indicates that even when there was previously no newly minted Bitcoin as a block subsidy, the fee rate did not skyrocket, as the effective fee rate already considers the block subsidy as a cost borne by users.

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

Conservative Assumptions for the Future#

Let’s revisit the pessimists' viewpoint: under the assumption that the price of Bitcoin will not double every four years and the number of transactions processed per second remains unchanged, if security expenditure is to be maintained, 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.

Predicting the future is challenging, 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, the fee rate of Bitcoin will skyrocket, I will assume that until the block subsidy drops to zero:

• 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 cycle as a baseline.
• The price of Bitcoin will remain unchanged, using the average price from the third halving cycle as a baseline.

This will allow us to analyze how the actual fee rate of the Bitcoin network (excluding block subsidy fees) 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 cycle.

However, since 80% of the halving cycle has been completed (319/(365 x 4)=0.8), assuming the growth rate of data remains the same as before, we estimate that the data for this cycle will increase by approximately 25% (0.8 + 0.8 x 0.25 = 1), considering it as the final data for this cycle.

Considering the recent bear market over the past two years, data such as transaction volume, transaction counts, and fees will be slightly below average. Currently, as the market gradually warms up, estimating future data based on previous data is likely to underestimate it. For instance, assuming that the price of Bitcoin remains at $30,893 indefinitely 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 cycles remaining. Simulated data indicates that if, after 2024, the security expenditure in USD, total transaction volume in BTC, total transaction counts, and average price of Bitcoin do not change, the actual fee rate 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 pessimists' viewpoint is not as solid. Even under the most conservative conditions, the actual fee rate of the Bitcoin network is still acceptable, even cheap.

For those who require large transactions, 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, but 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 blocked the bank accounts of domestic opposition.
• Afghan women's income can be confiscated by male relatives because their bank accounts are not in their control.
• The U.S. Treasury has 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 the protocol.
• And so on.

Thus, we can finally answer the question posed at the beginning of the article: Historically, the effective fee rate of Bitcoin is not high. With security expenditure remaining unchanged, as issuance decreases, the actual fee rate paid by users is 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 term.

Viewing Development with an Open Mind#

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

Satoshi Nakamoto wanted Bitcoin to be an electronic cash system accessible to everyone, while Vitalik Buterin aimed to build 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 areas to respond to reality.

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

The Bitcoin community, in pursuit of ultimate decentralization, has minimized the barriers to running full nodes and has not chosen on-chain scaling. 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 the average price of Bitcoin in the future 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.