Threshold: Given USD level of security spend
Stock: Security spend should be indexed to the value of Bitcoin itself
Flow: Fees must be large relative to transactional volume
- It makes it extremely difficult to forge units of the currency
- Accumulated historic difficulty makes it practically impossible to reverse the chain
“I'm sure that in 20 years there will either be very large transaction volume or no volume.” - Satoshi Nakamoto
“Nobody goes there anymore. It’s too crowded.” - Yogi Berra
Consider the UX for most North American, European, and Asian participants. Any transaction fee has a higher level of friction than existing payment methods, so any fee is deemed “expensive."
For US banks, the average domestic wire fee is $30-40, and $65-80 for international (both incoming and outgoing fees combined).
“The setup fee for opening an offshore bank account is between…. $1,935 to $3,745 for [a bank account and an entity filing]”
“Buyers from China bought 40,400 units totaling $30.4 billion between April 2017 and March 2018. They spent a median of $439,100 per purchase” - National Association of Realtors. Average closing costs on a home are 2% of the value, or $8,000.
@TokenHash requested information from the Bundesbank regarding their NY Fed transfer of 300 metric tons of gold ($12 Billion at the time) from NYC to Frankfurt. It took 3 years and cost $4.8 million.
Nic Carter’s MIT presentation highlighted two ways to improve transactional demand: increase economic or semantic density of transactions.
Semantic Density = other blockchains imbed data
Economic density = increasing transaction types on Layer 1:
“In conjunction w/ techniques... Schnorr can... make it nearly impossible to pinpoint specific entities by simply looking at the blockchain while simultaneously allowing greater transaction density per block by aggregating signatures.” @LucasNuzzi
As Bitcoin scales (Schnorr on Layer 1, Lightning on Layer 2, etc), it will become more and more efficient, driving higher on-chain usage. Jevon’s Paradox intuitively predicts this — as cars have become more fuel efficient, more miles are driven annually.
"The adoption of quantum resistant techniques will also result in larger (and more expensive) transactions. Post-quantum crypto algorithms require larger key sizes, which in turn increase the size of non-witness data in a transaction." @Lucasnuzzi
We have empirical evidence that total fee revenue will slowly trend up to equal the block subsidy in the coming decades. Based on this data, fears that the transaction fee won’t replace the block subsidy are definitively overblown. Projections by @Awe_andWonder
“The volatility of fees, which seem to behave nonlinearly as blocks become full. Might lead to corresponding big swings in hashrate.” - @szabo
“Other longer term low subsidy era ideas include fee averaging across block intervals to smooth fee revenue.” @adam3us
What do transaction fees in a post block subsidy world look like? I built a model that would help us think through what they might be in the year 2140 (in today’s dollars), with a few necessary assumptions that you can view for yourself below
Bitcoin survives, thrives, and continues to grow in market share exponentially, as it has done the last 10 years. $10-$100T is reasonable:
Total wealth in the world: $750T
Real Estate: $225T
We can see that transaction fees as % of market cap trend towards a little above 0.001%. Even with the continual decline of the block subsidy, total mining revenue (ie security) has increased exponentially as Bitcoin gain adoption @Awe_andWonder
Assuming that current Layer 1 is 20 TPS max w/ Segwit. TPS depends on the byte size of the transaction but I had to choose a value to build the model.
Proposals for increasing the 21M hard cap aren’t appropriate to bring up at this stage for three reasons:
- Lack of evidence that this will be an issue
- Divisiveness of the ask due to its ethical tradeoffs
- More palatable fixes