Thread by @MorganTBennett

#Bitcoin enthusiasts frequently state that "there will only ever be 21 million $BTC ". Therefore BTC is “digital gold”.

In reality, the 21M BTC supply cap is a pipe dream.

Why am I so sure about this?

Thread 👇

1. Theoretical considerations:

Multiple studies indicate that #PoW becomes unstable when the block subsidy is low:

bis.org/publ/work765.p…

medium.com/logos-network/…

medium.com/@hasufly/resea…

In a nutshell:

The great thing about inflation is that it incentivizes miners to secure the network even if there are few transactions. BTC users can rely on this baseline security at all times.

Bitcoin enthusiasts expect that a fee market will eventually evolve and start replacing issuance. With the 1MB block size, an average on-chain transaction would need to pay a fee of 0.005 BTC (~45 USD) to match the current block subsidy.

While holders benefit from the security of the chain, active users need to pay the bill. But why would a user pay high fees when he can just (selfishly) use another equally secure currency with cheap fees and higher inflation (e.g. 5-20 cents in #Ethereum)?

Even worse, as a result of the strong fluctuation of fees, miners are either highly over-paid (i.e. providing more security than needed —> attackers will just wait) or highly under-paid (making the chain vulnerable to attack). The fluctuations may also affect Lightning channels.

2. Empirical considerations:
a) BTC has never been tested with near-zero inflation. It is entirely uncharted territory. Its strong security guarantees are “battle-tested” only in high-inflation-BTC. As such, low-inflation-BTC is as experimental as #IOTA.

b) There is not a single live PoW #blockchain with zero inflation. If transaction fees alone could secure a blockchain, why has this design parameter not been explored in any project?

c) Reality check: fees have indeed failed to replace the diminishing block subsidy. As a result, the economic force that secures BTC continuously declines in relation to its market capitalization.

Two things will happen inevitably.
1. The current bitcoin implementation will fail long before the supply cap is reached in 2140. Serious vulnerabilities will likely arise within the next 4 halvings (≤2036). By that time, the subsidy will have fallen to 6% of what it is today.

2. A bitcoin fork will emerge that introduces a constant inflation. This fork—which may or may not be called “BTC”—might reach and exceed the 21 Million limit, if it survives long enough.