Long-term mining incentives

Summary:

The issue of block size increase in Bitcoin has brought attention to the long-term mining incentives. Currently, miners receive most of their reward from the block subsidy which will progressively be removed. The question now is whether a steady-state regime will be reached in the future and what are the necessary conditions for this to happen. Satoshi's paper suggests that this may be achieved through miner fees, but a working fee market needs to emerge first. Proponents of a block size increase argue that if the block size is not raised soon, Bitcoin will enter an unknown and potentially harmful regime. However, opponents argue that increasing the block size limit would postpone a crucial reality check and reduce Bitcoin's decentralization. There is also a lack of vision regarding the maximal block size increase. If it is increased only to buy time or to compete with VISA, then developing off-chain infrastructure like the Lightning network may be healthier. Additionally, there is no evidence that limited block capacity will lead to a functional fee market that can sustain a steady state. A clear vision is needed on the steady-state regime for Bitcoin, how it will look like, and what incentives will exist for miners once the subsidy is gone. It is also important to determine whether miners will have an incentive to permanently fork off the last block and capture its fees, and what kind of miners will make Bitcoin work.

Updated on: 2023-06-09T20:45:00.620110+00:00