Long-term mining incentives

Summary:

In May 2015, Thomas Voegtlin initiated a discussion about the long-term mining incentives of Bitcoin. He stated that Bitcoin's current market value is derived from the assumption that there will be a stable, steady-state regime in the future where miners have an incentive to keep mining to protect the network. However, such a steady-state regime does not exist today because miners get most of their reward from the block subsidy, which will progressively be removed. Thus, the question arises whether a steady-state regime can exist in the future and what are the necessary conditions for its existence. Satoshi's paper suggests that this may be achieved through miner fees, and many people seem to take this for granted and are working to make it happen through developing cpfp and replace-by-fee.Proponents of a block size increase have a good point that if the block size is not raised soon, Bitcoin is going to enter a new, unknown and potentially harmful regime. In the current regime, almost all transactions get confirmed quickly, and fee pressure does not exist. If users start to experience confirmation delays and uncertainty, they may stop using Bitcoin. However, those who oppose raising the block size limit argue that doing so would postpone a crucial reality check and be buying time at the expense of Bitcoin's decentralization.Voegtlin points out that he fails to see evidence that a limited block capacity will lead to a functional fee market able to sustain a steady state. A functional market requires well-informed participants who make rational choices and accept the outcomes of their choices, and that is not the case today. To believe that it will magically happen because blocks start to reach full capacity sounds like wishful thinking. Therefore, a clear vision from both proponents and opponents of a block size increase is needed to achieve a steady-state regime for Bitcoin.Voegtlin is guided by Satoshi's paper, which suggests that most transactions will occur off-block with the block chain used for settlement. He believes that if commerce works well enough off-block with zero trust settlement supporting it, people might even forget that the block chain exists, like with gold settlement. However, it can still be used for transactions. To this end, he welcomes higher fees so that the block chain becomes the reserve currency of the internet and is used sparingly. Bitcoin is still an experiment, and there is no huge urgency to increase the block size limit. Voegtlin would lean towards caution as Bitcoin infrastructure rapidly grows.

Updated on: 2023-06-09T20:42:14.736638+00:00