Every few weeks, someone involved in Bitcoin writes the following somewhat breathless blog post:
- Block rewards account for almost all mining rewards
- Block rewards are going to drop (next drop in 2016/2017) and drop by 50% every four years forever
- There won't be enough rewards for miners leading to insufficient hashing power
- Therefore either (a) Bitcoin is in trouble (anti-Bitcoin camp) or (b) block rewards / inflation will have to be increased to keep miners incented (pro-Bitcoin camp)
Points 1 and 2 are true. Points 3 and 4 are an exercise in ignoring all data that you can't model, like the old cliche of the drunk looking for his keys under the lamppost because that is the only place he can see...
First, let's recall how rewards in $ terms to miners are calculated because that is what matters for hashing rate since silicon and electricity are priced in $, not BTC.
[# of bitcoins in the block rewards] x [price/bitcoin] + [# of transactions] x [fees per transaction]
Things to ask the author when you read the inevitable Concerned-About-Hashing-Rate-In-The-Future-But-Sanguine-About-Hashing-Rate-In-The-Present Blog Post.
- What is your assumption for BTC price at the time of the block reward drop? Also, in the long-future (2020s before it drops again!), what are your assumptions about transaction volume and fees?
As a general rule, nobody has any defensible assumptions because if you can predict the BTC price in 2017 and 2021 (note, you can't), you would have more lucrative pastimes than predicting hash rates!
I will declare upfront that I have no idea what BTC price will be 1/5/9/13 years from now (same goes for transaction volume) and I have never read any credible analysis suggesting anyone else has a clue either.
- Isn't it a bit odd to be predicting that BTC price certainly won't double at least once every 4 years (particularly since reduced block rewards mean fewer BTC to market)? If that not-particularly-dramatic-move-by-BTC-standards happens, rewards in $ terms stay stable or rise, even if transaction-related fees don't rise.
- How does your model account for the last 2 years? The block reward in $ terms swung 10x over the last couple of years during the price run up/down. During that period, hashing rate has gone consistently up (see chart above) Why would a crisis emerge with a 2x swing in block rewards when it did not with a 10x shift in block rewards?
- Do we have [not enough][too much][just the right amount] of hashing power today? How about six months ago when we had less? Was it a crisis? Or 18 months ago when there was much less?
This is a very tough, very technical question but not nearly as tough as predicting if tomorrow's hashing power will be sufficient (since today all the variables like BTC price, transaction volume, etc) are known.
So, without a credible model for "Is hashing sufficient now?" how can one have any opinion on "Will hashing be sufficient in the future?"
This is not to say that I have the answers to the questions above and/or I know it will all be OK. I don't!
My position is that:
- I don't know what will happen but neither does anyone else. In these cases, worrying is premature since small shifts in other variables will render the block halving irrelevant. In fact, if you want to worry about blockchain security, worry about colored coins, not native units (that is a different post though)
- The implied models of the pessimists don't account for the history of the hashing rate to-date very well at all if they were to be back-tested...
- It is hard to imagine too many cases where Bitcoin is a big success and either BTC price doesn't go up or transaction volume doesn't go up. In which case, in the cases when you want the network to work, it will reward miners and in the cases where it won't need a lot of hash rate, it (correctly) won't have it.
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