1/ For those who have not read @danheld article titled “Bitcoin’s Security is Fine” you would do yourself a great service by heading over to blog.picks.co/bitcoins-secur… and reading it now.

8:08 PM · Mar 3, 2021

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2/ This write up came from an exploration of my own ideas surrounding the issue of security and the speculative future surrounding it.
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3/ By the end of this thread I will have provided three main scenarios that will define Bitcoin’s long term security and determine whether Bitcoin or Monero is a better store of value. These scenarios are ‘Gold-valued’, ‘Gold-like’ and ‘Status-Quo’.
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4/ In reality we may find ourselves anywhere in between. And in fact, since this writing, Bitcoin has moved closer to Gold-valued, which is the most bullish scenario for Bitcoin’s security that I put forth.
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5/ All the data and writing was done nearly two years ago in the middle of 2019. I never ended up publishing it because it felt like it abruptly ended and there was more to add, nevertheless, it has sat dormant for so long that I’m just going to post it as is.
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6/ To rehash some of the key concerns we should first address what all the fuss around Bitcoin security is all about. The premise is simple: Approximately every four years Bitcoin goes through a very important event often called the Halving.
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7/ This is when the block reward subsidy is immediately cut in half, and is often viewed as an era within the bitcoin supply and demand lifecycle.
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8/ The original block reward was 50 Bitcoins approximately every 10 minutes and of course back then Bitcoin was essentially worthless so these 50 Bitcoins didn’t mean much.
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9/ Now the reward is 12.5, and in less than a year we will witness the third halving event which will cut the reward down to 6.25 per block. [this has now already happened]
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10/ The main concern comes from the fact that Proof of Work is secured by the rewards. We often notice that mining is not profitable for the vast majority of participants and finds equilibrium at near break even relative to the purchasing power of the average block rewards.
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11/ This means that mining rewards are not rewards at all, they are simply an alternative way to purchase Bitcoins. Said another way, mining is much like a decentralized exchange where the trading pair is simply BTC/Energy.
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12/ If the rewards are zero, you would be asking people to buy Bitcoins for more than the market price, and it is only altruistic actors that would care to do this.
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13/ We already see this a bit with how retail miners had been pushed out of the market since they could not get the economies of scale, and thus mining today is no longer profitable for them.
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14/ As mining rewards approach zero the system becomes much less secure, so insecure in fact that the likelihood of attack approaches 100%.
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15/ Because of this, in the event that Bitcoin had no mining rewards whatsoever you should expect that the BTC/Energy decentralized exchange would simply shut down and the users would switch to a Proof of Stake consensus model.
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16/ They would have to, because in the event that Bitcoin was attacked continuously the users would elect to fork. Forking would persist again and again such that the economic value of the most valuable chain would be no different than a representation of the holders’ stakes.
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17/ Hopefully that lays the foundation of what we’re talking about here, but that was only a small component. The block reward consists of two parts: Subsidy and Fees.
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18/ The case I laid out above would only become reality in the event that both the subsidy and the fees approached zero.
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19/ Though neither is truly certain, we can safely assume that the subsidy on Bitcoin will approach zero as changing that would be one of the most dramatic ideological changes in Bitcoin.
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20/ Therefore, we will assume that Bitcoin security will depend on cumulative fees in the future. How far in the future are we talking?
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21/ Since the current Bitcoin mining reward will be ~1.8% in a year, we can further set a threshold date where the subsidy falls below a material value, which I will say is 0.1% for the purposes of discussion. This occurs in the halving event taking place in approximately 2040.
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22/ This might be where a lot of people check out, as 20+ years is probably not on the minds of many holders. However, if markets become more efficient then these distant risks could be priced in today
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23/ For more clarity on Bitcoin subsidy you can see this plot which shows the time series for the subsidy.
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24/ Now with that background in mind, let’s go through a few of the arguments put forth in @danheld's article. First with the key points in the TLDR: “The larger the Bitcoin network grows, the more secure it becomes.”
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25/ In isolation this may not be true. It needs more context. If we are isolating to a post-subsidy Bitcoin economy then I agree as long as block size is not increased. A low and stable block size would be important for creating a fee economy with more demand than supply.
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26/ Increasing the blocksize as some Bitcoin forks have done would actually hasten the pace of the security risks I am laying out, because they essentially allow for an environment with no fee end-game, and thus both subsidy and fees trend toward zero.
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27/ If the sum of fees collected is constant then Bitcoin’s price must double every 4 years to maintain constant security. But this itself is not great because twice as much wealth being protected at the same numeric security level.
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28/ As the Bitcoin network grows, it becomes a larger attack target so it is not enough to keep the security constant as the value stored grows.
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29/ If you were a new buyer looking to store $1 you would have preferred to store it in the prior subsidy era because your $1 would have received more proportional security.
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30/ Said another way, if cumulative fees stay constant and the price only doubles every four years, the security fee as a percentage of assets will be cut in half every four years.
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31/ Therefore for Bitcoin to become more secure the larger it gets it can only achieve this goal through higher cumulative fees collected.
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