As we slide into a protracted bear market in the ‘cryptocurrency’ industry, a market rife with lawsuits and scandals suggesting that the long arm of the law is finally catching up to the Wild West industry, one of the major misconceptions needs to be clarified in favor of all investors and project participants – the fee model. Deactivated BTC.
As we watch popcorn in hand with interest in the upcoming Ethereum fork to Proof of Stake, BTC proponents are rushing to celebrate just how low the average fee for the digital currency has been for just one year.
But the drop in network fees has left some of those who understand the economics of Bitcoin security in awe. This is because the security model of the network relies on miners compensated for their efforts to generate blocks, and the lower the average fee, the more economically insecure and attackable the network is. This is where the economic model of micro-blocks 1 breaks down – all for the sake of a vague idea of decentralization.
If you ask a BTC supporter, they will quickly say that network transaction fees are not for miners. They are intended for Lightning Network (LN) centers to earn and provide cash. On the other hand, miners are supposed to earn block-support rewards (which will be close to zero in less than twenty years) and sometimes high fee-paying transactions, which consist in opening the LN and closing the liquidity channels.
This model conflicts with the original design of Bitcoin. As the white paper states, Bitcoin was supposed to be a peer-to-peer monetary system, not a settlement system for some second-tier liquidity channel. How did we allow the slide from Bitcoin as ‘cash’ to something like ‘bank account’? After all, for all intents and purposes, an LN behaves like a bank account, with the same friction as depositing and withdrawing. However, once it is “in the system”, funds can be transferred quickly and instantly globally2.
This deviation from Bitcoin’s simple peer-to-peer fee model extends to the fact that many cryptocurrency exchanges are now operating as “payment rails” to transfer BTC. Due to the inherent costs and hassle of depositing and withdrawing your BTC from crypto exchanges, many people leave their coins on these platforms. When it comes time to pay someone, they will simply enter the third party’s SegWit address and withdraw coins to the person they wish to pay. This is one way to avoid paying exorbitant network fees or dealing with the hassle and unpredictability of LN’s liquidity channels.
But the problem with this is that it integrates settlements into a giant transaction pool called exchange, which operates off-chain (just like LN…funny that). It carries with it all the counterparty risk, bankruptcy risk, and unbridled CEO risk that comes with unregulated exchanges.
It’s also funny that some BTC fanatics will be the first to tell you to keep your coins off the exchanges. (“Not your keys, not your coins” is the sermon they put themselves to sleep with.) But if they are reluctant to trust off-chain exchanges with their money, then why trust the same coins on the second tier network as LN, which are at the mercy of the demands of the future fee market for miners who will rightfully charge more. And the more fees on the chain as the block support subsides?
All economies are backward and, unfortunately, unnecessary. If people just read Bitcoin’s original design for what it was, peer-to-peer electronic cash, miners will forever be compensated by ever-increasing fee income, which will be determined by the size of the transaction they can process. This keeps the rate of single transaction fee to sub-cent fee fixed and stable. For example, BSV currently charges a fee of consistently $0.0001 per transaction, while at the same time, fee revenue for miners as a percentage of the total MEV (mining extractable value) has increased to five to 10% on some even larger blocks. When the fee-to-subsidy ratio in the total block revenue exceeds 50%, we will start to see some interesting economic impacts that will lead miners to leave BTC and BSV mining instead. This is because they can make more money in US dollars for the same amount of energy spent.
Imagine if all the trades executed daily on exchanges were transactions on the blockchain and what that would mean in terms of revenue for the nodes that build the network to the level where they can process more and more transactions.
This is the BSV model, where the more people use the blockchain to transact in a peer-to-peer manner, the higher the fee returns miners can generate, which, if they are savvy entrepreneurs, will reinvest in increased transaction processing capabilities.
This is the virtuous cycle of investing, generating revenue, increasing usage and capabilities, more investment, more revenue, more capabilities, etc.
The key is simply Peer-to-Peer. Not this central pooling of blockchain transactions, all while selling to the public on Concept Decentralization, when the system is economically centralized like any existing banking system we are currently dealing with.
 Small block proponents believe that bitcoin should prefer smaller blocks and lower volumes, with higher fees per txn.
 Sometimes, but most of the time you will get frustrated that your transaction cannot be sent due to channel fluidity.
Watch the BSV Global Blockchain Convention Dubai 2022, day one here:
Watch Day 2 of the BSV Global Blockchain Dubai 2022 conference here:
Watch the BSV Global Blockchain Convention Dubai 2022, Day Three here:
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