If Bitcoin’s bulletproof reputation for reliability has anyone to thank, it would be the miners. For nearly two decades, miners have been infallible defenders of bitcoin’s impenetrable front line, preserving the network and its denizens from fraudulent transactions and exploitation. By validating transactions and adding them to the blockchain through the rigorous proof-of-work process, these quiet stewards quite literally convert raw computational power into digital gold — and, in doing so, allow the rest of us to transact without fear of attack.
Incorruptible by design, miners are reliable not because of their ethics, but because of their economics; by participating in proof-of-work consensus on valid transactions, they receive compensation in the form of transaction fees and block rewards. This model makes fraud a losing financial bet. While a miner could theoretically present fraudulent transactions for validation, other miners on the network will be unable to achieve consensus on that data and prevent the faulty transactions from being written to the block. The compromised miner misses out on the block reward and has to write off the time and expensive energy used during the attempt as a loss.
Put simply, fraud is financially infeasible. The bitcoin network is safe because miners get paid for validating honest transactions — and would only waste time and costly energy attempting otherwise.
But what happens when miners are paid less?
Declining block rewards could increase security risks for the Bitcoin network
Block rewards are steadily dwindling. Occurring approximately every four years, planned bitcoin “halvings” are designed to gradually taper the influx of new bitcoins by periodically halving the rewards miners receive for mining new blocks. The cycle will continue until around 2140 when the network achieves its maximum supply of 21 million bitcoin. At that point, miners will no longer receive block rewards, becoming entirely dependent on transaction fees for compensation.
But as miners’ rewards decrease, so too do their incentives to uphold and secure the bitcoin network — and make no mistake, compensation is decreasing. Analysts expect the crypto mining industry to report up to $10 billion in lost revenue this year due to increasing production costs and April’s planned halving, which slashed miner rewards from 6.25 BTC to just 3.125 BTC per block. The pressure has already compelled some less-profitable miners to pack up their rigs.
It’s hard to blame miners for seeking more lucrative work, but their attrition is alarming. As miners’ participation and cryptographic competition decrease, so will the security of the Bitcoin network. Realistically, for mining to continue to be a hyper-competitive and cost-intensive enterprise, miners will need price appreciation, higher transaction fees, or alternative sources of revenue.
The problem? Transaction fees and bitcoin prices aren’t nearly as predictable as block rewards. While fees occasionally spike to meet or overtake block rewards, they rarely maintain their lucrative highs.
Consider the volatility we saw this spring as an example. In mid-April, shortly following the most recent planned halving, furor over the launch of Runes — a new token standard designed to allow efficient bitcoin token generation — sparked an explosion of network activity that pushed transaction fees to an unprecedented high of $128.45. Miners earned over $4.5 million in fees within a matter of weeks.
“[The halving] decrease was unexpectedly offset by a significant increase in transaction fees. Simply put, what we lost in rewards, we made up for in transaction fees,” Greg Beard, CEO of Stronghold Digital Mining, told CoinTelegraph in late April.
But spikes are situational and unpredictable. Point in case: It only took one day for transaction fees to plummet from $128.45 to $34.80. Runes enthusiasm dwindled and eventually disappeared; by mid-May, miners’ Runes-related transaction fees had decreased from millions to mere thousands. Unfortunately, this rate is closer to the norm; analysts expect that rather than providing one-to-one compensation for halved rewards, transaction fees will generally account for about 15% of miners’ overall revenues in the short to medium term.
Bitcoin is impossible to attack largely because of the prohibitive energy costs required to compete in the cryptographic race to validate. If overall rewards for miners decline as block rewards decrease, the incentives creating that defense apparatus will also decline. Transaction fees alone may not deliver the same lucrative compensation to incentivize miner commitment or inspire the competition required to secure the network.
But if the bitcoin halving schedule is inevitable and transaction fees are a volatile and unreliable replacement, what can Bitcoiners do to reinforce the network’s long-term security? The answer might just lie in the emerging BTCfi ecosystem.
Delivering secondary miner compensation will ensure long-term BTCfi security
Over the last few years, Bitcoin-based DeFi (BTCfi) has commanded increasing attention as a fledgling ecosystem with the potential to rival — or even overtake — Ethereum’s DeFi empire. If the Bitcoin network can preserve its characteristically reliable security as it expands its DeFi footprint, BTCfi could ultimately emerge as a more compelling base for those who want to take advantage of decentralized finance without exposing themselves to the security or centralization risks imposed by a proof-of-stake model.
Miner protection is in high demand. If, in exchange for novel rewards, miners extend their protection to BTCfi-specializing blockchains, those chains can host Bitcoin-secured and scalable dapps. This Delegated Proof-of-Work approach would benefit all those involved; miners could offset halving losses via secondary rewards, dapp creators and users would enjoy enhanced security, and the Bitcoin network as a whole would benefit from increased miner engagement and competition.
Embracing Delegated Proof-of-Work rewards before block rewards decline even further is our best chance at getting ahead of this potential Bitcoin economic dilemma. While reinforcing Bitcoin’s long-term security alignment, it also promotes growth in the Bitcoin ecosystem without compromising the design of the base Bitcoin layer. Such a win-win is rare to find when balancing different party incentives, but Bitcoin is no normal incentive-aligning technology.
For BTCfi to grow, it needs the support of miners. For Bitcoin to remain maximally secure, it needs rewards for its miners. Making Bitcoin miners a centerpiece of BTCfi security is how we address both needs while gearing up for a new era for a maximally secure and scalable Bitcoin network.
