Last month the cryptoverse was ablaze with news of Bitcoin halving. Most of the posts were about the influence of halving on prices. This seems to be the principal concern of the hodlers and the boosters. Bitcoin as a way to make small payments for internet commerce without a financial intermediary is stymied at the moment. Small transaction fees are part of the design and model as envisioned by Satoshi. The bitcoin paper was titled “Bitcoin: A Peer-to-Peer Electronic Cash System”.
We see why halving and the rise of bitcoin prices will raise transaction fees. This takes bitcoin further away from being a peer to peer electronic cash system. Marooned bitcoin contributes to this movement.
Every block that is added to the end of the bitcoin blockchain is attested through a proof of work algorithm. This algorithm secures the chain from malicious alterations. The proof of work miner adding a new block gets rewarded with newly minted coins. This is the money supply of bitcoin. The money supply of bitcoin is algorithmically limited. The number of coins in this reward halves every 210,000 blocks.
Given the controlled rate of block production, the block subsidy halves every 4 years or so. The total number of bitcoin that will be produced is less than 21 million, if the current code runs unchanged. At 36 halvings, the subsidy will be less than 1 Satoshi, which is 1 billionth of a Bitcoin. 1 Satoshi is worth 1 ten-thousands of a cent at current bitcoin prices. Anything less than 1 Satoshi is worthless in bitcoin. The halving will continue after 140 years, but will yield no block subsidies. Even if one Bitcoin is worth $1 billion, 1 Satoshi will only be worth $1.
This is not the only payment to the miners who do all the work to hold bitcoin together. Every block consists of multiple transactions. Every transaction can contain multiple inputs and outputs. The sum of bitcoin in the output transactions has to be lower or equal to the sum of transactions in the input transactions for the transaction to be valid. If it is lower, the excess bitcoin in the transaction compensates miners for including the transaction in the block. This is called a transaction fee. All the transaction fees in a block also goes to the miner who builds the block. This is the other incentive for the miners.
As the block subsidy reduces in value, the miners have to make money from transaction fees, if they are to secure the bitcoin ecosystem with proof of work. This creates upward pressure on transaction fees.
Like Elvis, Satoshi was spotted last month, when 40 Bitcoin mined the first year, moved. This caused panic in the markets, as Satoshi’s presumed hoard is around 1 million bitcoin. A prospect of so much supply suddenly entering the market caused the prices to dip momentarily.
The upward price pressure is predicated on scarcity. In addition to the programmed turning off of the money supply; there is another source of scarcity. These are the bitcoin that are effectively immobilized due to the loss of private keys, either directly or indirectly, due to the death or disappearance of their owners who have effectively taken these bitcoin out of circulation. This attrition is sure to continue; as long as bitcoin lasts. The trove of bitcoin that has not moved in a long time is more than 10% of the eventual supply. This percentage will inevitably increase as time passes.
For a moment, Lightning and other layer 2 protocols was seen as a way to make a micro-payment system on top of bitcoin. However, there are many crypto-economic and other factors seem to stand in the way of increased adoption of Lightning. Halving, transaction rates, immobilized bitcoin, pool mining, all of these take bitcoin further away from a true peer to peer system into the hands of a few.