Is Bitcoin's fixed supply incompatible with proof-of-work?

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The security of Bitcoin’s ledger is based on proof-of-work.

Bitcoin miners are paid through new issuance + transaction fees for the blocks they create.

New Bitcoin issuance is decreasing exponentially. It is halving every 4 years.

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Today new issuance is 6.25 Bitcoin per block.

With the next halving event due in May 2024 and the next after that due in May 2028.

In 2028 new issuance will be only 1.5625 Bitcoin per block.

Compared with inflationary issuance, Bitcoin transaction fees are minimal.

Recent blocks show average total fees of less than 0.1 Bitcoin per block. Let’s call it 0.1.

Height    Age                       Transactions  Total Sent        Total Fees  Block Size
738326    2022-05-28T21:01:10.885Z    498            663.236 BTC    0.024 BTC     437,255
738325    2022-05-28T20:59:00.654Z    855          1,809.137 BTC    0.021 BTC     708,657
738324    2022-05-28T20:56:50.483Z    785          1,170.233 BTC    0.03 BTC    1,732,594
738323    2022-05-28T20:53:50.476Z  1,807          3,678.288 BTC    0.071 BTC   1,722,712
738322    2022-05-28T20:45:04.775Z  3,073         28,345.104 BTC    0.1 BTC     1,577,402

Today, at a price of $30,000 US, Bitcoin miners are receiving 6.35 Bitcoin per block which equates to earnings of $190,500 per block.

Assuming Bitcoin’s price appreciates 4 fold by 2028 this equates to $120,000 US per Bitcoin.

In 2028 Bitcoin miners will be receiving 1.6625 Bitcoin per block which equates to earnings of only $199,500 per block.

This causes Bitcoin security to not scale with its market cap

The security of something needs to scale with its value. Basically, if something is very valuable then you need to protect it more. If you double the value of something then there is twice the incentive to steal it, so you need to protect it twice as diligently.

As Bitcoin halvings continue, the amount the miners are making is decreasing exponentially. At the same time, the halvings are increasing Bitcoin scarcity and thereby increasing its perceived value, which is what everyone wants.

With two more halvings and a quadrupling of the Bitcoin market cap, the Bitcoin miners will only be earning about the same amount per block as they are today. Even if the Bitcoin price is 4 times higher again (total 16 times today’s price) the miners will only be earning around 4-5 times what they are today.

Something has gotta give. Future halvings will only make this situation even more untenable. We are getting to the pointy end in the next 6 - 10 years because 10 years from now, Bitcoin miners will earn only 0.88125 Bitcoin per block.

If enough powerful computers choose to do something other than Bitcoin mining then there will be a lot of available computing resources that could be harnessed to attack the Bitcoin network. The cost to attack the network is getting comparatively lower as rewards from an attack are going higher.

Is a fixed supply incompatible with proof-of-work?

In the long term, maybe it is.

But, a fixed supply is not a problem for proof-of-stake. This is because as the token price increases, it becomes proportionately more costly to purchase 51% of the supply. So, the security of a proof-of-stake system, with a fixed supply (Cardano), does directly scale with its market cap.

Note: This security scaling problem arises from the fixed supply design because this requires the issuance to reduce, exponentially, over time. It is the combination of proof-of-work with an exponentially decreasing issuance that causes the problem. Other proof-of-work systems that have persistent inflation, don’t have this design flaw. For example, a proof-of-work system with constant issuance rate of 2% per year would be paying 2% + fees of its market cap, for its proof-of-work security, per year.

Can Bitcoin fix this?

I don’t see how.

Bitcoin maxis are crowing about Bitcoin’s fixed supply. The hard money narrative is literally Bitcoin’s major selling point as a “store of value”. You just need to listen to people like Peter McCormack and his “What Bitcoin Did” podcast to understand that this narrative is entrenched. It has reached a level of religious worship. Destroying the “feature”, that every Bitcoin maxi considers to be essential, would be catastrophic for their belief system.

Furthermore, it is important to understand how ossified the Bitcoin code is and how reluctant to change things its developers are. Bitcoin also has no governance model built in so there is really no easy way for the community to decide on changes. Moreover, if you listen to people like Michael Saylor, they consider that resistance to change, is a feature, not a bug.

How will this play out?

In the short term, I expect that things will go on as they have been. People will continue to bid up Bitcoin and stick with this hard money, fixed supply, narrative. They will continue to harp on about safety through warning of risks with smart contract cryptos, and that everyone should just HODL their Bitcoin. The Bitcoin community is not focused on increasing Bitcoin’s utility so they are not looking to increase transactions or fees. They are instead focused on Bitcoin’s value as “digital gold” to just hold it and do nothing with it.

In the long term, I don’t know. But, I am starting to think that Bitcoin is NGMI.

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To be fair: There are also a lot of people who think the fixed supply of ADA is for some reason important.

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I too am not convinced the supply of Ada needs to be fixed. However, I do think a fixed supply is incompatible with proof-of-work.

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I take the opposite view - I think the fixed supply is actively a bad thing. Zero inflation basically leads to rent seeking and free-loading.

Crypto exhibits none of the properties that make an attractive currency (like price stability - would you want a student loan that you had to pay back in crypto?) No one worries over the a fixed supply of mobile phones, baby formulas or houses.

If anything, the ever disinflationary nature of crypto is working against price stability - the increasing scarcity has contributed to the price increasing. This idea that a business model that is essentially the same as cornering the market on toilet paper is going to be long term stable feels like it misses the point that anyone can just create another L1 when the price gets out of control - you’d be better off forking yourself before that happens - reward existing community with an airdrop (like a stock split)

(That’s just my opinion though, not a statement from IO)

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Thank you! I tend to agree with you.

Of course not!

Nevertheless, I like the Cardano community for providing a space, where disagreeing on such things and having good arguments about it is possible in such a nice way. And not even IO staff and ambassadors are religious about it. :grin:

I have the impression that that is not really the norm in crypto space.

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I agree. I didn’t think that was the long term goal. I thought Djed stable coin would be used for currency purposes. I also had the impression that there might be a design to stablise transaction fees using the Babel fee mechanism and Djed so the Ada amount would be variable with Djed amount fixed.

However, I am not sure that a fixed supply necessarily creates issues if Ada is used for:

  • Collateral (eg. asset backing Djed)
  • Voting rights
  • Staking - essentially voting on stake pool block production rights

@HeptaSean @Colin_Edwards
I am interested in both of your thoughts on whether a fixed Ada supply causes problems for these uses?

Also, I am intrigued by the proof-of-work combined with fixed supply issue.

How would you go about calculating a security budget estimate for a proof-of-work system?

What percentage of market cap (per year) do you both think would the the minimum safe security budget for Bitcoin?

It seems to me, longer term, this is a Bitcoin design flaw and eventually its maxis are going to have to change their minds about monetary policy and/or fees.

I don’t think a fixed supply creates the same issues for Cardano on proof-of-stake. Am I wrong about that?

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I’ve been thinking about this a bit myself. I guess that what will happen is they’ll just have to increase transaction verification to a larger number of blocks, making it less convenient.

As for proof of stake, there’s no functional difference between a limited and an unlimited supply with PoS if people just get a share of inflation for holding the coins. If inflation is a tax and it’s distributed to workers that help the ecosystem, people might just vote to fill their own pockets for no work - the rich get richer. Any veto system could be abused and cause wars, anything built on human labour (CAPTCHA oracles) can be bought, anything based on humans needs organisations to vouch for them. It’s a tough problem I guess

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I don’t see this. Why and how? I see both as behavioral problems and not something that can be solved by any monetary policy. I also don’t see the reigning inflationary environment free of any of the two. On the contrary: the higher the inflation in a society the higher the number of rent-seekers and free loaders is and these actors are usually rather close to the source of money issuance.

I also don’t see how an inflationary policy would solve it? Let’s say we agree on a 2% yearly increase in the number of ADA. Who would get that? The stakers? Or we would vote on how to spend it, where (again) the votes would be proportional to the holdings? How would that make the system more fair?

I’m a strong proponent of fixed supply, but I love this question because it points right to a real problem, and proves the obvious: fixed supply WILL introduce new problems.

In my understanding deflation caused by fixed supply ends when adoption reaches it’s peak. It’s not that it’s going on forever. So probably we have to wait with student loans (and any other form of credit) until that.

I also love the ADA community and this forum that it allows us to talk these real problems through, raise new questions, and possibly find answers or at least ideas to solve these. Thanks!

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The cryptocurrency market will eventually approach maturity, and these problems will be moot. Until that point arrives we have stablecoins with which we can price contracts. Borrow 1,000 USDC worth of BTC, and pay back 1,000 USDC worth of X cryptocurrency.

Speculation on the ultimate future price of BTC makes it risky to price long term contracts. This is no different than the rest of global finance, where the overwhelming majority of international contracts are priced in $USD.

Once widespread cryptocurrency adoption is established, there will be an anchor/ reserve currency among them (at this point it is BTC, and most people expect BTC to keep this first mover advantage). Until then crypto, like the rest of the world, will continue to price contracts in the global reserve currency.

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I am one of those people :smiley:
I don’t see a point of crypto revolution if it isn’t going to provide an alternative to existing system.
I believe that only by having an option to move ones assets from inflationary to deflationary based system a true economic liberty can be achieved. I don’t think that crypto will replace fiat in largest economies nor should it.

Crypto, in my opinion, should be another economic layer that individuals can use globally.
Just like the introduction of internet didn’t end stores or factories. Internet just made some sectors more efficient and opened other sectors that didn’t even exist. I expect crypto will do the same.

Is it really fixed supply if they fork the whole chain every few years? Lets be honest here. If you make a Bitcoin fork and the new Bitcoin is worth 10 times less do you think Bitcoiners are just gonna leave it? Nope.

When Bitcoin forks everyone that owns Bitcoin just doubled their supply. It is true that it is worth less then main fork. But if you can get Bitcoin 2.0 for free and sell it for profit, why wouldn’t you.

Some forks deal specifically with PoW payments. Bitcoin Gold fork had to do with making mining less dependent of ASICs. So, I’m assuming that once all Bitcoin is mined they will just fork it again and provide more ‘coins’ for miners. Maybe they just call it Bitcoin Hash-Cash and force fees to be paid in that while Bitcoin is just a store of value. This way they can have networks like lighting network use another coin for settlements so they don’t have to wait 10 minutes for Bitcoin blocks.

And for those that think Bitcoin wouldn’t just fork like that. Here is a list of some Bitcoin forks so far:
Bitcoin Cash, Bitcoin Gold, Bitcoin Diamond, Bitcore, Bitcoin God (not a typo), Bitcoin Zeo, Bitcoin Private, Super Bitcoin, United Bitcoin, Bitclassic Coin, Bitcoin Clashic (also, not a typo) , Bitcoin Nano, Bitcoin Wonder, and so on. There are many more if you care to look them up. Last time I checked there are about 30-ish functional and about 25 dead forks (or under development).

Rent seeking is not caused by inflationary nor deflationary systems. It is caused by asymmetric value due to adaption of any common unit of value. There are many examples of rent seeking in current inflationary system everywhere. There will be just as many examples of it in deflationary systems as well.

This is why I believe that having access to both systems is the most reciprocal way to allow world population to achieve economic independence. If one is in a country where they feel that economic system is to their benefit, then crypto can be just an investment or just another app. If one lives in a country where one has no economic opportunity, then crypto can be their main economic activity.

However, just like with most things, I think we will find that balance of fiat and crypto will be somewhere in a middle. Just like how we do half of our shopping on Amazon, but still go to the stores in our city.

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I think the exact opposite is true - you couldn’t be more wrong - and part of that is crypto is not acting like currency. Let’s just replace “currency” with houses or toilet paper or mobile phones in your example.

Is there any reasonable point in limiting the expansion of houses or toilet paper or mobile phones below the wider growth in the economy (both population and getting richer)?

Are you actually arguing that matching the supply and demand of an asset is economically bad?

You don’t have to agree with me right now - just think about whether or not crypto being a currency (as opposed to any other type of asset) is absolutely essential to your argument.

Currencies have a special place in an economy - they are the asset with the least volatility.

In the majority of human experience, things tend to be cyclical or vary widely in value. For example, enough corn to feed your pigs before the harvest is a lot more valuable than that same amount of coin after the harvest. Some years may be better than others too - in a drought year it may be much more valuable. If you are trading something like corn, you want to talk about the amounts in something that holds its value better - something easier to transport, easier to store, easily divisible - those factors all contribute to price stability.

That’s really important for price discovery - if you (and everyone else) has no idea what something is worth, that basically means trade grinds to a halt. Having that standard frame of reference of having everything quoted in something that doesn’t change much is key enabler of commerce.

Anyway, the point of that is inflation isn’t even directly important for currencies - it’s only important in that price stability is important. Too much inflation and no one knows what anything is worth any more and commerce breaks down. If a little inflation (in line with economic growth) keeps the price more stable - then that is better than no inflation.

Anyway, the point of all that is that crypto is too volatile. Would you want to take a 200K Ada student loan that had to be repaid in Ada in 10 years? A critical mass of people needed for both sides of that trade, for it to be acting like a currency.

(All opinions here are mine alone - this is not me speaking for CF, Charles, Dr. Aggelos, IO or anyone else; this is just me thinking aloud - and I reserve the right to change my mind!)

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A lot of the value proposition of crypto comes from network effects: the more people that use it, the greater the benefit for everyone. In that sense, it works a lot like telephones or membership on social media.

In an economic phrasing these kinds of effects (“positive externalities”) tend to be underproduced by the free market - the producer of the good is not being fully compensated for the economic benefit. The value of everyone using crypto benefits when anyone uses crypto.

The people who are benefitting, who are not part of that economic transaction, are essentially getting “unearned” value. That is, people who are buying crypto and sitting on it, waiting for other people to make it valuable, are hoping to get wealthy are doing that without doing anything to benefit anyone else.

That’s the literal definition of “rent seeking”.

One way to change that is to put an economic cost on doing nothing with your coins - like hoarding toilet paper might cause you to incur a storage cost. Additional token emission is one way of doing that (and one that doesn’t involve lots of transactions)

The goal of that is just to align personal incentives to make money with the value for everyone on the shared platform, encouraging activities that make the platform more valuable. There are some other aspects to this like better governance - if we are moving to distributed governance, getting more influence in the hands of people using and extending the platform, less in the hands of passive investors who have never actually moved their coins off the exchange or out of an ETF, will be important.

Also, read the notes above about not being a currency - crypto is acting like an asset with utility, not as a currency. Inflation in the toilet paper supply in line with population growth is not some economic crisis - it is a good thing.

(All opinions here are mine alone - this is not me speaking for CF, Charles, Dr. Aggelos, IO or anyone else; this is just me thinking aloud - and I reserve the right to change my mind!)

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I don’t think BTC can serve that purpose. You need to be able to tease apart the platform into a portion that acts like a store of value and a part that accumulates value. I think we can all agree that as more people use a platform - the more valuable it gets. However, that value accumulation (and expected growth) works against the requirements for a good currency, like price stability.

If crypto is going to fill the role of a new reserve currency, it will probably need to do it with a two-token platform - one representing the ownership of the platform (which gets more valuable as economic activity occurs), one representing the currency (which expands/contracts along with economic activity, to keep prices stable.)

(All opinions here are mine alone - this is not me speaking for CF, Charles, Dr. Aggelos, IO or anyone else; this is just me thinking aloud - and I reserve the right to change my mind!)

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Are you stating that the inflation rate is in inverse proportion with rent seeking and free loading!? In your opinion there is less rent-seeking and freeloading in Venezuela, Argentina, Turkey and Zimbabwe than in the U.S., the E.U., the U.K. or Switzerland? I hope you just misunderstood something…

Anyway, your argument - if I understand it correctly - that inflation is matching the demand for currency is interesting, but not convincing at all. First of all the demand for money is always infinite. Second money issuance doesn’t need effort. Third the risk of overproducing lays on the consumer and not the producer.

You are confusing a product (currency, tool of exchange) with a property of a product (circulating amount). Nobody asked for inflation ever (except some freeloaders, but that’s another story). There is no demand for inflation, is it? But there is demand for credit. Fiat systems implemented credit by money issuance, with the unfortunate and constant side effect of inflation. And that lead to huge problems that you seem to ignore.

And that is a problem. Because if you don’t see the problems of the current system then we won’t be able to compare those problems with the problems that fixed issuance will bring us.

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To give you an example:

  1. All salaries are losing value constantly.
  2. Student loans have to be set against a chosen price index instead of a simple percentage of interest.

Which is the bigger problem in your opinion?

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You need to define about which rent-seeking and free-loading you speak. Rent-seeking and free-loading by buying a load of cryptocurrency and just hoarding it, sitting on it, not doing anything good for anyone and just hoping to sell it off with a nice profit to greater fools later on (or buying a Lambo for it directly if any Lambo dealers ever start to take payments in crypto) happens a lot. That won’t make any sense with a currency with high inflation. Nobody buys Turkish Lira and hopes to get rent, to free-load and sell them with a profit later.

There is a constant demand for higher salaries, for example. And to finance those higher salaries, there is some demand to raise the prices of goods (if the higher salaries cannot be completely compensated by higher productivity or lower profits). That leads to inflation (in the sense of rising prices) and that again leads to demand for higher salaries. There are some such circles and in a lot of economies they worked quite okayish most of the last decades.

Most huge problems that I am seeing seem to have their roots in capitalism itself, not in monetary system and monetary policy. As long as we have very large and growing inequalities globally and inside societies, it does not matter that much if these inequalities are measured in fiat or crypto. But that might be a matter of belief.

Why do you think that the monetary system is the root cause? For what problems?

For these, you would want a currency with stable prices. A highly deflationary system will give you the same problems in the opposite direction. As long as more people adopt ADA (or any other cryptocurrency), the salaries will have to go down constantly, you would not want to pay back the same amount of a loan even without any interest, …

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Not quite - my point is that the inflation should be whatever it takes to keep the price stable (for a currency), and for an economy at an equilibrium with no growth, no innovation, and no disruption that would be zero. If there was growth, innovation or disruption it would be non-zero.

(In a real economy, that might be a challenging information gathering and calculation problem, but in the with a permanent shared ledger, it’s a more tractable problem.)

This is where your argument is getting non-sensical: applying “inflation” to something that isn’t acting like a currency gets to some weird conclusions. “Zero Inflation of Housing” = “no new houses can ever be built, unless one gets destroyed.”

Kind of a weird thing to talk about a non-currency, but that seems to be what you are arguing.

Does anyone who feels trapped in renting and unable to afford a house ask for “zero increase in the housing supply?”

It seems obvious to me that they would prefer that the supply of housing stay roughly proportional to the demand. Right?

In the context of currencies or houses or toothpaste or toilet paper, it’s the same basic idea: how to keep the supply and demand in balance such that prices stay stable.

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Nor does an American citizen buy USD, a Swiss citizen buy CHF or a British citizen by GBP with an expectation of getting rich either. I’m not sure what you are getting at here - no one buys a currency to get rich.

The idea that crypto can 10x is one of the things that means it can’t act like a currency.

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No, I’m not talking about that kind of free loading, because that’s not even freeloading in my opinion, because it involved real risk on the investors side.

Don’t forget that the development of the crypto world is backed by investors, even if they’re stupid to invest in crypto.

The current crediting practice is free loading because credits are just issued money without any real effort behind it. If the credit turns out to be bad it the general public who pays the price thru inflation. You keep the profit if there is some, the general public sucks up the loss if there is some. That’s free loading at it’s best. Of course there are some bs narratives that defends this practice.

Because there is inflation. Needless to say that not every salary keeps up with the inflation. And which salaries does? The ones close to the crooked crediting system.

I couldn’t disagree more. Let’s criticize capitalism after we see how it works without free credit. If the creditor takes real risk and not just pressing a button on a computer possibly ruining the lives of others.

No. We just need to have different contracts for crediting.

Exactly!!! And that’s the great thing! We got rid of the problem of the current crediting system explained above (nobody can print money financing things from other people’s money, basically stealing from the general public), and we just need to fix the problem of deflation as we dealt with inflation just the other way around.

Until you don’t admit that the current system is crooked you won’t see my point. So if that’s the case just make it clear: you think that the current system is fair and the risks are where they belong.

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Yeah, I see your point, but what I also see that it never happens. Fiats are constantly loosing their value. So it’s just not happening. Why? Because the demand for money is infinite. If you want to match that infinite demand that lead to infinite money. And infinite amount of money contradicts the idea of money much more than deflation.

I don’t know how the crypto economy is not real, but otherwise good point, but needs some refinement. The currrent system is not simulatable because you can’t predict how much credit the financial sector emits into the economy. It’s not hard: it’s impossible. Simulation becomes an infinite tree of sub simulations branching at every point where new money is issued, because the amount issued leads to different outcomes. This is yet another problem fixed supply fixes: economical simulations will become computationally feasible.

Good, because that reflects how nonsensical is applying “product” to money.

Since money issuance is a press of a button, and the risk lies on the general public, it’s obvious that it will lead to inflation. The amount of inflation is only limited by the awareness of the general public. Sorry to say, but if it’s nonsensical it’s because your proposition is.

Yeah, again, I understand that it shouldn’t act like a currency in your opinion, but what I see is that it just does. I use it as a currency. I can buy things, I can sell things, I can keep it and it somewhat holds its value. Just like any other currency. It might not be very efficient in every possible way, but there are some ways where it’s more efficient than fiat. And I have every reason to believe that it has the potential to get even better than this.

I think you confuse efficiencies with theoretical possibilities.

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