Bitcoin Needs Apps

Bitcoin's toughest problem has a straightforward solution
Dec 5, 20233 min read

Bitcoin has a major problem: its security budget!

Miners securing the Bitcoin network rely on inflationary block rewards and user transaction fees for revenues, but the BTC emissions halve roughly every four years.

The next Bitcoin halving event is slated for April 2024, and the resulting decrease in block emissions will make miners even more dependent on transaction fees for income. Bitcoin's security budget will be reduced without an equivalent increase in transaction fees.

Contraction in Bitcoin's security budget results in the attrition of miners, reducing the amount of hash power securing the network and making it more economically feasible to launch an attack on the chain! While not necessarily an immediate problem, addressing how Bitcoin can afford to pay for security over the long run is of paramount concern for the network.

Ethereum commentator Anthony Sassano recently took to Twitter to poke fun at Bitcoin's security issues by listing alternatives for securing the Bitcoin network should transaction fees alone prove insufficient to compensate for the reduction in BTC issuance.

The above-proposed actions could help Bitcoin avoid its brewing future security crisis. Still, the network's conservative community is unlikely to consider alternatives to the existing network, as implementing them would require compromise on core principles.

To secure its future and reduce its dependence on block subsidies, the Bitcoin network must increase transaction fee revenue, but in order to do so, Bitcoin must first give people a reason to want to use it…

Undoubtedly, the Bitcoiners have an uphill battle to wage if they hope to increase transaction revenue and avoid integrating more drastic suggestions, but their campaign is not without hope: transaction revenue has spiked twice on the network during 2023.

Source: BiTBO

Surges in transaction activity are thanks to the birth of useful primitives, like Ordinals and BRC-20s, built using Bitcoin's Taproot upgrade that sparked utilization of the chain!

Tragically, as demonstrated by the 6-month stretch where transaction fees comprised less than 10% of the Bitcoin block reward, usage of these applications is highly inconsistent and entirely dependent on speculative activity.

Thankfully, experimentation is underway to bring other forms of life to Bitcoin that could spawn more consistent transaction activity 👀

Botanix is bringing the EVM to Bitcoin via L2 technology, and their testnet just went live. Support for the EVM allows developers on Botanix to write and deploy their applications in Solidity, the predominant crypto coding language, and creates compatibility with existing Ethereum infrastructure, like the MetaMask wallet.

BitVM is another solution aiming to make Bitcoin programmable by enabling Turing-complete Bitcoin contracts at the Layer 1.

While the BitVM would not require a fork and does not inject additional complexities into the Bitcoin network, the solution is highly limited by its two-party design, which means BitVM cannot support large-scale decentralized applications with multiple transacting parties.

Bitcoin Improvement Proposal-300 wants to bring programmability to Bitcoin through sidechains. However, this proposal would inject additional complexity into Bitcoin and must be implemented via a soft fork. Given Bitcoin's history of conservatism, it is unlikely this upgrade will occur.

▶️ Takeaway

While traders flipping JPEGs and aping sh*tcoins may not be the ultimate instantiation of innovation, the rise of emergent use cases able to generate insane transaction fee revenue demonstrates that it is possible for Bitcoin to be self-sufficient in the absence of block rewards.

What Bitcoin needs now are real use cases that lead people to make recurring transactions on the chain. The easiest way to accomplish this is by creating environments where people can develop useful applications!

Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.

Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here.

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