Interest fee

The BTC fee model is all wrong

As we plummet into a protracted bear market in the ‘crypto’ industry, a market plagued by lawsuits and scandals indicating that the long arm of the law is finally catching up with the Wild West industry, A major misconception needs to be clarified for the benefit of all investors and people involved in projects – BTC broken fee model.

As we watch with popcorn in hand with interest in the upcoming Ethereum fork at Proof of Stake, BTC proponents are quick to celebrate how low average fees on the digital currency have become compared to it. barely a year ago.

Currently, fees are reduced to around $1 per transaction (Source: BitInfoCharts)

But the drop in network fees has put some who understand the economics of Bitcoin security on edge. This is because the network’s security model depends on rewarding miners for their efforts in generating blocks, and the lower the average fee, the more economically insecure and attackable the network. This is where the economic model of small blocks1, all in the name of a vague notion of decentralization, collapses.

If you ask any BTC supporter, they’ll quickly tell you that the network’s transaction fees aren’t for miners. They are intended for Lightning Network (LN) hubs to earn and provide funds liquidity. Miners, on the other hand, are expected to earn block grants (which will approach zero in less than twenty years) and occasional high paying transactions, which are the opening of the LN network and the closing of liquidity channels.

This pattern is antithetical to Bitcoin’s original design. As the white paper states, Bitcoin was meant to be a peer-to-peer treasury system, not a settlement system for certain second-tier liquidity channels. How did we allow the shift from bitcoin as “cash” to something like a “bank account”? After all, for all intents and purposes, LN behaves like a bank account, with the same friction as depositing and withdrawing. However, once “in the system”, money can be transferred quickly and instantly around the world.2.

This perversion of Bitcoin’s simple peer-to-peer fee model extends to the fact that many digital currency exchanges now act as “payment rails” for transferring BTC. Due to the inherent costs and hassle of depositing and withdrawing your BTC from digital currency 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 instruct the exchange to withdraw coins from the person they want to pay. It is a way to avoid paying high network fees or manage the hassle of LN network liquidity channels and their unpredictability.

But the problem with that is that it just merges the settlements into a giant transaction pool called an exchange, which operates off-chain (just like LN…funny that). And that comes with all the counterparty risk, bankruptcy risk, and runaway CEO risk that comes with unregulated bucket shop exchanges.

Also quite funny is that some BTC maximalists would be the first to tell you to keep your coins out of exchanges. (“not your keys, not your coins” is the litany they fall asleep with). But if they are so averse to trusting off-chain exchanges with their money, why would they trust the same coins on a second-layer network like LN, which is at the mercy of future miner fee market demands that will rightly charge more and more for channel fees as the block subsidy decreases?

The economic aspects are all backward and, unfortunately, unnecessary. If people would just read the original design of Bitcoin for what it was, peer-to-peer e-MONEY, then miners would be compensated forever with ever-increasing fee revenue, which will be defined by the VOLUME of transaction they are able to process. This keeps the fee PER TRANSACTION rate at sub-dime fees fixed and stable. For example, BSV currently has fees that are consistently $0.0001 per transaction, while at the same time fee revenue for miners as a percentage of their total MEV (miner’s extractable value) has increased from 5 to 10% in some even bigger blocks. When the fee/subsidy ratio in total block revenue exceeds 50%, we will start to see some interesting economic effects that will incentivize miners to leave BTC and mine BSV instead. Indeed, they can earn more in US dollars for the same amount of energy expended.

Imagine if all transactions executed daily on exchanges were transactions on the blockchain and what that would mean in terms of revenue for the nodes that help build the network to the level where it can process more and more transactions.

It’s the BSV model, where the more people use the blockchain for peer-to-peer transactions, the more fee income miners can earn, which if they’re smart businessmen, they reinvest in increasing their transaction processing capabilities.

It’s the virtuous circle of investment, revenue generation, increased usage and capacity, more investment, more revenue, more capacity, etc.

The key is simply Peer-to-Peer. Not these centralized pooling of blockchain transactions, while selling the public on the notion of decentralization, when the system is as economically centralized as any existing banking system that we currently face.


[1] Small block proponents believe bitcoin should favor small blocks and low volumes, with high fees per txn.

[2] Sometimes, but most of the time, you would just be frustrated that your transaction could not be sent due to channel liquidity.

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