I was listening to one of the Unchained podcasts the other day where Laura Shin is interviewing one of the Ethereum developers, Justin Drake on the new changes to transaction fees that were introduced in the London hardfork of Ethereum, especially those that came with EIP-1559. In the podcast, the Ethereum developer talked about a number of things, most notably about the future trajectory of Bitcoin vs other cryptocurrencies like Ethereum. Now, to get this out of the way, Justin Drake is not a ETH maxi or anything like that... those sorts of things are only for the mud-slingers on Twitter, but of course he is going to have a bit of a bias towards Ethereum.
That said, he did say a couple of things that crystallised some thoughts that I had bumping around in my head about Bitcoin, and its possible future.
Now, to start off with, the narrative of the utility of Bitcoin has changed since it first began. Originally it was hoped that it would be a currency replacement, but it appears that as a Layer 1 solution, that isn't going to happen. So, the narrative has shifted to it being a store of value by virtue of it being the most heavily secured (via hashpower) blockchain and the fact that everything has a trading pair against it. It is the most trusted and venerable of the cryptocurrencies, and there is quite a bit of value that is attached to that.
However, it has a strength and a weakness in the fact that it is relatively set in terms of emission and cap. Halvings and 21 million BTC are well known concepts among the cryptocurrency community... these are essentially set in stone, and to change them would risk a war that would dwarf previous Bitcoin fork wars. So, it is a game with all the rules laid out... which gives predictability and certainty in comparison to Ethereum, which is still iterating and trying to find a long-term solution.
The current security around bitcoin is dependent on its hashpower, and that hashpower is incentivised by the emission (block reward) for mining new blocks. It was always intended that this would decrease over time, in the events known as halvings, to be compensated with by rising Bitcoin prices and transaction fees. In the medium to long term future, this would be primarily transaction fees.
So, the question then arises... are the transaction fees going to be incentive enough for miners to continue acting in good faith and continue securing the blockchain with their expensive to run machines. And more critically, will they start attacking each other in order to capture the most lucrative transactions from block to block? These are tricky questions to answer... but the idea from Justin Drake is that... no, given no other significant change, the incentives to NOT secure or to attack the chain will start to become more enticing.
The reason that was laid out (and something that I have thought about) is the fact that if we assume that Bitcoin is going to serve as a store of value (and NOT a transaction currency) the number of transactions will be relatively low in comparison to the value of Bitcoin. You essentially make very few transactions when you are holding the coin for future price appreciation. So, there would not be enough transaction volume to incentivise miners.... and it isn't likely that the price would skyrocket so much that the trickles of BTC would be worthwhile in comparison to the value of attacking the chain.
So, what would be shifts that would affect this bleak outcome. Well, first is that the Bitcoin community manages to push for changes to base rules around emission and rewards. Given past history, that is really unlikely...
... another is that Bitcoin does become the transactional currency of the world, and it is so valuable that the transaction volume is enough to deter attacks. Possible, hopeful... but somewhat wishful thinking rather than a plan!
... and another option that was floated by Drake was the idea that Bitcoin would evolve to be essentially locked and secured trustlessly at a point in time on a different chain with a more up to date and robust consensus... such as Ethereum. That would essentially mean that there would be jumping off snapshot... sort of like rats leaving a sinking ship, although... hopefully something more orderly could be carried out!
So, interesting things to think about... so, inherently, there is NOTHING wrong with Bitcoin as it stands at the moment. However, looking out towards the future (perhaps even only 20-30 years out!)... perhaps the certainty of the rules around it might serve to work against it in comparison to protocols and blockchains that can adapt to situations that even Satoshi could not forsee... after all, a person is still fallible... even the Pope!
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