Core Question

Can Bitcoin fees truly replace the block reward?

Current situation

Bitcoin is currently in its 5th stage of the halving (3.125 btc). Later on April of 2028 at block height 1,050,000, that will halve to 1.5625 btc. By the year 2140, all BTC will have been mined, meaning that the network will need something to replace the incentive for miners. Those are transaction fees. Bitcoin hopes to be adopted enough to have the transaction fees still make it worth for miners without having to make new bitcoin like it currently does out of thin air.

Viable?

Currently, each bitcoin block has around .02 BTC in transaction fees. That is worth about $1620 at the time of writing this. That is pretty small, especially compared to the 3.125 btc (a little over $250,000) of the block reward. As that dollar value diminishes from the block reward, we need to find a new source of money.

Options

Bitcoin has a few options to keep the dollar amount from fees high enough. This includes: 

• Price increases
• Increased adoption and transactions
• Some new features on bitcoin

Price increases is pretty obvious. The blockchain works where everything is measured in bitcoin, not fiat dollar value. The only real limiter here is that say bitcoin is 1 million dollars. Suddenly a 0.000062 fee today or about $5 is worth $62. That is a huge increase, and so less people will pay that, putting a soft cap on the fee.

As more and more people use bitcoin, that will naturally increase the number of transactions. But since bitcoin has a strict block size (which is already pretty much maxed out all the time), that will cause an intense bidding war, therefore putting huge upward pressure on fees.

The new features on bitcoin is rather unheard of. There are multiple things you can send. For example, with a recent protocol upgrade, you can attach stuff like code, images, and text to a satoshi and send. You can also send fungible tokens (not NFTs) using Bitcoin Runes, or BRC-20 standard. Essentially, instead of bitcoin being just a network for one thing (BTC), you can use it as a multipurpose and decentralized mailing service.

So, can it?

Honestly, it really is a coin toss. It could go either way. On one hand, you have all of these new futures and backing, along with growing adoption. On the other, running a mining rig is expensive, and so fees have a lot of ground (dollar value) to catch up on if they really want to replace base block rewards.

The danger

If the fees don't keep miners profitable, then more and more miners will quit. The network will then reduce the difficulty since the total hashes drops and it needs to keep 10 minute blocks. That means that we will reach a point where only a few miners are actually running the network, centralizing the network to a few giant operators. That is the opposite of what bitcoin wants and what it was intended for. So, if fees don't keep up with how much it costs to run the hardware, then it could become very centralized. And, another risk is with the hashrate so low, then it will make bitcoin susceptible to 51% attacks, where attackers control over 50% of the network hashrate, meaning that they can reorganize blocks, double spend tokens, and a bunch of other bad things. And also, mining pools can also be an attacker themselves by having 51% of the network power. 

For example, on XMR, the largest pool, supportxmr, has about 24% of the network's hashrate. While it is down from where it used to be (around 30-35%), it is pretty dangerous to one entity having majority control of a network.

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