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Why A Premature "Fee-Market" is Unsustainable for BTC

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Written by   54
1 year ago

One of the many talking points that those in favour of BTC have are that the maximum block size should be intentionally kept low so that a fee market can develop. The reasoning behind this is the fact that transaction fees eventually need to replace the block subsidy. Though the block reward needs to be replaced by fees, I think this line of reasoning is extremely flawed, as a fee-market prematurely introduced gives a bad user experience, and does not sufficiently subsidize block rewards.

Let's take a look at how good the artificial restrictions placed on BTC are at developing a fee market:

- Currently, the average transaction fee is $1.30

- The block reward is currently 6.25 BTC per block (or ~$57,500 as of right now)

- The maximum block size is ~2.0 MB on Bitcoin (if you include SegWit in this figure)

- A block can only take a maximum of ~4,400 transactions, roughly equating to maximum throughput of 7.3 transactions per second

- This means that the maximum possible allowance for transactions per day is around 630,000 transactions

Using these metrics, we can calculate what percentage of the mining reward is covered by transaction fees. Doing some quick calculations at current usage, Bitcoin transaction fees can only subsidize 4.8% of the mining rewards, and this number is just based off of today's fiat value. If the fiat value of Bitcoin goes up, that number is only going to go lower.

For example, let's say Bitcoin somehow manages to enter a bullrun to $100,000. Evidently, people won't pay more than $25.00 in transaction fees, and even with that number, fees will only subsidize 14% of the block reward. This is assuming people will be willing to pay such high fees, when the reality is that they won't. Last bullrun has shown that to be the case, and so far, Bitcoin has only managed to be sustainable when the fees were around $2.00. With this in mind, the fee subsidizing drops to 1%. For Bitcoin to be sustainable on a low-volume, high-fee model, fees would need to be tens or even hundreds of dollars for the average transaction.

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Avatar for IMightBeAPenguin
Written by   54
1 year ago
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