Once the block reward diminishes greatly, can Bitcoin be secured only by transaction fees? On Unchained, Bitcoin writer Vijay Boyapati and Ethereum Foundation’s Justin Drake debate the merits of Bitcoin’s security model, which Drake says will largely rely on transaction fees as soon as within 20-30 years, not in 100+ years. Highlights:

  • Justin’s and Vijay’s professional backgrounds
  • why Justin thinks Bitcoin cannot survive solely on fees
  • how Bitcoin is currently secured
  • what makes Bitcoin’s security subjective rather than binary
  • how much it would cost in dollars to 51% attack Bitcoin
  • what the Bitcoin network could do in response to a 51% attack
  • how to calculate Bitcoin’s security budget
  • why Bitcoin’s price can’t go exponential forever
  • whether a “nuclear option” for Bitcoin miners could protect against a 51% attack
  • why nation-states could be either pro or anti-Bitcoin
  • why a Bitcoin Standard could be similar to the Gold Standard
  • how Bitcoin will change going forward, and why Vijay thinks transaction fees will increase
  • why Justin does not think transaction fees will increase enough to secure Bitcoin’s base layer
  • how Justin would fix Bitcoin’s security model — and why he thinks the 21 million hard cap is a meme
  • why Vijay does not think Bitcoin’s security model will ever change — especially the 21 million hard cap
  • what Justin thinks Ethereum is doing better than Bitcoin
  • why Vijay thinks Ethereum will fail

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Episode Links

Justin Drake

Vijay Boyapati

Bitcoin’s Security Model

Basic Info

Bitcoin Fees

Episode Transcript

Laura Shin:

Hi, everyone. Welcome to Unchained, your no hype resource for all things crypto. I’m your host, Laura Shin, a journalist with over two decades of experience. I started covering crypto six years ago, and, as a senior editor at Forbes, was the first mainstream media reporter to cover cryptocurrency full-time. This is the September 14th, 2021 episode of Unchained.

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Laura Shin:

Today’s topic is whether Bitcoin can be secured by transaction fees only. Here to discuss our Justin Drake, researcher at the Ethereum Foundation, and Vijay Boyapati, author of The Bullish Case for Bitcoin. Welcome Justin and Vijay.

Justin Drake:

Hi there.

Laura Shin:

So the impetus for today’s discussion came about from a previous show I did with Justin, in which he contended that in the not too distant future, like about maybe 20 to 30 years from now, he believes Bitcoin’s block reward will be so low that the system will mostly be reliant on transaction fees and that those will actually not be large enough to secure the network. Since the show that we recorded previously was actually intended to focus on ether as an asset, I decided that this topic is big enough that it needed its own show. Before we actually get into the meat of that topic, let’s just have each of the guests state their background in crypto, and also what they do now, so that people can get a sense of each of your experience in the field. So Justin, why don’t you start?

Justin Drake:

I’m a researcher at the Ethereum Foundation. I’m helping design what used to be called a Ethereum 2.0 — basically a set of upgrades to improve Ethereum. I’ve been at the foundation for close to four years now. Before that I was an entrepreneur building on top of Bitcoin through this project called OpenBazaar. Before that, I was involved tangentially with Bitcoin by running a Bitcoin ATM and also by running the Cambridge Bitcoin meetup group in the UK.

Laura Shin:

Okay, great. And Vijay.

Vijay Boyapati:

So I’m a computer scientist by training. I came to the US to do a PhD in computer science, but ended up at a startup called Google. I spent many years at Google. I left to do some political campaigning, but came back to tech. I discovered Bitcoin in 2011 in a bet with a friend where I won the bet and the bet was for a silver coin, but he told me to take the Bitcoin. And I said, what’s that? And I’ve sort of been going down the rabbit hole for the last decade trying to understand Bitcoin. And I wrote an article in 2018, which I think has become the most read non-technical introduction to Bitcoin. It’s been read over a million times, translated into 20 languages, it’s called The Bullish Case for Bitcoin. And it’s been now published as a book. So I’m really interested in the economics of Bitcoin. I’ve studied Austrian economics for a long time. So I’m a computer scientist with an interest in economics.

Laura Shin:

All right, let’s get into the topic of today’s discussion. Why don’t we just have Justin begin by laying out his theory for why he thinks Bitcoin will not be sufficiently secured by a transaction fees at at a high level and then we’ll like unpack it in greater detail throughout the show. So go ahead.

Justin Drake:

In terms of the basics of Bitcoin security, we have what’s called the security budget. And the security budget is basically the rewards that are given to miners to help secure the Bitcoin network. And this is made up of two components. Component number one is BTC issuance. So BTC the asset is just minted out of tin and given to the miners. And then there’s a second component, which is the fees.

To have this 21 million limit, what Satoshi Nakamoto did is that he has a exponential decrease of the issuance. So right now, the issuance is about a 1.6% of the total supply. And there’s a halving every four years roughly. So if we look at a multi-decade time span, for example 20 years, that’s five halvings, which is the equivalent of reducing the issuance by a factor of 32.

So we go from roughly 320,000 Bitcoin issued every year to only 10,000 Bitcoin issued every year. And there’s relatively good reasons to believe that 10,000 Bitcoin per year alone is not sufficient. Also this number of 10,000 will keep decreasing exponentially. So if you wait enough for 10 years or another 20 years, it effectively almost goes to zero.

We need to be thinking about the security of Bitcoin from transaction fees only. It turns out that transactions for fees are problematic for various reasons. One: the total fee volume cannot be guaranteed. So you can have periods of time where, for some reason or another, the transactional utility of Bitcoin dips below a safe minimum. And so you don’t have this guaranteed security factor that you could have with issuance.

Another problem with transaction fees is that they’re very volatile. So, for example, during bull markets, they could be more than 10 times larger than doing a bear market. That leads to various problems, for example, overpayment for security which is kind of,the duel of underpaying for security. And then there’s more subtle aspects related to transaction fees.

For example, the fact that they can be stolen. So what do I mean by stolen? I mean that if you have a transaction with a very juicy transaction fee, that transaction could go in a block A, or it could go into a block B, it doesn’t really have to be assigned to a specific block. Unlike issuance, where every single block kind of has a very controlled amount of issuance.

And so there are some instances where we have very high variance in the transaction fees in the given the block that the longest chain rule starts to break down. It’s no longer incentive compatible for miners to follow this rule. You start having what we call chain instability. Basically transaction fees are worrisome from both a quantitative standpoint and also from a qualitative standpoint relative to insurance. So that’s it in a nutshell, the basic arguments as to why we should be at the very least having the discussion and asking ourselves will Bitcoin be the secure in the context of low and no issuance.

Laura Shin:

Okay. And Vijay, do you want to start with kind of like your just overall basic response, and then we can go one by one through these points?

Vijay Boyapati:

Yeah. There’s actually tons of stuff to unpack. And I think this debate is a great opportunity for education in general. And I hope you’ll permit me, Laura, to take a step back and talk a little bit about security and what it means for Bitcoin. I don’t think many people have really delved into what does it mean when someone sends me a Bitcoin. What’s the security around them sending me a Bitcoin? To do that, I just want to very briefly talk about the concept of ownership. By sending someone some Bitcoin, they own the Bitcoin. But in our real world, we have this concept of ownership where you possess something, Laura. So your microphone in your house, you possess that. And we have this social structure around it, which is an apparatus of coercion, which is the government or the state, and the government steps in when someone takes that microphone from you.

So this is kind of an imperfect system of ownership. What Bitcoin and these other cryptocurrencies is trying to provide is a form of ownership over a digital good, which doesn’t require an apparatus of coercion. With that background, the concept of perfect ownership would be something like… I give you, Laura, a car or something like that. And the car has a force shield around it, and no one can touch the car except you. That would be perfect ownership. We don’t have that. But we try to get close to that with something like Bitcoin. And the way it works is that when I send a Bitcoin to you, your ownership of that, your strength of ownership, increases over time as you have a number of block confirmations.

The way you can think about this, I’ll try and give an analogy, so your listeners can understand this. Imagine I give you a block of gold or a brick of gold. And each block confirmation is like a brick wall that’s built around that block of gold. Each time there’s a new confirmation, it becomes harder and harder to get that gold. And so if you have a whole number of confirmations, then it’s very, very costly to get that bar of gold, because you have to tear down the wall to get to it. And this is essentially the security model that’s used by Bitcoin and various other proof of work cryptocurrencies. I think it’s important to have that kind of concept in our head. This isn’t really binary. When we talk about security, we can’t say, when I send you Bitcoin, you have it. You just have greater and greater confidence over time that you really have it, because the cost of taking it away from you, of unwinding the transaction that sent to you, becomes so high that it becomes infeasible to take it away from you.

Now, each brick in this wall that’s protecting the gold bar that we’re securing, is made up of two components. It’s made up of the block subsidy, which is kind of the reward that a miner gets when they mine a block, and transaction fees. So you can think of the height of the brick as made up of two things. And over time, one part of the brick is going down, which is the block subsidy going down. So the size of the bricks will go down. We don’t know how small the bricks are going to go. The bricks are going to be essentially just transaction fees. Imagine the brick has two components, a green part, and a red part. And the green part eventually is going to go away. And the bricks are just going to be the red part, and the red part is transaction fees.

So I think it’s important to have that mental model. One thing I think is important to understand, Justin brought this up, is that sometimes we overpay for security. Currently, the bricks that are being put around each transaction are huge because the block subsidy is really large. When an exchange receives BTC, they will say, we want six confirmations before we believe that we have the Bitcoin, because we want a very low risk that this can be unwound. What they’re saying is that they want six, very, very large bricks around this confirmation that they received Bitcoin. Now it is possible. There are alternative strategies where you can say if the bricks got smaller, you just wait for more bricks, right? And this is actually true for other cryptocurrencies, which have much less work put into each block.

So for instance Bitcoin Cash, the amount of mining energy that goes into mining a single block of Bitcoin Cash is much, much lower. So if you’re an exchange, you’re not going to say we will accept your Bitcoin Cash with six confirmations. They might wait for 60 confirmations. So I’m saying all of this to provide an analogy and to give some context as we talk about this discussion going forward.

The bigger point I’m trying to make is that we don’t know what the right amount of security is. Security is a spectrum. It’s not good security or bad security. It’s a level of security. And that level of security is actually a little bit subjective. It’s not necessarily the same for everyone. So me accepting a small payment, if you send me a few hundred dollars with a Bitcoin, one block confirmation is certainly enough for me. But if someone’s sending a billion dollars worth of Bitcoin, the person who’s receiving that billion dollars might want 30 confirmations because the amount of security that they want would be commensurate with the amount or the value that’s being sent.

Laura Shin:

If I were to summarize where I think you’re going with this: you’re trying to say that even if part of what Justin is saying is right, or even if someone were to attack the network, that there was only so much they could do, because the amount of effort to really unwind things would be far greater. By the way, Justin clearly disagrees with you. He’s making all kinds of faces and whatever. So I definitely want to get to him, but I want to make sure that we understand your point in terms of this discussion.

Vijay Boyapati:

This is only one of the arguments I have. There is a whole number of them, but most of them center around the fact that I think Justin’s argument is kind of a static analysis that doesn’t really think about the game theory of what happens when Bitcoin is widely adopted. This is more just the context to think about how security is treated from a micro perspective, rather than a macro perspective.

From the perspective of someone who’s accepting Bitcoin, they are able to change the amount of security that they want for a transaction. You can conceivably say that right now would massively overpaying for security. I don’t think Justin can realistically claimed that he knows what the right amount of security for Bitcoin is. I would actually argue that right now, we are probably overpaying for security for Bitcoin because the block subsidy makes the rewards so high that we have just a gigantic amount of resources being put into Bitcoin mining. It seems to me that the network could probably get away with less security over time. But we’re going to get into the argument of nation state attacks, which I think is going to be interesting and how many resources they can bring to bear. But I think my view is that it’s not correct to think about security as a binary thing.

Laura Shin:

Okay. So go ahead, Justin, with your response.

Justin Drake:

Vijay is correct that security as a spectrum, if, and this is a very important if, if the attacker has less than 50% of the hash power. Then he’s right, the notion of confirmation makes sense. If you have six confirmations, that’s better than the one confirmation, et cetera, et cetera. But, then, the if might not hold true. There is a possibility that the attacker has more than 50% of the hash rate in which case it is binary. It’s no longer a spectrum. The attacker has essentially achieved God mode over Bitcoin, the blockchain. One of the things that the attacker could do, for example, is one of the simplest attacks, is simply to mine empty blocks for the rest of the time. Even if you have a Bitcoin, which is a UTXO behind a million confirmations, doesn’t matter. You can think it’s yours in the sense that you can look on the blockchain on blockchain.info or whatever block explorer, you can be happy that you own the one Bitcoin, but you’re unable to spend it.

Why? Because all the blocks are empty and Bitcoin has lost censorship resistance. I very heavily disagree with the fact that security is non binary. It is binary as soon as the attacker reaches 51% of the hash rate. Now you could ask yourself the question, is it reasonable, yes or no, for an attacker to have 51% of the hash rate? And I would argue that, yes, it is very much reasonable for an attacker to have 51% of the hash rate. Even today, it would be a reasonable. Why is it reasonable? And the reason is that at the end of the day, hash rate can be manufactured. It can be purchased. And so you can think of it in dollar terms. And so you can look, for example, at the hash rate of the Bitcoin network, which is roughly 150 million terahash per second. And then you can ask yourself, how much does it cost to manufacture and deploy one terahash per second? You can put a dollar amount to that. Maybe $50, maybe a slightly different number.

But let’s say that we assign $50. Then the cost to make the most naive attack possible, which is to manufacture 150 million Terra hashes. And then to just turn on all the hardware in one go and perform a 51% attack, is roughly $7.5 billion. So that is the security shield, right? The economic security of Bitcoin. Which, in the grand scheme of things, is peanuts. Right? If you look at the governments like the United States, their military budget is $750 billion per year. That’s for just a single year. So in a single year, the United States has a hundred times the budget to go 51% attack Bitcoin, gain this God mode capability, and effectively remove all the nice properties that Bitcoin enjoys today.

Vijay Boyapati:

Can I just respond to that? I wanna split this debate into the incentives to attack Bitcoin sort of endogenously, versus exogenously. Which is the people within the network, what is their incentive to attack it? Versus the people who are antagonistic to be a kind of want to attack it? I think it’s important to separate that out. Justin’s making a point, which I somewhat agree with, but he said that when you have 51% of the network, you’re in God mode and you can do anything and you will do anything. That’s actually not true. There has been empirical political studies where there’ve been periods of time when more than 50% of the hash rate was controlled by a pool. And there was no 51% attacks. They never tried to do a 51% attack. Satoshi designed the system so that it’s much better to just mine the coins than to attack the network. If you’re participating in the network, there’s a huge detriment to attacking if you’re being rewarded in Bitcoin. And you’re trying to steal some Bitcoin with a double-spend attack, you’re undermining the network in which you’re being rewarded.

Laura Shin:

Right. But I think what he’s saying is this is somebody that is in participating in the network. They just want to kill it. But also one thing, Justin, I don’t think it’s true that if you 51%, that you can just go to God mode. It’s kind of limited what you can actually do. And for other miners that win rewards, like they can continue adding to the blockchain.

Justin Drake:

There’s basically three things than an attacker can do. The first thing is censorship. And it can be full censorship, as I mentioned, you just mine empty blocks, or it could be partial censorship. So you could imagine, for example, if it’s the Chinese government that makes this attack, they could say Chinese transactions can go through or Chinese unfriendly transactions and can’t through. And so the associated UTXOs would be essentially lost. So that’s one type of attack. Another type of attack is reorgs. So for example, someone spends Bitcoin, the recipient thinks he owns a Bitcoin, but actually he doesn’t really because a reorg happens and the UTXO is sent to someone else.

And then there’s the third type of attack, which is breaking down the lite clients. So the way that lite clients work, they’re not full nodes. What they do is they only check the head of the chain of proof of work. And for lite clients, you can really fool them greatly in the sense that you can make them believe that they have Bitcoin when they don’t or vice versa. You really do have God mode over lite clients. Lite clients are very important, for example, in the context of bridges between blockchains.

So when you have two blockchains, for example, Bitcoin and Ethereum, and you want to bridge the two. The way you do that is you will build a lite client. So for example, Ethereum you’ll have a smart contract, which has lite client access to Bitcoin. There could be billions of dollars, hundreds of billions of dollars, that are on this bridge. And so these lite clients become huge targets for attackers.

Laura Shin:

All right. Let’s actually now go systematically through some of the theory. So the first component, at least, and this is based on actually what you had written out before the show, so if it doesn’t match exactly the overview at the beginning, that’s why. So Justin, the first component of your theory is about the security budget and the security factor. You talked about how the security budget is what we paid to miners total. Then you have something that you call a security factor, which is the security budget divided by the market cap. One of my questions for you was since the security factor is divided by the market cap, and since both of those are denominated in dollars, why is it that you don’t think that the rise in price will just keep up with the halving of the block rewards so that the subsidy is kind of either at the same level or even like a greater level in dollar terms?

Justin Drake:

Right? So there’s two things you can do. You can look at security from an absolute standpoint: what is the number of dollars required to attack Bitcoin? You can also look at security from a relative standpoint: which is basically relative to its market cap. How many dollars do you need to break a greater number of dollars? So the security factor is going to be the the security budget divided by the market cap. The smaller the security budget, the more leverage you have as an attacker. So, for example, if the security factor is only 0.1%, then roughly speaking, for every $1 that you spent attacking Bitcoin, assuming that you are successful, then you’ll be able to break 1000 worth of Bitcoins. Now, if we take the standpoint that Bitcoin will become the future of money, that it will reach that say a market cap of a hundred trillion dollars, then you need to consider nation-states as attackers. And if your security factor is only 0.1% then the cost to attack Bitcoin is only going to be a hundred billion dollars. And in the grand scheme of things, a hundred billion dollars is tiny right, to break the money of the internet for the whole world.

Laura Shin:

We kind of went over this, but I guess what I’m asking is like… So if mining costs and for like equipment and energy are like somewhat fixed, obviously as the hash rate grows, there’s just going to be a greater number of miners. So in that sense, that cost will grow. But like the dollar value. For Bitcoin in terms of the issuance has been halved every four years. You would just kind of need the dollar value to double. You would need the security budget just to double in order to keep up with the halving of the issuance every four years, which like, that doesn’t seem that challenging to me. Am I wrong? Am I thinking about this wrong? Maybe I’m not thinking about it correctly.

Justin Drake:

I think you were focusing on absolute security. So let’s focus on that. So there’s kind of two problems about absolute security. The first one is that even today, absolute security is kind of not satisfactory. We talked about at $7.5 billion of economic security around Bitcoin. That’s not satisfactory for the longterm future.

Laura Shin:

Okay. And so, so it goes back to the nation state thing.

Justin Drake:

The second problem is that the halvening of the issuance, that’s an exponential process that is going to last for decades. We cannot have the price of Bitcoin go exponential for decades. It has to stop at some point. You can’t have, for example, Bitcoin as an asset be a hundred times larger than the rest of all the assets in the universe combined. There needs to be a point at which Bitcoin has reached maximum penetration, and maybe that’s on the order of a hundred trillion dollars. That’s kind of the best case scenario for Bitcoin. Beyond that point, it cannot double every four years, the exponential has to stop somewhere.

Laura Shin:

There is so many components to this. Let’s just actually keep moving because this one was also really interesting to me.

Vijay Boyapati:

So I actually agree with the point you’re making, which is what really matters is the purchasing power of the security budget. Not necessarily denominated in Bitcoin terms and say, this is a tiny fraction of the market capitalization of Bitcoin. It’s how expensive is it in real terms to attack the Bitcoin network? I think that’s important. I think Justin’s making the point that as the market capitalization of Bitcoin goes up, the incentive to attack the network goes up. An increasing incentive doesn’t necessarily mean any increasing capacity to attack the network. So I do think the absolute security network is an important factor to consider. The other thing I think is really important to think about is this is a sort of theoretical analysis. I think it’s really interesting. I think Justin has laid it out really well. But I think it’s much more complex than this because you have to start thinking, at this stage, if the mental model is okay, this is so big that nation-states want to attack it, you need to think about the game theory of that as well. Right?

It means that a lot of nation-states have probably adopted Bitcoin and they have a stake in Bitcoin and they care about Bitcoin. You could almost imagine a sort of sci-fi future where one nation-state sit drops bombs on the mining facility of another country that’s trying to attack Bitcoin because they have a stake in Bitcoin. The US for instance, might have Bitcoin as its reserve currency and China is attacking it, so they go drop bonds on the mining facility in China. So the game theory is much more complex. We need to think about stakeholders. We need to think about how individuals in these countries will react who own a lot of Bitcoin. Like imagine the United States government decides we want to attack Bitcoin, but all of the large financial institutions have a massive part of their savings in Bitcoin. Are they going to allow that to happen? Would they just sit by idly. From a theoretical model, it’s interesting. But in reality, people are going to lobby, and people are going to put political pressure. And this is going to be true at the nation-state level as well. Political pressure can come in various forms. It can come through military might, it can come through lobbying. So the game theory is quite complex, and Justin’s bringing up a very interesting theoretical model, but we need to sort of expand our scope here.

If we are talking about the case where Bitcoin has become so big, that it’s the reserve currency of the world, yet the block subsidies decreased to a very low level, to mostly transaction fees. There are two things that are to the security budget versus the adoption. And does the adoption itself provide protection? The fact that people have the financial stake in this? Imagine, for instance, like the politicians in the US try to ban 401ks. Outright, just banning them and saying all your 401ks are confiscated. What do you think would happen? You’d have riots on the street in America. So that’s certainly something I think we need to consider here as well.

Laura Shin:

If it gets to the point where a nation-state does feel the need to 51% attack Bitcoin, then it’s like they already lost at that point.

Vijay Boyapati:

Well, there is one other thing I want to bring up. Justin and I have spoken about this a few days ago. I think it’s important to understand that there is a nuclear option here as well. Bitcoin has a proof of work function, which is SHA 256. It’s a sort of formula that is used by miners to calculate whether they’ve got the right pattern to win the block reward. Under extremely grave situations, it would be possible for participants in the network to say, we want to change our proof of work function. What would that do to an attacker? Every machine that they had bought, all of the electricity that they’d put into attacking the Bitcoin network, would instantly be worth nothing. They would wipe away the value instantly. So you need to think about the participants in the network as well.

People who have a stake and who would say the value of our Bitcoins are being attacked. What can we do? We can change the proof of work function. That’s a nuclear option, which would be very contentious, because that is a fundamental building block of Bitcoin, but in an extreme situation, you could imagine something like that happening. You could also have people in the network just rejecting a particular chain. If you have a chain split where you have an attacker trying to double spend and building their own chain, each individual node can say, I am not going to accept this chain. So you have this internal game theory as well. What do people who are stakeholders do when there is an attack? That’s the part which I think is not really being brought up or thought about. And it’s very complicated because we don’t know exactly how that would work. People behave in all sorts of crazy ways. And we saw in the Bitcoin block size war that happened in 2017, there was all sorts of crazy game theory where people like the miners were saying, look, if you keep mining the legacy chain, we’re going to try and kill your chain. We’re going to use our hasht power to kill your chain. And it wasn’t clear what exactly would happen. So there’s a lot of complexity to think about. We need to focus on the stakeholders as well.

Laura Shin:

Okay. So in a moment, we’re going to get Justin’s response to this, but first, a quick word from the sponsors who make this show possible. Crypto.com:

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Laura Shin:

Back to my conversation with Justin Drake and Vijay Boyapati. Justin, what’s your response?

Justin Drake:

Okay. So I have a few thoughts. The first one is that I agree with Vijay that we should be looking at skin in the game. If you have a government, for example, that wants to attack Bitcoin, we need to understand how invested they are in Bitcoin. Now it turns out that there’s going to be some nation-states which are maybe overweight Bitcoin and some nation-states, which might underweight Bitcoin.

So just to illustrate what I mean by overweight, underweight, let’s imagine, for example, that Bitcoin is 20% of the world economy, but that in a specific country, for example, like China, it’s only 1% of China’s economy. In that situation, China will be underweight Bitcoin. And it’s not implausible for China to be underweight Bitcoin in 20 years. Why? Because they’re preventing banks from dealing with Bitcoin. They’re preventing exchanges from dealing with Bitcoin. They’re preventing miners from dealing with Bitcoin. The trend is pretty clear that they don’t want Bitcoin to be a large part of the economy. So they want to be underweight Bitcoin. In this situation, they have relatively low skin in the game, and they actually have an incentive to go attack Bitcoin, because they’re essentially short Bitcoin.

Vijay Boyapati:

There is a bit of game theory here to adoption as well. I think if you look at the gold standard, you can say, look, we don’t want to be on the gold standard. But eventually there’s a massive financial disincentive to not be on the global standard. You know, in the 19th century, eventually everyone adopted the gold standard because by not being on it, and when everyone else is using it, you’re harming yourself and your own nation. Some nations will try to pursue a path of autarky, which is like completely enclosed having a closed economy, doesn’t interact with anyone. There are massive economic cost to that. My view is that Bitcoin will eventually become the world reserve currency because it has the properties that make it suitable as a world reserve currency. The nations that are last in line might be upset because they didn’t get the biggest benefit from jumping on Bitcoin early on, but they’ll just inevitably have to adopt a Bitcoin if they want to be part of the global market.

Laura Shin:

I agree with Justin that they could, it, China is a good example of simply because of how long they’ve resisted the normal internet. I could actually see two scenarios. One would be that they would attack Bitcoin because they don’t have it and other countries do and it’s nothing off their back if they attack it. But I could also see that if they do want to unseat the US dollar as the global reserve currency, then actually maybe they would start to suddenly embrace it. So I actually could see it going both ways. But anyway, Justin, did you want to continue with your response?

Justin Drake:

That’s one aspect, trying to look at skin in the game. Your response Vijay, is that it harms them to not have skin in the game. But that’s based on the assumption that Bitcoin will be the winning monetary shelling point for the internet. The whole reason why we’re having this discussion is maybe to put that to the test, because if you want to be the monetary shelling points for the internet, you need to have predictability. And as such, you need to have predictable security for decades and centuries to come. And this is not something that Bitcoin provides out of the box.

The other point that I wanted to make, besides skin in the game of governments, is that this is not only a game of governments. Attacking Bitcoin is a game that is to individuals right now. It would be rich individuals, but individuals nonetheless. So we could look for example, at Elon Musk. He has 50 times the budget to go attack Bitcoin single-handedly, this is one single entity. You could look at large entities like, like MicroStrategy, right? MicroStrategy have over a hundred thousand Bitcoin, and they have no plans to sell them. It’s accumulation only. And so maybe in 20 years, they might have 200,000 Bitcoin. That would be 20X, the annual issuance.

If for some reason or another this one entity is compromised, maybe they were hacked, maybe they were pressure by some government, or whatever it is, then they would have multiple times the budget to go out to go attack Bitcoin. So this is not just a game for nation-states. It’s also a game for large individuals.

Then another point that Vijay put forward is that we always have the nuclear option to replace proof of work. And I don’t think that’s true. I think this is a flawed kind of argument. Tthe reason is, is as follows, if you were to replace a proof of work, what would you replace it to? You don’t have time to go build another proof of work system that’s based on ASICs. That’s a maturation process, which in the case of Bitcoin, it took many, many years. So you have to resort to basically proof of work on commodity hardware. Now, what type of commodity hardware do we have? We have basically three types. We have CPUs, GPUs, FPGAs that you can just go buy off the shelf and use for proof of work.

Now, let’s assume that it’s one of these three. It doesn’t really matter. Let’s assume it’s GPUs. That’s not going to be sustainable defense in the sense that the attacker has now just simply has to buy whatever it is, $10 billion of GPUs, and now they can go attack a Bitcoin. And now you could, you could think to yourself, ah, we could do the nuclear option another time. Then could change proof of work another time, but what are you going to move to? You no longer have the ASICs. You no longer have GPUs. So now your gonna have to go to CPUs and then you might do it again, and FPGAs. But now you’ve run out of options. You’ve covered all your commodity hardware and there’s nowhere else to go to go hide in terms of changing the proof of work.

Vijay Boyapati:

Well, you have to think about the context in which this argument is being made, where Bitcoin is widely adopted and switch the proof of work function. Everyone who has Bitcoin is a stakeholder, suddenly switches to mining on their computer. And so you have millions or tens of millions of computers on commodity hardware mining, and somehow this attack needs to accumulate that number of computational power that’s being used by all of the stakeholders of Bitcoin who want to defend the network? It is again something which isn’t like something you can do immediately. Like an attacker can’t instantly accumulate tens of millions of computers and put them into a mining facility and start attacking again. I think that’s very, very implausible.

Justin Drake:

No, I think the model that you’re putting forward is implausible. So there’s basically three types of models like that you could try and put forward when you look at Bitcoin security. There is the honest majority. So what that means is that basically you have the majority of the network which is honest. Generally this is not seen as a realistic model. And so you, want to go to the rational majority. So the the rational majority will only mine to defend the Bitcoin network if it’s financially rational to do so. But the thing is, it’s only rational if the cost of doing the mining is smaller than the rewards that I get.

But the whole context of this discussion is that we have low issuance and we have totally unpredictable fees and potentially extremely low fees during bear markets. And so there will only be so much mining power that will be rational. And so what are you assuming is you have altruistic miners, so miners that are willing to pay to secure a common good. And the problem with common goods is that you have the tragedy of the commons. And you can’t just assume that people will altruistically burn tens of millions of dollars every day to secure a network, for which the action of doing so it doesn’t benefit them directly. It only benefits this common goods where we have a tragedy of the commons.

Laura Shin:

Yeah. And even just on a coordination level, coordinating millions of people to do something is like really, really difficult. But anyway, Vijay, what were you going to say?

Vijay Boyapati:

I want to also talk about another part of Justin’s argument that I have a bit of a problem with, which is the idea that Justin’s done a historical analysis of a transaction fees over time as the block subsidy has decreased and it hasn’t dramatically increased. I think it’s to understand Bitcoin’s path to becoming the global reserve currency, because I think that plays into it as well. People’s usage of Bitcoin now isn’t what it will be in the future. There is an evolution of money where money goes from being, and I talk about this in my book, it goes from being a collectible to being a store value, the a medium of exchange, and eventually a unit of account. This is a big misunderstanding a lot of people had when Bitcoin was first created. They thought, oh, this is a medium of exchange. We should be using it for buying and selling things in commerce. And they were really confused why no one wanted to do that.

So part of the reason, I believe, that we don’t see a really large increase in transaction fees right now is that Bitcoin is transitioning through this phase of becoming a store of value. It’s a nascent store of value, and people largely use Bitcoin as a means of savings. They don’t move it around very much. I think this is going to change over time. I think, eventually, Bitcoin is going to become more of a medium of exchange. And as it does, we’re going to have much more movement and much more transaction fees. Ultimately, though, I think most medium of exchange usage is going to happen on second layer networks. What Bitcoin at the base layer is going to be used for settlement between banks.

So large financial institutions are going to settle with each other on a daily basis. So JP Morgan and Citibank, for instance, will settle $3 billion worth of Bitcoin on a daily basis because their customers are sending funds back and forth and they’ll have some difference in balance and they’ll settle with each other on the blockchain. Once we get to that stage, I think the fees that it can be used on the Bitcoin network are going to be much, much higher. This is under what I think will be a Bitcoin global reserve standard. And I think we could easily see Bitcoin fees in the thousands or tens of thousands of thousands of dollars because people are settling very large amounts of money. And I think the demand for the block space will be much higher in the future than it is now, which is going to drive transaction fees.

I don’t think the historical analysis is, you know, what they say in the stock market: past performance doesn’t guarantee future returns. I think past transaction fees for Bitcoin doesn’t necessarily predict what the transaction fees are going to be in the future. And I think that really is because of the stage of monetization that Bitcoin is in: primarily a means of holding savings. And Justin’s talking about how the fees go up during bull markets and go down during bear markets. This again is part of the process of monetization. It happens. We’ve kind of learned. We’ve never seen this before, by the way, we’ve never seen a monetary good being monetized in real-time in the space of like a few years or a few decades. The process of monetization for gold took millennia, and we’ve seen some very compressed timeframe.

And what we’ve learned is there are all these hype cycles. And I agree with Justin that the transaction fees increase during the boom phase or the parabolic phase of the hype cycle, because people are just trading back and forth in this speculative frenzy and using the block space just to move to exchanges. But that won’t be true in the future. These hype cycles are going to diminish in magnitude, as Bitcoin becomes more widely adopted. We’re not going to see a hype cycle in 20 years from now where Bitcoin drops 90%. As Bitcoin gets to the market capitalization of gold and surpasses it as I believe it will, it’s volatility will be commensurate with the volatility of gold and eventually decrease below that volatility. So the model that we’re thinking about is like a sort of looking in the rearview mirror. It’s not looking forward. To look forward, we need to think about how will Bitcoin be used, what implications will that have on transaction fees? How much demand would there be for block space? And I think all of those things are gonna change very dramatically as Bitcoin becomes adopted by financial institutions, by nation-states, by wealthy individuals. It’s going to change a lot.

Laura Shin:

Justin, what’s your response?

Justin Drake:

Yeah. So I guess my first response, which is kind of qualitative, is that it is, for me, at least as a kind of a designer of blockchains as it were, it’s unsatisfactory to have the security of the blockchain rely on something which is unpredictable. And it’s almost as if Bitcoin is assuming the best possible case for Bitcoin, like it’s going to be money for the internet. And in that situation, with these very large transaction sees, then maybe Bitcoin can be secure, but that is quite a bit big if, right. But I’m happy to make that assumption. I’m happy to put aside the past, which is the past and which doesn’t predict the future. I agree with that. And just assume the best-case scenario. So let’s assume that the Bitcoin asset is worth a hundred trillion orders.

Now let’s say that we want to have a security factor of 1%. 1%, by the way, is smaller than the current security factor, which is at 1.6%. Because there’s only so many transactions that the Bitcoin network can do every year because of the block limits, which is fairly small. It turns out you can only do roughly a hundred million transactions every year on Bitcoin. And so to achieve this 1% security factor, as Vijay said, you actually need $10,000 average transaction fee. Now $10,000 is an insane amount of money to do one single transaction, even in the context of settlement. Now, one of the reasons is that there are ways to settle other than doing a transaction on the layer one Bitcoin blockchain. And if you have two ways of settling, and one is significantly cheaper than the other, then you will go with the cheaper one.

That’s just a rational aspect of the model that we have, the rational players. Now, let me give you know an example, right? You have a lightning channel, right? When you make a transaction and settle some amounts on the Lightning Network, that doesn’t accrue fees to the Bitcoin network, or you want to settle on the Liquid Network, or you want to settle, for example, WBTC on Ethereum, there’s various other ways to settle then to use the layer one. So I think there’s basically three big assumptions assumption. Number one, Bitcoin will take over the world. Assumption number two, even if there was no alternative to settling, and the only way to settle a Bitcoin was using layer one, these institutions would be willing to pay $10,000 per transaction, which is questionable. Three, that there’s no competition to the settlement of Bitcoin. That I don’t think is as true.

Vijay Boyapati:

I think there’s a disagreement of terms. I mean, I think the difference there is a huge difference between payment and settlement. Like using the lightning network to do a payment is not the same thing as settling Bitcoin. Settlement of Bitcoin is having confidence in final possession of the Bitcoin that you think you own. Financial institutions in the 19th century, when they were under a gold standard, they have customers paying back and forth with pieces of paper, but that didn’t mean that they believed they had the gold. They had the gold when they settled the gold, when the gold entered their vaults and they had the gold. The equivalent for Bitcoin is settlement on the blockchain. Like lightning payment is definitely not a form of settlement.

Justin Drake:

I would disagree. When you like the Lightning Network is designed in such a way that receiving X amount of Bitcoin through the Lightning Network is essentially the same as receiving the real thing. It is designed to be trustless. There is this one assumption that basically the base layer is censorship resistant. Butif you have that layer, which you need in order to have this monetary status, then the Lightning Network is designed such a way that Bitcoin that you receive is as good as the real thing. And so transactions on lightning are effectively settlements, at least from a security standpoint.

Laura Shin:

I mean, the one thing I will say about what Vijay said was the idea that Bitcoin will be a settlement layer for big banks. I think it just means like we’re sort of in the same system we are now where we’re all bank customers. It’s almost like nothing changed at least from the user point of view.

Vijay Boyapati:

I think I would disagree with that. I think that something very important change, which is that the money is not owned or controlled by any government and can’t be inflated. That’s a very, very different to what’s currently the case, which is banks settling with each other using dollars, because the underlying monetary system that’s being settled on is very easily politically coerced, very easily inflatable. This is where I think the biggest impact of Bitcoin will be. Is that it is a new monetary standard that can’t be inflated, and it can’t be politically manipulated. The fact that we have a financial system on top of it, I think is inevitable. And Hal Finney, the guy who received the very first Bitcoins from Satoshi, wrote about this all the way back in 2010. He said we need second layer systems. We need banks on top of Bitcoin, because Bitcoin is designed in a way that it’s very hard to change.

And Satoshi wrote about this a long time ago as well. He said, well, as soon as Bitcoin version 0.1 was released, it was set in stone. It’s designed in a way that’s very, very difficult to, to change. And that’s a good thing because we can rely on Bitcoin’s inflation schedule. We can rely on the fact that there’s only going to be 21 million Bitcoin. If it was easy to change, as I think it is very easy to change a whole most altcoins, I would have no trust in their inflation schedule.

I don’t think the fact that the financial institutions that are built on Bitcoin look somewhat similar. I think there’ll be big differences. For instance, they would be using lightning instead of using the Federal Reserve. That doesn’t mean that the change isn’t profound. It is very geopolitically profound to have a different monetary base, which is nonpolitical and non inflatable.

Laura Shin:

And, but then when you said, like, it’ll be JP Morgan settling, will I, as a customer of JP Morgan, will I be transacting in Bitcoin on my end, or will I still be using dollars?

Vijay Boyapati:

You will probably be using the Lightning Network and you will be connecting with some node operator on the Lightning Network. And that may be JP Morgan. It may be someone who’s currently building out their lightning node. I hope it’s not JP Morgan, but yeah.

Laura Shin:

Justin, I think you wanted to respond.

Justin Drake:

I think Vijay is heavily downplaying the lack of self custody. I see it as as very problematic for Bitcoin. I mean, in a similar way that a lack of easy self custody for gold didn’t turn out so well for gold, right? Gold has all the properties that that Vijay was talking about. It can’t be controlled by governments. It can’t be inflated away. And yet gold hasn’t really succeeded in modern society. And part of the reason I believe is because it’s difficult to self custody gold. And so what happens is that you have banks, right? You have these financial institutions, just like the future that VJ is talking about. And the problem is that these central entities now become pressure points, right? So they become pressure points for, for governments to start coercing.

One of the beliefs of the Ethereum community is that you can only achieve true resistance to corrosion from governments if you remove these custodians and you have self custody of your assets. Another thing that Vijay talked about is that you can rely on the 21 million limit. And actually, I think this is an illusion, a dream. I think it’s a meme that has weak fundamentals. And the reason it’s a meme with weak fundamentals is precisely because of the topic of today’s discussion, which is security. If you have an asset which is insecure, then its basic livelihood is is jeopardized. What I foresee is the situation where there’s going to be two Bitcoins, like the unsustainable Bitcoin from a security standpoint, will continue on living.

And then there might be a group of people who say, hey, we’re going to fork out the 21 million limit. We’re going to have sustainable Bitcoin market forces will come at play. The unsustainable Bitcoin will likely die off because it’s insecure. And then the the sustainable one will be the next best thing that we can because we don’t live in an ideal world, and we can’t always have the dreams that we dream. And so in that situation, where the sustainable Bitcoin wins out, you’ve effectively been debased. There’s the saying that fate loves irony. The Bitcoin philosophy is to try and be as ossified as possible kind of for the sake of ossification. But it’s quite possible that the premature ossification the Bitcoin network will lead down the line to a necessary change. And so Bitcoin, in that sense, has sacrificed long-term predictability for the benefits of short term predictability. In the short term, we can predict what will happen. But at some point, things become so unsustainable that something has to change. And one of the easiest things that could change is simply removing the 21 million limit.

Laura Shin:

Wow, and in that instance, would it then become just a perpetual issuance or is that what you would propose?

Justin Drake:

I think 1% tail issuance is a pretty good design, as it provides a guaranteed security factor. And this is something that I believe other Bitcoiners, I think this is Vijay told me this, it’s one of the things that Peter Todd thinks, not that I agree often with Peter Todd, but in this specific instance Peter Todd wished that Bitcoin from day one had this tell issuance to provide guaranteed a security factor.

Laura Shin:

Vijay, do you want to give one last response? By the way, you guys, I had like so many questions and we didn’t even get to it all. I think we hit on most of the topics. There’s just so much to it, but there is one last question I do want to ask after Vijay gives his last response.

Vijay Boyapati:

I don’t want to get too wedded to this idea. I think part of Justin’s response to the financial institutions was like, oh everyone’s going to be using JP Morgan. I mean, it would look very different. There would be far more financial institutions and then would still be in some individuals who did self custody Bitcoin. But if you look at it mathematically, it’s simply not the case that everyone is going to own on chain Bitcoin. It’s just impossible. There are 8 billion people. There are 21 million Bitcoin. A person owning that tiny, tiny fraction of a Bitcoin is not going to be able to transact that Bitcoin. It’s just not going to work. So some very large fraction of the world’s population is going to own Bitcoin through custody, through a different kind of financial institution, a much smaller, I think, financial institution, they will interact with someone who’s on the Lightning Network.

The other thing is I think Bitcoin is not going to change the 21 million supply limit. I don’t think it’s ever going to happen. I think Bitcoin is treated much more like a protocol than as a piece of software. I think Ethereum is treated more like a piece of software then as a protocol. And the difference is with protocols, immutability is incredibly important. I’ll just give one quick example. There’s a protocol for power sockets in the United States, which is the shape of the power socket and all the devices that use it. You do not want to change that protocol. You don’t want to change the shape of the power socket because everyone who’s using that power socket is suddenly unable to use it. You can make backward-compatible changes. So, for instance, with power sockets in the US, there didn’t use to be a ground.

They added a ground, which didn’t make it so that all the devices which use the old power sockets couldn’t use them anymore. So Bitcoin has this philosophy. It’s a value transfer protocol, and it’s incredibly important to stay backwards compatible. It’s very strongly ingrained into the culture of the community. I think if you embrace a different culture where, oh, we can just change the protocol whenever we want, the trust in the protocol, that you can build on the protocol, is severely undermined. And the properties of the protocol. Ethereum, for instance, has made that so-called ultrasound money by changing the issuance of Ethereum. I think this only proves that Ethereum issuance can be changed and could potentially be changed in the future if enough people in the Ethereum development community became Keynesians and start subscribing to Keynesian economics and said, well, we need really good inflation here because we believe that it’s required for growth, then that could happen. But I think that’s a big difference. And I think that’s one of the reasons that Bitcoin is not going to change. It’s this belief that it’s a protocol. Not that it’s a piece of software.

Laura Shin:

Okay. So I’m glad you brought up Ethereum, because this was the last question I did want to ask. Justin, you said in the last show that we did, that you felt Ethereum was the fulfillment of Satoshi’s vision. And as I’m sure we all saw on social media, that was a very controversial statement, to say the least. I mean, I knew it at the moment. I was trying to wrap up the show, so I didn’t want to go there at that time. But can you explain what it is that you mean by that?

Justin Drake:

I regret using the term Satashi Vision, because there’s literally a project called Satoshi Vision, and I didn’t mean to like align myself to that project. After the show, one of the things that I did, I tweeted Satoshi’s very first commit, right? So we have a very good record of Satoshi’s very first piece of public code for Bitcoin. And one of the things that you’ll find, and this is not at all kind of obfuscated or hidden in any way. In the code Satoshi was thinking of building a marketplace on top of Bitcoin. Now when you want to build a marketplace, you basically use money as one of the lego blocks. But you are going to need many other decentralized lego blocks in order to get a marketplace running.

You’re going to need a decentralized identity. You’re going to need decentralized escrow contract. You’re going to need decentralized stablecoins. You’re going to need a decentralized reputation. You’re going to need decentralized file storage. There’s lots and lots of things that you weren’t going to need to build in order to get a decentralized P2P marketplace, which was the vision of Satoshi, literally in the code, the very first commit, that he put forward for Bitcoin. Now, unfortunately Bitcoin has become, well, maybe not unfortunately, but the the fact of the matter is that Bitcoin has become digital gold. Now, gold is this very interesting asset. It’s literally a rock or shiny rock that you spend a ton of energy to get out of the ground, dirty ground. And then you just put it back in the ground, just in the vault of some bank. It’s kind of this somewhat crazy concept, but that that’s what money is.

But the thing that’s a little bit disappointing is that it’s not a lego block in the sense that the idea of Bitcoin is that you hold it in a vault for decades, and you just don’t touch it. You just look at it. It’s shiny. And you enjoy just looking at your pet rock. In the context of Ethereum, we are trying to build these money legos.. That’s literally what we call them. And we want to stack them together, and we want to build cool stuff such as decentralized peer to peer marketplaces. And by the way, this is part of the reason why I was working on OpenBazaar. I felt that this was part of Satoshi’s vision and I wanted to  help out. It turns out that I was maybe 10 years too early, right?

All the building blocks were not there. We had escrow contracts with Bitcoin scripts. We had Bitcoin, but we don’t have many of the things like stablecoins and reputation and identity and all these other things. So, yeah, long story short, I see the opportunity kind of this total addressable market, for blockchain technology, to be maybe a 100X larger than this digital gold aspect, which is interesting, but in the grand scheme of things is kind of missing the big picture and missing the wider opportunity.

Laura Shin:

Hmm. And Vijay, what do you have to say about that?

Vijay Boyapati:

I think Ethereum is a big experiment. As a computer scientist, I think it’s doing something that I think is actually not possible. I think the the saying smart, sexy, sane, pick two, I think there’s an equivalent for blockchains, which is decentralized, Turing complete, and scalable. And I think that Ethereum is trying to be all three, but one of them is going to fall apart. And I think the thing that will fall apart with Ethereum is the decentralized aspect. I think there’s another problem with Ethereum. It is sort of taking this approach: this is cool software we can upgrade and we can add all of this stuff. Anyone can do that too, if it’s a piece of software. If it’s not something that’s immutable, where you can trust it, and you believe that it’s something you can store value in, you have these other projects coming along saying, oh, we’ll just copy the things that and add all this new stuff.

If you’re Ethereum, and you’re trying to make a change to help the scalability…. because Ethereum right now is almost unusable. The fees on Ethereum. If you worry about fees. I don’t worry about fees as a settlement system, but I worry about fees if I’m trying to do these tiny smart contracts. The fees on Ethereum are insane right now. So you have these other platforms coming along like Solana saying, look, we can do the same thing with way, way cheaper fees, and we can scale way faster than this and we can do all these new things. It’s very hard to change something like Ethereum when it’s at scale. It’s like changing a plane that’s flying and taking the engine out while it’s in mid air and changing the engine. So they’re trying to do this kind of thing. And they’re trying to make Ethereum scalable at the same time as allowing it to do all of this stuff.

I think at best, it’s an experiment. I think it’s an experiment that is very unlikely to succeed because I do not believe it’s possible to have these three attributes at the same time: decentralized, Turing complete, complete, and scalable. Justin is working on this, Justin. Just from speaking, he is an incredibly smart person. I commend the efforts of people who are working on this thing. It’s worthy of effort. I just think it’s a doomed to failure.

Laura Shin:

All right. Well, we’re well over time. And I feel like this conversation could have gone on a lot longer. As I said, there’s just so much we didn’t even discuss that I had on my list, but maybe we’ll revisit this because this is a kind of perennial topic. I remember learning about this potential issue back in 2015, when I first started learning about Bitcoin. And I was like, I know I’ve said this before, but I was thinking, oh that’s going to happen in 2140 and I won’t be around to see it. And I wanted to know how it would turn out. But apparently, Justin thinks that it’ll happen in a couple of decades, so maybe I will get to see what happens. People are constantly writing pieces on this issue and talking about it. So I think maybe we could revisit in the future. But in the meantime, you guys, this was super fun, very thought provoking. And for each of you, why don’t you say where people can learn more about you and your work?

Justin Drake:

Sure. Happy to go first. You can find me on Twitter: @drakefjustin,

Vijay Boyapati:

You can find me on Twitter as well, @real_vijay, and you can find my book, wherever books are sold.

Laura Shin:

Perfect. All right, well, thank you both so much for coming on Unchained.

Laura Shin:

Thanks so much for joining us today to learn more about Justin, Vijay, and the issue of whether Bitcoin can be secured by transaction fees only, check out the show notes for this episode. Unchained is produced by me, Laura Shin, with help from Anthony Yoon, Daniel Nuss, and Mark. Thanks for listening.