Security budget

When discussing the block subsidy, we learned that the block subsidy serves two primary functions:

1. Implementation of Bitcoin’s monetary policy, as the mechanism by which the supply is fairly distributed to the network on a predetermined release schedule.
2. Provision of ample incentive to miners to commit computing power to mining new blocks during bitcoin’s adoption phase, before a robust fee market for including transactions in blocks has been established.

Here we’ll discuss point 2 – Bitcoin’s security budget.

Since the total computing power (hashrate) honest miners are committing, in aggregate, to mining new blocks serve as the hurdle which malicious actors must overcome to 51% attack the network, the block subsidy effectively “subsidizes” Bitcoin’s initial security budget.

Around the year 2140, the last satoshi will be released and the block subsidy will fall to zero. At this point, the only revenue bitcoin miners will receive will be from fees paid by users to add transactions to the bitcoin blockchain.

Assuming mining remains an open and competitive free market, the cost of mining a new block should converge to the reward for mining a new block. As such, in the long-run, when the block subsidy drops to zero, Bitcoin’s “security budget” (i.e. cost to mine a new block) will converge on the value of the transaction fees included in each block. 

Some worry that when this happens, the block reward, now composed solely of transaction fees, will be too small for miners to cover the cost of the energy that is currently being deployed by miners. In response, miners will be forced to reduce costs by decreasing hashrate deployed to the network, and/or increase revenue by selling their energy supply to a higher bidder than the Bitcoin network. The end result would be that total network hashrate falls, reducing the cost of 51% attacking the network, and thus reducing Bitcoin’s “security budget,” perhaps to a dangerously low level.

This theory has caused a lot of consternation among the bitcoin community and been a constant source of fear, uncertainty and doubt (FUD). Some have argued that this dilemma ultimately means that bitcoin monetary policy will need to be amended to provide for an eternal block subsidy in order to maintain network security, inflating the supply beyond 21 million. This is known as “tail emissions.”

This theory, however, does not hold up under scrutiny.

For one, it assumes a static state of the Bitcoin network in terms of the bitcoin price, adoption, and usage. It assumes that the demand for bitcoin blockspace (i.e., the demand to make a transaction on the base chain) will not increase over time, which would result in more sats/block in fees. It also assumes that the $ price per bitcoin will not increase, which would assign more value for a given amount of fees as measured in sats.

And, these assumptions might prove to be true! But that would mean that bitcoin stagnated in its growth, and never gained adoption nor new use cases beyond today’s state of affairs.

But what if it does?

What if bitcoin does continue on its trajectory of growth from the last 15 years? What if more people adopt it? What if the price goes up? What if the demand for blockspace increases?

Clearly, under different assumptions of the continued future growth and success of the bitcoin network, it is easy to also assume that the fee market matures to a level where it provides more than enough security budget for Bitcoin; indeed, potentially orders of magnitude more than we empirically observe today.

And what do we empirically observe today, anyways?

As of March, 2024, bitcoin is secured by approximately 590 EH/s (exahashes per second). A “hash” is a single attempt at solving the Proof-of-Work math problem required to mine a new block. One exahash equals one quintillion hashes.

This means that, in aggregate, bitcoin miners are deploying enough compute to make 590,000,000,000,000,000,000 attempts at solving the PoW per second.

590 EH/s is likely about equal to or greater than the total sum of the rest of the world’s computers if they were to flip a switch and start mining bitcoin today. This is because bitcoin mining ASICs (application specific integrated circuits) are about 2,000 times more efficient at solving PoW math problems than CPUs or GPUs.

And how much energy is needed to perform all those computations?

Global bitcoin mining electricity consumption is projected to be around 140 terawatt-hours (TWh) in 2024.

That’s more than the US Department of Defense at 117 TWh.

Global data centers consume about 200 TWh of electricity annually, to power the global internet.

The UK consumes about 300 TWh of electricity annually.

So, to put it in perspective, what’s currently securing the Bitcoin network?

The sum of the rest of the world’s computing power combined with half of the energy needed to power the entire UK for a year.

And it’s only going up: