Where does the 33.33% threshold for selfish mining come from?

In discussing the transition from rewards to fees within Bitcoin mining, a significant observation emerges regarding the inflation issue and its relation to mining dynamics. The inflation concern traditionally stems from the fact that increasing the rate of block production allows miners to access a larger portion of the total 21 million Bitcoin supply ahead of schedule. For example, if miners were to manipulate the difficulty algorithm to produce a million blocks in a timeframe where only 50,000 were expected, this would theoretically result in the distribution of approximately 1 million new BTC, significantly deviating from the projected addition of 156,000 BTC over 350 days.

However, as the system transitions from mining rewards to transaction fees, this dynamic shifts. The primary distinction lies in how block production rates affect transaction space rather than direct BTC issuance. In an environment dominated by fees, producing 50,000 blocks offers 50 gigabytes of transaction volume (GvB), while a million blocks would provide one terabyte of volume (TvB). The financial outcome for miners—whether this results in increased or decreased revenue—depends on how fee rates respond to the substantial change in transaction space availability. If fee rates remain stable, miners could potentially see a 20-fold increase in revenue. Conversely, if fee rates plummet by a factor of 100, their revenue could reduce to merely 20% of its original value.

This nuanced shift from reward-based to fee-based incentives introduces a complex interplay between block production rates, transaction space, and miner revenue, contingent on market reactions. The potential for manipulating the difficulty algorithm to enhance transaction throughput without directly inflating the currency supply was explored in detail during the Forward Blocks presentation at the Scaling Bitcoin 2018 conference. This discussion underscores the evolving landscape of cryptocurrency mining economics, highlighting how changes in the underlying incentive mechanisms can profoundly impact both the blockchain's operational dynamics and its economic equilibrium.