bitcoin-dev

ossification and misaligned incentive concerns

ossification and misaligned incentive concerns

Posted on: November 7, 2023 12:24 UTC

The recent discussion highlights the critical challenges facing Bitcoin's economic model, particularly in light of its fixed supply and halving events.

The system initially thrived due to its expansionary phase, enabling stakeholders to weather high inflation rates. However, as Bitcoin approaches system saturation, the flexibility to navigate economic shifts diminishes, raising concerns about the rigid transition from high inflation to zero inflation with each successive halving.

This inflexibility leads to a contentious environment where different user groups within the Bitcoin ecosystem have conflicting interests regarding who should bear the costs of network security. Historically, stakeholders have favored having transactional users foot the bill, while those users prefer that stakeholders cover these costs. This longstanding tension has been further exacerbated by the introduction of services like Ordinals, which increase transaction fees and provoke debates over transaction censorship.

The hard cap of 21 million bitcoins is criticized for being a detrimental oversimplification that exacerbates existing issues rather than addressing them. As the community acknowledges the problem—"Houston, we have a problem"—the focus tends to be on the meme itself rather than the underlying issues it represents. The disproportionate burden placed on active users to subsidize network security cannot be sustained indefinitely, especially when it allows passive users to benefit without contributing.

Additionally, the looming threat of quantum computing necessitates proactive measures to ensure Bitcoin's long-term viability. A proposed solution to address both the quantum threat and the economic model's shortcomings is a conditional delay of the halving event. By extending the halving period by an additional four years in the event of a network regression lasting the same length, the market would gain an element of unpredictability, discouraging passive users from becoming free-riders. Moreover, this approach ensures backward compatibility between new and old code until a critical event triggers the need for change.

Ultimately, such a critical event—indicated by a network regression caused by early halving and exacerbated by subsequent ones—could signal the end of Bitcoin's value proposition as a store of wealth, an outcome that must be prevented to preserve the future of Bitcoin as envisioned by its supporters.