How to Sustain Bitcoin without Fees or Inflation
The Bitcoin network is secured by mining, which consumes electricity. That means there is a real-world cost to keep the miners running, which must be paid for somehow. Currently, the Bitcoin network mints new coins in order to pay miners, in the form of a fixed reward in every block. This has worked fine for the first decade, but since the mining reward is set to gradually decrease and eventually stop at 21 million coins, we’ll eventually have to find another way to pay for the network’s security.
People typically respond to this issue with two strategies: fees or inflation.
Fees: Since every Bitcoin transaction pays a fee to the miner who puts it in a block, we can imagine this stream of revenue eventually growing to sustain miners’ power costs. However, this means either the cost to send a transaction would go way up (a “fee market”, limiting who can transact) or the blockchain would grow to include tons of data (“big blocks”, limiting who can run a node in the network). Fee revenue also isn’t guaranteed as there are emerging technologies which reduce the demand for on-chain transactions, e.g. the Lightning Network or sidechains.
Inflation: Bitcoin could be hard-forked to have new rules which would throw out the existing 21 million coin limit and continue to mint coins for miners, say, an additional 2% per year. This would be tricky since hard forks have been shown to be difficult to coordinate in Bitcoin, and it weakens trust in the currency since the whole point is that the rules are immutable and there is a known, limited supply.
Since the default state is to continue running as-is, what will happen? Will miners eventually turn off their machines since they can’t make a profit, lowering the security of the network? That would open up the chain to be 51%-attacked, causing BTC-holders to exit the unsafe currency, lowering the profits of miners even more, and repeat, in a so-called “death spiral” that could kill Bitcoin sometime in the next decade or two.
There is a third way to pay for the mining costs. It would let people mine with no extra cost, and it’s distributed across the world population. Mining creates a byproduct, one that almost every human needs and already pays for: heat.
If you mine to heat your house, the hashpower is free. The cost of providing a secure hashrate can be subsidized by the world’s existing demand for heating. If every home which was already paying for electric heating was generating that heat with mining rigs instead of simple heating elements, not only would they pay a little less to heat their house, the Bitcoin network would stay secure. Amazingly, this would not even increase anyone’s power bill assuming they already use electric heating (however if gas heating is cheaper for you, or you live in a warm place and don’t need to heat your home, this doesn’t apply).
Residential heating scales the Bitcoin network far enough to be secure: Bitcoin currently consumes an estimated 51 terawatt-hours of electricity per year through mining, whereas electric heating of homes in the US consumes an estimated 207 terawatt-hours. This 207 Twh figure only covers space heating in the US (a mere 4% of the world population), so extrapolating for the rest of the developed world, plus all commercial and industrial demand for heating, we can see that this source of “free energy” can be scaled very far.
Even though it won’t be profitable to mine, you get the heat you were already planning on paying for at the same cost, plus the addition of some nonzero amount of Bitcoin revenue. Heater-miners will never have to be shut down due to an increased difficulty.
In my experience, people are skeptical about this idea so let me address the common criticisms I’ve heard:
This covers the marginal costs of mining, but we still have to worry about the capital costs of buying hardware. You might not break even if you buy mining rigs for your home.
Hardware costs will be viable in the long-term - Moore’s Law is ending so chips will only get cheaper.
State-of-the-art mining ASICs made by Bitmain use 7nm transistors. That’s really small. Silicon atoms are only 0.2nm. While we’re not quite maxed out yet, the amazing manufacturing technology of the human race has come many orders of magnitude and is now approaching the physical limits of our universe. As it gets exponentially more expensive to develop processes for smaller, more efficient transistors, chip manufacturers will catch up to the leader, leading to more competition and lower costs (not to mention a smaller lead in the performance of the state-of-the-art vs. last year’s model). This end of Moore’s Law will likely affect the tech world in many other significant ways, but that’s another story.
You’ll end up consuming more electricity than if you were only heating since chips aren’t 100% efficient.
This isn’t true, due to the law of conservation of energy. Usually, when we measure something as not being 100% power efficient, it is because some of the power is lost as heat. When you’re actually trying to generate heat, you get 100% efficiency. In other words, a 1300W mining rig generates 1300W of heat.
Mining rigs are loud!
Anyone with this complaint lacks basic imagination. They have soundproof enclosures for indoor diesel generators, so it can’t be that hard to make miners silent. And with central heating, the noise only has to be in the garage.
For simpler setups, it’s not too different from a space heater with a fan. While mining rigs might be loud today, manufacturers aren’t designing for the in-home use case, and can likely build quieter models in the future.
If everyone can mine for free, doesn’t this break the security model of Bitcoin and open it up to attacks?
Although everyone can mine for free (plus the one-time hardware costs), they have a finite limit: their natural need for heating. This is nice because this demand is distributed fairly evenly across all humans in colder climates, which helps decentralize control of the hashrate.
Every watt-hour you spend on mining past what you actually needed for heat is just wasted.
A huge benefit of mining-as-heating is that it nullifies one of the biggest criticisms of Bitcoin: that it is “wasteful” or “bad for the environment”. Another benefit is that the hashpower becomes very physically distributed, unlike today where much of the hashrate lives in a few big datacenters (which could be destroyed or taken by force).
I’m not sure how exactly this will come into the world, but I believe there are incentives for companies to produce heating units for the heating use-case, for instance a consumer in-home mining company like Coinmine. Depending on who captures the value (the manufacturer of the heater, or the owner of the building), they can either be marketed as “a cheaper heating unit”, “a heating unit which costs less to operate”, or “a heating unit which sends some BTC to your wallet as you use it”. The latter seems ideal since it also helps get BTC into some people’s pockets, which is a great way to accelerate adoption of the currency.
If the incentives ever make sense for people to buy miner-heaters, the Bitcoin hashrate can shift away from large industrial operations into the homes of everyday people. Bitcoin just might be able to exist with a secure enough hashrate to power the world economy of the future.
Thank you to Judd Keppel for reading the first draft, and everyone I talked to who brought up good points.