The decay of the Block Subsidy is inevitable
Halvings are Inevitable
As we approach the fourth Bitcoin Halving (‘halvening’ for dwarves or ‘halfining’ for Hal Finney) expected for April 2024, it is interesting to consider how much longer Bitcoin mining can be profitable based on the block subsidy reward.
It has always been anticipated that eventually, the revenue of bitcoin miners would, over a period of multiple halving eras, shift to rely primarily on fee revenue rather than the block subsidy reward. We are still very much in the time of block subsidy dominance and in the past few years transaction fees were typically less than 10% of the subsidy amount.
But transaction fees have been rising of late. The daily subsidy amounts to 900 BTC, and transaction fees alone have spiked above half that amount (450 BTC) as additional revenue on three days during this year. That is the total revenue was more than 1/3 due to transaction fees on those two particular days of May 8, 2023, and December 16 and 17, 2023 according to blockchain.com .
The recent capability of the Bitcoin blockchain to support inscriptions and NFTs via the ordinal numbering technique has been a principal driver of these ‘outsized’ transaction fee receipts.
Of course, the subsidy reward itself is just the product of the Bitcoin price and the number of BTC in the subsidy.
Bitcoin’s Value Accretion
One of the simplest yet statistically robust models for Bitcoin’s price is a “Lindy” power law model. The price grows as a power law of block time elapsed (which is also close to calendar time, more so recently). The idea is that it is new technology that becomes more certain and valuable as it persists, and as its network grows.
The price of Bitcoin is supported by both the security (based on cryptographic hashing energy) and supply dynamics. The supply is ratcheting down as shown above, essentially as:
Subsidy per block = 50*(1/2)^[floor(Byr/4)] bitcoins.
The term in [ ] is a step function of an integer divide, and Byr is the number of elapsed block years of 52,500 blocks each. Four of…
