Can Bitcoin continue to pay for its security?

Limited demand for transactions is a problem

What does it cost to gain 51% of the hash rate?

At a given Bitcoin price, difficulty rate, and mining reward, it is challenging to estimate the cost of gaining 51% of the hash rate, since it depends on many factors. GoBitcoin.io estimates it currently costs at least $33mn in hardware and at least $23mn in electricity daily. However, these numbers assume that 1) you can acquire the necessary hardware at these prices, as it will without any doubt push prices up and 2) you have a location large enough accompanied with the required but cheap electricity. At present, these conditions are unlikely. There is also an option to rent the computational power through existing miners or cloud providers. Doing it through cloud providers would be much more costly, as they are not geared for mining Bitcoins. Renting the necessary computational power through existing miners is not realistic, as such an attack will dilute their future business. All in all, a 51% attack is quite unlikely based on the current Bitcoin price, difficulty rate, and mining reward.

All other things being equal, fast forward three halving’s the mining reward stands at around 0.78 Bitcoin in 2032. At the current Bitcoin price, this amounts to around $2,25mn daily plus $300,000 in transaction fees. If the hash rate decreases proportionally with the mining revenue, it might be durable to achieve 51% of the hash rate from 2032 and on, since the cost of doing so has decreased manyfold, while it is technically much more feasible. Yet, if the Bitcoin price has decreased, it will be even cheaper and easier by 2032.

It is important to notice that alongside the cost, there are significant uncertainties around to what degree such an attack will affect the network and the market’s reaction to it. However, what is clear, though, is that the cost of performing such an attack decreases following each halving, considering that neither the Bitcoin price nor total transaction fees appreciate significantly.

There are several solutions

With under 10 years until the halving in 2032, it is evident that the Bitcoin community must come together sooner or later to solve this issue if they do not want to put their trust in an ever-increasing Bitcoin price. There are various ways to solve it, however, none have so far gained sufficient traction.

The Bitcoin network is currently able to handle around 6 transactions per second. Altogether, these transactions shape the transaction fees paid to miners. To consistently raise total transaction fees, Bitcoin must raise its transactional output, thus massively improving its scalability, alongside advancing its ecosystem. The latter can be accomplished by supporting smart contracts and decentralized applications similar to Ethereum, Solana, and Avalanche. Compared to Bitcoin’s $300,000 paid lately in transaction fees daily, Ethereum averages around $5mn daily in transaction fees, mostly due to its superior on-chain ecosystem of decentralized applications. Developers have for years been trying to improve Bitcoin’s scalability and achieve smart contract compatibility through various solutions but with limited success other than Lightning Network, which hardly has any traction.

The Bitcoin network could adapt another consensus mechanism than proof-of-work to improve decentralization and security. If Bitcoin’s hash rate plunges significantly, it is easier to acquire or rent massive computational power for a short amount of time to gain 51% of the hash rate to attack the network. Prior to this, the attacker can go short Bitcoin for potentially a great return. By adopting proof-of-stake, the attacker needs to acquire at least 51% of all Bitcoins to attack the network. First, this will be severely expensive, as it will push the price much higher, if possible, at all. Next, following the attack, the Bitcoins will be worthless, so there is no idea of shorting Bitcoin on the side. Another aspect is that it is markedly cheaper to be a staker than a miner, so you can uphold higher security with a lower security cost. For instance, Ethereum’s security cost decreases to around 0.5mn from 5.4mn Ether yearly following the Ethereum merge. The Bitcoin community is not actively pursuing the path of proof-of-stake. Assuming it starts on this journey tomorrow, it will likely take years before it is ready to fully implement proof-of-stake. In the case of Ethereum, it has spent well over 4 years developing a proper proof-of-stake framework.

The final option is rather drastic, which is to remove the max supply of 21mn Bitcoins. In that way, the network does not have to undergo a halving every 4^th year but can keep a constant mining reward. This is truly unlikely, as it will challenge the scarcity narrative that many Bitcoin advocates strongly adhere to e.g., MicroStrategy’s Michael Saylor. However, if the community does not act on the other two options, preferably both, it might be the final option to keep the network secure.

In conclusion, Bitcoin’s faith is deeply settled on a continuing price appreciation. If the latter is no longer true, Bitcoin can lose its decentralization and security, effectively worsening with each halving, one by one. Not only can it concentrate the hash rate on a few, highly efficient miners, but it can also make the network vulnerable to attacks for financial or political reasons.