Bitcoin's fee revenue problem and the long-term security budget
Quote711 words
Argues Bitcoin's store-of-value role, lack of smart contracts and growing share of BTC wrapped on other chains limit fee revenue, threatening the miner security budget as block rewards decline. Surveys L2s and cross-chain options but doubts they suffice.
Key claims
Falling block rewards require fee revenue to keep miners profitable
Wrapped BTC on Ethereum moves transaction volume off the Bitcoin chain
If fees fall short, hashrate drops or the 21M cap may be questioned
0/ Have been thinking about the #Bitcoin fee issue as well lately
A $BTC 🧵 summarizing some of my thoughts (0/19) 👇
1/ While #Bitcoin was originally meant to be a form of decentralized e-cash and hence primarily a medium of exchange, the narrative around $BTC has long shifted to it being a store of value and inflation hedge (basically digital gold)
2/ If $BTC were a global digital medium of exchange, payment traffic would result in high tx volumes and hence a lot of fee revenue
3/ But serrving mainly as a store of value that people tend to buy and then simply store rather for the long term, means that the tx volume is much lower, which hence adversely affects tx fee revenue
4/ But why is that important with regards to $BTC fee revenue? #Bitcoin relies to tx fees to generate revenue. If tx volume is high, more tx fee revenue is generated
5/ Tx fee revenues are important because alongside block rewards, tx fees basically fund the "security budget" that #Bitcoin has to reward the miners securing the network
6/ For now, tx fee revenues play a subordinated role in miner income as it is still dominated by block rewards. This will change in the future as $BTC goes through more halving cycles and block rewards diminish
7/ It is therefore really important that tx fee revenue will be large enough to still reward miners adequately. Since miners are for profit entities, they will only stay in business as long as they can earn a profit
8/ If tx fees fail to compensate for the decreasing block rewards, some miners will stop mining $BTC, which would consequently reduce the network's hashrate and hence adversely impact the security of the #Bitcoin network
9/ The lack of smart contract functionality also limits the potential for $BTC tx volume. While tx volume and hence fee revenue on L1 chains like $ETH is primarily driven by smart contract interactions, $BTC lacks this driver entirely @tokenterminal
10/ But the problem doesn't end here. #DeFi protocols on smart contract chains like $ETH have been quick to come up with ways how to tap into the large pool of capital that is #Bitcoin , while offering $BTC holders yield on their holdings
11/ As a consequence an increasing percentage of the $BTC supply is being locked up and wrapped onto other chains. While this might be attractive to $BTC holders, this effectively moves tx volume off the #Bitcoin chain, further affecting fee revenues negatively
12/ $wBTC or $renBTC are just two out of manny versions of wrapped $BTC that exists on #Ethereum as an ERC20 token. $wBTC supply has been growing constantly over the past years @DuneAnalytics
13/ So, the combination of lack of adoption as a medium of exchange, absence of smart contracts & the increasing share of $BTC supply moved to other chains, leads to a situation in which #Bitcoin has only a limited and seemingly decreasing potential to generate fee revenue
14/ This gives rise to the question what options there are to address this issue. Projects like @lightning, @RSKsmart & @Stacks are building L2 solutions for #Bitcoin that aim to provide scalable payment infrastructure (@lightning)...
15/ ...or bring smart contracts to #Bitcoin (e.g. $STX & $RSK). @THORChain on the other hand provides non-custodial cross-chain swaps for native assets like $BTC and enables $BTC holders to earn yield on native $BTC (instead of wrapped versions on other chains)
16/ Both L2 solutions or cross-chain projects integrating native $BTC have the potential to increase economic activity on the #Bitcoin blockchain & become drivers of tx volume/fee revenue. Not sure though if that'll be enough. Will likely look into $BTC DeFi a bit more this week
17/ But as @odin_free said, if fee revenue doesn't increase, $BTC will likely have to turn away from the 21mn $BTC fixed supply model at some point and resort to continuing to reward miners through inflation rather than fee revenue
18/ Otherwise insufficiently rewarded miners are likely to drop out and the decreasing hash rate would heavily impair the store of value narrative that is currently the main promise of the digital gold that is $BTC
19/ What are your views on the #Bitcoin fee issue?🤔
$BTC
QUOTING @odin_free
Magic Internet Money revenue just flipped BTC, let that sink in. Bitcoin *NEEDS* this income if it wants to hit the "0 inflation" goal, else it has no security budget and will be targeted Either that figure goes up, or you need to turn away from the 21 million meme.
Magic Internet Money revenue just flipped BTC, let that sink in. Bitcoin *NEEDS* this income if it wants to hit the "0 inflation" goal, else it has no security budget and will be targeted Either that figure goes up, or you need to turn away from the 21 million meme.
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How the covered assets moved · since 24 Jan 2022
Prices as of 23 Oct 2026This piece lays out a thesis on the sector without making a call on the token, so price moves since publication are shown as market context.
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