This post originally appeared on ZeMing M. Gaos website, and we republished with permission from the author. Read the full piecehere.
While the whole world seems to be fixing its eyes on the bitcoin price charts, I closely watch a simple and mundane number:
The transaction fee/subsidy ratios of BSV and BTC.
These ratios are the most significant Bitcoin chart to look at, because it is signaling the future.
Why is this important? Because this is where the dynamics of competitive mining economics is active.
In the past years, the total number of transactions on BSV blockchain has increased from nothing to first surpassing that of BTC and then reaching 10-100 times that of BTC as of March 2023.
If the trend continues, BSV miners will enjoy exponential growth of revenue from network fees, while BTC miners will face a growing avalanche of pressure to migrate to BSV for superior profitability, and this despite the fact that fee per transaction on BSV is many thousands of times lower than that on BTC and is likely to continue to drop further lower by many times in the future.
The only reason why the increase in BSV transaction volume has not already caused a shift of mining behavior according to the prediction of mining economics was a quite simple one: in the past, while the number of transactions of BSV increased, the fee per transaction of BSV decreased proportionally to cancel out the effect. Considered with a long-term view, this is healthy. Even though it is desirable for the fee/subsidy ratio to increase to show the superiority of BSV mining economics, it would not be good for the ratio to increase for a wrong reason, specifically as a result of fee per transaction increase. This is because the latter would diminish the utility of the system. A real production economy is always based on actual utility, in which a product/service is rewarded because it has made something more efficient. As BTC and the rest of the crypto sector find their life support in a fake economy driven by ponzymistic mental energy, it is a good thing that the real utility blockchain is not affected by that. So far, BSV has been doing marvelously well in this respect.
At the same time, the transaction fee cannot drop continuously without a limit. The lowest natural transaction fee is 1 sat/transaction, beyond which special measures would be necessary. Given the already very low transaction fee on BSV, the future decrease of the fee is expected to decelerate, to be outpaced by the increase of the transaction volume.1
Therefore, if the total number of transactions on BSV continues to increase unboundedly, it will be inevitable that the transaction fee/subsidy ratios of BSV will pull away from that of BTC.
For example, the current peak of transaction volume on BSV is 50 million transactions per day. If it increases another 100 times to 5 billion transactions per day and sustains at around that volume, it will translate to about 10 BSV per block (versus the current 0.1 BSV per block). But if we assume the fee per transaction further drops from the current 25 sats/tx to 10 sats/tx, it would be about 4 BSV per block. In that scenario, the fee/subsidy ratio of BSV will be around 0.65 (65%).
In comparison, the fee/subsidy ratio of BTC is likely to be still in the range of 0.01-0.03 (1-3%) because there is inherently limited room for BTC transaction fees to move.
As will be explained in detail in this chapter, such a drastic gap between the fee/subsidy ratios will have irresistible impact on the miners profitability. The above is a very conservative estimate. Significant economic impact could be felt by the miners well before fee/subsidy ratio of BSV reaches 65%. It could happen at just 25% or even before that.
At the present time, the fee/subsidy ratio of BSV is just a bit over 1%, comparable to that of BTC. The transaction economics is therefore completely buried under noise.
But it will not remain like this forever, because the economics of profitability is an operative force like gravity is.
The basics of bitcoin mining economics
At the most basic level, the economics of bitcoin mining is not complicated, and is the same with BTC as with BSV.
Miners block reward = block subsidy + network transaction fees
The block reward is a miners revenue for successfully creating a valid block on the chain.
As will be shown in this article, in terms of comparative mining profitability, the block subsidy parts essentially cancel out on each other among BTC, BSV and BCH, and thereforethe only competitive action is found in the network transaction fees.
And as will be shown in this article, the trend of the network transaction fees, along with the inherent designs of BTC and BSV, spells bad news for BTC.
Please do not quickly jump into the following superficial conclusions:
Your intuition is wrong if you think the above. Read on. But first a hint:
The actual prices of BTC and BSV are irrelevant in this analysis, as the dynamics is determined by the relative ratios, and the fundamental profitability metrics is the profitability per-unit hash power (rather than that of the total hash power).
For example, the current price of BSV is 1/500th that of BTC. But as far as the mining subsidy is concerned, mining on BSV is equally profitable to that on BTC, because mining BSV requires 500 times less hash power. Therefore, the subsidy part of the economics evens out between BTC and BSV, and the only thing that is competitive comes from the network transaction fees, which is a focus of this article.
Because historically the price ratio and hash power ratio between BTC and BSV have largely matched each other in the market, this conclusion does not change whether this ratio further deteriorates to 1/1000 or improves to 1/10, or even 10/1, in the future.
This is not a theory. If youre a miner, whether you understand this intellectually or not, you will actually feel it in your mining operations. Anyone who has done multi-chain BTC/BCH/BSV mining simultaneously would know this as a fact.
The background & statusquo
The total block reward is a miners total revenue for successfully creating a valid block on the chain.
And creating a valid block involves two major types of work performed by the miner, namely:
(1) building a block, and(2) proving the block.
Building a block including adding and processing transactions in the block. It can be very simple when the miner includes only those transactions that have simple straight scripts, but may become very complex when the miner includes transactions that have complex smart contracts.
For BTC, there are no complex smart contracts to speak of. All transactions on BTC have simple standard scripts and a miner needs no special software nor technological know-how to process these transactions. Before you say wait a second, just because BTC doesnt have complex smart contracts now does not mean it will not have them in the future! please be reminded that it is a linchpin design of BTCnotto have such smart contract. In order to support the digital gold moniker and an attractive but fake decentralization narrative, BTC Coreremovedall the Bitcoin smart contract capabilities and limited the block size to 1 megabyte. And this is all so deeply entrenched that they would have to fork into a new chain while openly acknowledging that they were totally wrong in order to change it.
With BSV, however, a new field is opened up because more and more transactions are created by customers to take advantage of the smart contract capability on BSV. A BSV miner has a choice to make when building a block, namely deciding what transactions it wants to include in the block it is building.
This is where the BSV mining business becomes sophisticated and competitive beyond the mere hash power competition. A BSV miner cannot just blindly include every transaction into its block. Transactions having smart contracts can be highly complex and diverse, and they can come from all kinds of customers in various businesses, from art, esports to enterprise software. To include such transactions in a block requires a good understanding of the customers business logic, building a good business relationship with the customer, and developing software capabilities to compile the smart contracts to straight OP_codes. Advanced miners may even go beyond and start to build tools for new businesses in BSV blockchain ecosystem. There is no limit.
Proving a block is a different matter. Broadly speaking, it involves two different kinds of block proving activities:
(i) solving a hashing puzzle, which is a hashing competition among miners for the next block (as every miner builds its own block and wants its block to be accepted in the chain), and(ii) validating and accepting the block created by another miner who has won the hashing competition (miners are required to do this as matter of the consensus).
Note that the miner who has won the next block does not need to do extra work in validating and accepting the block, because all of that should have been done in building the block already, see the above (1), building a block. But to be accepted to the chain, the block has to be validated and accepted by other miners.
It is important to also note that, after a block has already been built, validating and accepting the block by another miner becomes easy and can be done by any miner, because all transactions have been compiled into straight scripts (OP_codes). In other words, although not every miner may be sophisticated enough to build a block to include transactions that have complex smart contracts, every miner that runs standard mining software is capable of validating and accepting such a block created by another miner.
This is part of the Proof-of-Work (PoW) consensus among the miners.
The concept of PoW itself has been a source of confusion, because by work in Proof-of-Work, most people refer to hashing only. But thats a misunderstanding. There are at least two different types of work involved as indicated above.
The term mining is also confusing, because to many people, it suggests working for newly minted coins as a block subsidy only. But that is not accurate. The reality is:
(1) there is no ongoing minting (in a real sense of the term) of bitcoin, as all 21 million bitcoins were minted all at once when the Genesis block was created; and(2) the only difference between block subsidy and network transaction fees is that the former receives new coins from the preprogrammed coinbase (an initial market) while the latter receives coins from customers (a secondary market).
Therefore, even after the block subsidy has stopped, miners work continues, and the work may still be considered mining in a sense that the process yields coins for a miner.
It is therefore misleading to focus on the block subsidy only. The block subsidy is supposed to be a temporary bootstrapping strategy for establishing the blockchain. The real dynamics of the mining economy is in the network fees.
The block subsidy is mostly static (except for halvings roughly every four years). And more importantly, as will be shown in this article, block subsidies are non-differential between different chains (that is, they are essentially the same for BTC, BSV or BCH, on a unit-hash power basis).
Currently, BTC and BSV prices track almost precisely in proportion to the network hashing powers (or in reality it is the other way around, but the key is that they are correlated). In other words, the ratio between BTC price and BSV price is almost exactly the same as the ratio between BTC hash power and BSV hash power. Both ratios fluctuate with time, but they are almost synchronized to match between the chains.
It means the market is completely writing off the network transaction economics.The market only sees the simple hashing part, and is completely blind to the transaction part that is the real story in the future.
This reflects a temporary fact that the fee/subsidy ratios of both networks are still very low and almost negligible (i.e., the network transaction fee is still a small portion on these networks and have a negligible impact on miners decisions on operations).
However, this ignores what is already happening behind the scenes and will likely happen at an even faster pace in the future.
This will be the textbook example of asymmetric information, or information failure, or knowledge failure of the market.
But watch thetrend!
The network transaction volume is rapidly growing on the BSV blockchain, while that on BTC is flat and capped by design. As a result, transaction fees as a component of the BSVs total block rewards is expected to grow as well, while the counterpart of BTC is perpetually limited by design. In the past, the total transaction fee per block on BSV did not increase despite the transaction volume increase, only because the fee per transaction on BSV has decreased proportionally to cancel out the overall effect. But because the fee per transaction cannot keep going down without a limit, it is expected to decelerate, and as a result the total transaction fees per block will eventually go up with the transaction volume.
Therefore, if the transaction volume on BSV keeps going up, an inescapable squeeze is being formed.
Imagine when BSVs fee/subsidy ratio rises to 9, while that of BTC remains at 0.01 (1%). It would mean that, for roughly the same amount of hash power, a miner can generate 10 times (10x) as much revenue on BSV as that on BTC. It would also translate to much higher profits (see Section What about profitability?).
If the fee/subsidy of BSV is 99 while that of BTC remains at 0.01 (1%), the difference would be about 100 times (100x), so on. There really is no ceiling for this as BSV is unbounded in terms of the block size and the number of transactions included in one block. See further below for a more detailed mathematical explanation for this conclusion, but at this point, just trust the math.
But in reality, thats not going to happen, as miners would have moved over to BSV long ago, because no business can ignore such a huge difference in revenue efficiency, and ultimately in profitability as well.
BTC miners therefore face a growing avalanche of pressure due to BSVs exponential growth of network fees. If a 10% or 20% extra profit margin is not sufficient to overcome ignorance, ideological bias, personal sentiments, whatever the case it may be, how about 50%, 100%, 200%, 500%, or 1000%?
Wherever there is a higher profit to be made, the capital and resources will figure out a way to follow. The friction or resistance cannot be infinite, and therefore a breakout point will arrive sooner or later. It is simple economics and capitalism. A rapidly growing economic force cannot simply be ignored or pushed back by mere slandering. There will bound to be reactions, legally or not.
So overall, as long as the BSV adoption continues, it will all gravitate toward BSV.
For the same reason, the apps and transactions on BSV are absolutely the key. If they keep going up like they have been during the last month, something big is going to happen in the BSV landscape, including the coin price. It will not be a matter of personal opinions, but objective economics.
The present and thefuture
The present price difference between BTC and BSV is a known fact. The purpose of this article is to help readers focus on the trend.
Note again that BTCs network fees are limited by design and have already reached the upper limit, while BSVs are unlimited. The potential room of growth can therefore also be unlimited, perhaps reaching a difference of a million times and more in the future. Speaking of potential, this is based on objective boundaries defined by each system, not a mere subjective opinion. Please keep this in mind while reading this article, as otherwise some of the logic and reasoning may not come through naturally.
That BTCs daily fees has almost a hard cap is a well-known fact. It is because the total number of transactions the BTC blockchain can process is already at or near its maximum block capability. Although the actual number fluctuates from time to time, it has touched the top frequently in the past. And by the very design of BTC which predicates on small blocks, the top is a hard ceiling, with no possibility to pierce through.
With the total number of transactions per block fixed, the only way to increase the transaction fee is to increase the fee per transaction, which is unrealistic because ranging between $1-$20 it is already too high. It is in sharp contrast with the $0.00001 transaction fee on BSV, which has unlimited block size, and therefore unlimited number of transactions per block. For more detail, seeBTC and Bitcoin, what is the real difference?
It really is an exciting time to be in the BSV space.
The dynamics between hash power andprice
The dynamics between hash power and price is not a simple cause and effect relationship. Nevertheless, the correlation and even causality between hash power and price is real:
The total hash power of a blockchain (BTC or BSV) is largely determined by the block difficulty level. Block difficulty adjustment happens once in a while due to the 10 min block time restriction, which is affected by miner competition (because more competition leads to higher hash power and thus shortens block time), which in turn is driven by miners profitability, which in turn is determined by revenue sources and the coin price.
The coin price at any given time is determined by the market.
The market is influenced by demand and supply.
With an asset that has no utility, the demand and supply is purely speculative, depending on peoples perception of the future price, the network strength (which in turn correlates to hash power), the selling of newly mined coins by miners, and many other things. It is therefore not a simple one directional linear relationship.
But as BSV processes more and more transactions and bigger and bigger blocks, BSV becomes a real commodity, not for pure speculative trading, but actuallyneededby businesses, entrepreneurs, consumers to have transactions and to store data on the BSV chain. Thus, a market that has real economic basis emerges, and BSV price will be driven by economic demand and supply, not just speculations.
As the demand increases, the price will increase too, because BSV has a limited supply.
Therefore, if transactions and block sizes continue to grow and the number of sats per transaction stabilizes, it will eventually come to a point where BSV price will be pressured to rise. The faster the growth is, the higher the pressure is. This pressure may not be felt temporarily when the difference is still small, but eventually will be, if the growth does not stop.
But if the BSV price continues to rise, BSV hash power will rise as well, leading to higher energy cost for the miners. Will this diminish the attraction for miners to move to BSV?
The answer is no, because ultimately, a miners willingness to increase its hash power are driven by profitability. Due to the extra revenue of transaction fees, the mining economics continues to be in favor to BSV, because no matter how much BSV hash power rises, it cannot make BSV miners transaction fee revenue advantage disappear.
Definitions andexamples
In order to look at this more quantitatively, let us look at several definitions.Block reward= block subsidy + network transaction feesBSV/BTC hash ratio: BSV hash power / BTC hash powerBSV/BTC price ratio: BSV price / BTC priceFee/subsidy ratio: network fee / block subsidy (either BSV or BTC, respectively)BSVs fee percentage: BSV network fee / BSV block reward (%)BTCs fee percentage: BTC network fee / BTC block reward (%)BSV-BTC differencein fee: BSVs fee/subsidy ratio minus BTCs fee/subsidy ratio (%)
The issue before the miners is quite simple:
Anytime when BSVs fee/subsidy ratio is greater than BTCs, there is attraction/pressure for a miner to move its hash power from BTC to BSV, because the difference is extra revenue, almost free surplus profit, provided that the BSV/BTC hash ratio and BSV/BTC price ratio are roughly tracking each other (which have been historically).
This is because, when BSV/BTC hash ratio and BSV/BTC price ratio are the same, the block subsidy alone results in the same profitability on BSV and BTC.
For example, currently, BTC price is 500 times that of BSV, but if the mining subsidy only is concerned, mining on BSV is equally profitable to that on BTC because mining BSV requires 500 times less hash power (and correspondingly 500 times less equipment and energy). So the subsidy part of the economics evens out between BTC and BSV. The conclusion would remain the same whether BTC/BSV price ratio is 1000 or 10, or even reversed at 1/10 or 1/1000 for that matter.
At the present time, because the fee/subsidy ratios of BTC, BCH and BSV are all very small, the mining profitability of these three chains are essentially the same when measured over a longer period of time by unit power conception, e.g. per THash/s, despite some short period fluctuations. See for example, profitability charts onbitinfocharts.com.
But all this will change when BSVs fee/subsidy ratio quickly rises above BTCs, and the difference becomes bigger and bigger. See further discussions below.
In other words, the bitcoin subsidy portion of the block rewards always cancel out with each other when compared between BTC and BSV, and as a result, any competitive difference in profitability comes only from the difference in transaction fees.
This may be very counterintuitive to many, because peoples mind tends to gravitate toward this skepticism: how can that be when BTC price is hundreds of times that of BSV?
The key: the actual prices of BTC and BSV are irrelevant in this analysis, as the dynamics is determined by the relative ratios, and the fundamental profitability is theper-unit hash powerprofitability (rather than the total hash power).
Now,ifBSVs fee/subsidy ratio and BTCs fee/subsidy ratio were also the same (in other words, BSV-BTC fee/subsidy ratio difference is zero), the transaction fee part of the economics would also be the same on BSV as it is on BTC, making the per-unit hash power profitability on both blockchains entirely equal to each other.
But as the transaction volume on BSV keeps increasing but that of BTC doesnt,BSVs fee/subsidy ratio and BTCs fee/subsidy ratio are not going to be the same.
Due to the design difference of BSV and BTC, the difference is destined to be large, and may grow larger and larger with no bounds.
And that, is where the real dynamics is operative.
When the fee/subsidy ratios of both blockchain are small, miners can ignore them. For example, when BSVs fee/subsidy ratio is at 2%, it is still almost negligible, despite its being twice the BTCs 1%, the difference (2% -1% =1%) between the two is almost negligible.
But if the difference between fee/subsidy ratios of BSV and BTC becomes larger, say over 10%, or 15%, it would become harder to ignore. And a difference of 25% or greater may be impossible to ignore.
Consider a situation where BSVs fee/subsidy ratio is at 100% while that of BTCs is at 1%. This would mean that on BSV, the transaction fees are half the block subsidy (a 1/2 and 1/2 split), but on BTC it is negligible. Together this would translate to a 2x in total revenue per-unit hash power on BSV as compared to BTC, and in much higher profit as well (see below Section What about profitability?).
The revenues in the above scenario are as follows:
total BTC block reward = 6.25 BTCtotal BSV block reward = 6.25 BSV + 6.25 BSV = 12.5 BSV.
That is, the mining revenue with a given amount of hash power would double (2x) if it is on BSV blockchain from the BTC blockchain.
If BSVs fee/subsidy ratio further becomes 10, while BTCs fee/subsidy ratio remains 1%, the total block rewards would be as follows:
Read the rest here:
The economics of Bitcoin mining - CoinGeek