This past week, thousands of participants in the crypto space converged in Miami to experience the annual Bitcoin conference. In recent years, this conference has served as an important checkpoint for investors, developers, and end-users to reflect on the state of the Bitcoin network and crypto as a whole.
While many view the recent achievements of Bitcoin (in terms of price appreciation, user adoption, and growing relevance in the mainstream macroeconomic narrative) as worthy of celebration, there are still some within the space who look at the state of the network with a sense of cautious optimism bordering on outright pessimism.
Many factors that threaten to derail Bitcoin’s progress were discussed during the conference. In particular, concerns about the environmental impact of proof of work and an increase in crypto regulations and financial censorship were key topics of discussion.
While these factors are all very important, they are mostly external to the Bitcoin network.
One risk factor that was not a major topic of discussion is the problem of declining bitcoin transaction fees and what it means for the future of the network’s security as the block rewards also decline overtime. What makes this risk factor stand out from the others is that it impacts the underlying protocol itself and calls into question its long-term viability.
Hasu, a researcher from Paradigm Ventures has written extensively about whether the Bitcoin network will be able to maintain its security once the block subsidy no longer exists in 2140 or becomes less attractive, especially if the price of BTC does not continue to appreciate at a rate that makes the dollar value of mining rewards large enough after each halving to cover mining costs.
While faith in the Bitcoin network has ascended to religious levels, we must not forget that economic incentives are what drive the network to continue running securely.
Specifically, the Bitcoin network runs on the incentive of miners who periodically earn 6.25 BTC by expending energy to validate transactions via its proof of work consensus protocol.
Despite the knowledge that in 4 years’ time the rewards will drop to 3.12 BTC, there remains an expectation that, as historical trends have shown, the price of bitcoin should appreciate enough overtime to make up for the decrease in mining rewards.
In the event that these assumptions are no longer true, or once we reach the point where all 21 million BTC have been mined, miners will for the first time have to rely on network fees (which are a proxy for the demand for blockspace and how many people are actually transacting with bitcoin) as the main source of revenue from which they will cover their costs.
Otherwise, protocols that produce unprofitable mining operations tend to quickly lose support from the mining community, which in turn affects the security of the network as a lower hashing rate increases the likelihood of a successful 51% attack.
The same risk applies to all maximum supply deflationary cryptocurrencies regardless of the consensus mechanism.
On a proof-of-stake blockchain, even though the costs of staking are virtually zero, declining block rewards that are not sufficiently replenished by a rise in protocol revenue from transaction fees increase the opportunity cost of staking elsewhere, which will drive the largest stakers to migrate to other networks, leaving the declining network more vulnerable to a 51% attack.
One of Hasu’s proposals is to increase demand for bitcoin block space through anchoring, which is a key feature of the Accumulate network.
On Accumulate, anchoring works by inserting a cryptographic proof (or hash) of a batch of transactions onto another Layer 1 blockchain like Bitcoin. This is the equivalent of backing up your data on multiple hard drives that each have its own unique security system.
Anchoring allows the Accumulate network to essentially buy the security of a larger and more secure blockchain for the cost of a single transaction, enabling the history of recorded transactions on the Accumulate Network as well as other interoperable networks to be backed up on the Bitcoin blockchain.
Anchoring has the potential to be the single biggest driver of Bitcoin adoption outside of its store of value use case. The current narrative today is to try and steer bitcoin towards not only being a store of value but also a payments network similar to Visa.
This is where solutions like Lightning network and Strike are making major progress. While the payments network use case is promising, it seems like a stop-gap solution to the transaction fee problem, and one that is entering an already crowded market of payment networks.
Given the level of decentralization and censorship resistance that Bitcoin has attained over the years, it should be seen as so much more than just another payments network, but ultimately a secure anchor for the entire crypto ecosystem.
Where does Accumulate fit into this?
“Accumulate believes that the business value of Bitcoin lies primarily in its utility as an immutable historical ledger for anchoring external data.” – Accumulate Whitepaper
Accumulate wants to leverage its anchoring feature to create new demand for Bitcoin block space by becoming the de-facto solution for anchoring the world’s on-chain and off-chain data unto the most decentralized network on the internet.
We believe that in a multi-chain world, anchoring is the ultimate solution for achieving true unification of the blockchain ecosystem as well as maximum censorship resistance.
What better way to ensure the survival and longevity of our industry than for every major blockchain to serve as a backup data source for every other major blockchain, enabling a new form of cross-chain interdependence without sacrificing autonomy.
In a world where all major L1s are onboarded to the Accumulate Network, Accumulate would become the primary funnel for driving transaction fees through anchoring to the most decentralized and secure networks like Bitcoin and possibly also Ethereum.
The gradual decline in block rewards would be replaced by the increase in transaction fees from anchoring data from L1s, enterprises, foundations, and even governments onto the Bitcoin network, creating continuous incentives for miners to contribute hashing power to produce blocks and maintain the security of the network.
Chains of chains architecture of Accumulate (with Anchoring to L1 Blockchain)
Why does Bitcoin’s continued success matter for Web3?
Why this matters for Bitcoin, in particular, is because as the first and largest cryptocurrency by market cap, Bitcoin’s continued success (or rather, its avoidance of catastrophic failure) is essential for maintaining confidence in the hundreds of other newer protocols that are further out in the risk curve and still vying to achieve the same level of institutional adoption and recognition as the Bitcoin network.
A loss in faith in Bitcoin due to flaws in its underlying protocol would call into question the longevity of every other cryptocurrency, especially those that are designed with the same deflationary tokenomics that have become a trademark characteristic of blockchain networks.
Anchoring is a solution for not just Bitcoin but ultimately all blockchains with a maximum supply and deflationary tokenomics. Once block rewards run out, there is no guarantee that every chain will be able to sustain itself from transaction fees alone. Only those that have managed to achieve enough user adoption to pass that inflection point will be able to sustain themselves through fees.
For most networks, this requires competing fiercely at the application layer as the market for NFTs, payments, gaming, and Defi Dapps continues to become more crowded and user acquisition costs rapidly increase.
Underpinning all of these sectors is the need to store data in a decentralized way. As long as decentralized data storage remains a foundational utility of web3, there will always be demand for block space, especially on networks that offer the greatest level of security and censorship resistance (ie Bitcoin).
Ultimately, generating fees from other networks storing data on the bitcoin blockchain can be the solution that drives continuous demand for block space which will lead to a sustained increase in mining rewards post block subsidy through anchoring fees.
Accumulate aims to facilitate this process by becoming the primary solution for enabling cross-chain data anchoring through its communication, audit, and identity layer.