Executive Summary: The Ultimate Deep Dive Into Bitcoin's Security Model
In this article, I explore Bitcoin's security concerns due to diminishing block rewards and whether merged mining and the Lightning Network can provide a solution.
Summary: The Bitcoin security model faces challenges due to the diminishing block rewards and the future reliance on transaction fees.
Challenges in Bitcoin's security model:
- Reliance on diminishing block rewards:
- Currently, 99% of miner revenue comes from block rewards, and only 1% from transaction fees.
- The block reward is halved every four years, forcing the security budget to rely on transaction fees.
How BTC security works:
- Miners validate transactions through proof-of-work.
- Miner income consists of block rewards and transaction fees.
- Miner expenditure comprises electricity and hardware costs.
Potential cheating and threats to the Bitcoin network:
- Cheating is possible but discouraged:
- Incentive for miners to be honest as long as income exceeds expenditure.
- A 51% attack is possible, but the network is set up to discourage rational actors from attempting it.
- Motives for attacking the network:
- Two types of motivations: rational/economic or irrational/sabotage.
Risk factors and defense mechanisms for the Bitcoin network:
- Defense against economic attacks:
- The primary defense is the expected long-term value of honest mining.
- Possible undermining of the network's legitimacy:
- Successful defense mechanisms could potentially damage the network's reputation.
- Importance of transaction fees in the future:
- Transaction fees must provide a sufficient security budget to maintain the network's integrity.
Merged mining as a potential solution to security issues:
- Merged mining allows miners to mine more than one blockchain simultaneously.
- Increased profit for miners can contribute to the network's security and incentivize honest mining.
The Lightning Network as an additional layer of defense:
- The Lightning Network is a layer-2 solution that enables instant, low-fee Bitcoin transactions.
- It can help address scaling issues, in turn potentially increasing transaction fees from a greater number of transactions, contributing to Bitcoin's security funding.