It’s almost a truism that Bitcoin (BTC)’s major selling point is its hard supply cap, limiting its total possible circulation to BTC 21 million. However, contrary to this received wisdom, there seems to be a growing chorus of people who worry that a hard cap isn’t without its problems, and that Bitcoin will run into difficulties when its block rewards become too small (and later stop completely).
A recent surge in discussion about this issue was incited by developer Peter Todd, who in July published a paper titled, “Surprisingly, Tail Emission Is Not Inflationary.” Basically, Todd noted that “no proof-of-work (PoW) currency has ever operated solely on transaction fees,” and that the lack of rewards may make block production unstable in the future.
Given how well respected Peter Todd is within cryptocurrency circles, many other serious commentators have taken his arguments as the launchpad for an exploration of whether Bitcoin’s monetary policy needs to be modified in the not-too-distant future. And there does seem to be support for the introduction of so-called tail emissions, even if this support isn’t unanimous.
Mixed support for Bitcoin tail emissions
It’s not too hard to find industry figures who’d support the introduction of tail emissions, which in practice means that block rewards would continue indefinitely. In other words, Bitcoin’s famed hard cap of 21 million would effectively be abolished, although it’s likely that any perpetual reward would be small.
“I have been very vocal for two years already, about needing tail emissions at some point in time in Bitcoin. These tail emissions will only be necessary after four or five halvings, so in about 15-20 years,” says Dr. Julian Hosp, the CEO and founder of Cake DeFi.
Hosp argues that most Bitcoin hardliners either don’t understand the need for tail emissions, or are burying their heads in the sand in order to maintain the simple — and attractive — narrative of the supply cap.
Of course, many people who’d oppose tail emissions would insist that they do understand Bitcoin’s monetary system, and that even so, they don’t think tail emissions are necessary, at least not for a long time.
“Generally I welcome the discussion around Bitcoin’s long-term viability. But I believe the block subsidy will be sufficient for the next couple of halving eras (so well into the 2030s), after which ideas such as changing Bitcoin’s monetary policy may be more pressing than they are today,” says Trezor Brand Ambassador Josef Tetek.
For Tetek, any attempt to change the issuance limit of BTC 21 million “will fail,” largely because it’s a “crucial part of Bitcoin’s DNA.” For others, seeking to change the cap isn’t necessarily doomed to fail, but would almost certainly be a protracted and contentious process.
“Such a protocol change, which would change Bitcoin’s fundamental economics and can be implemented only by a hard fork, will be a long and difficult process for the bitcoin community to reach consensus on,” says Nishant Sharma, the founder of BlocksBridge, a consulting and advisory firm for the bitcoin mining industry.
Basically, the fundamental point is that Bitcoin and its advocates have spent so long championing the cryptocurrency based on its cap, that performing a U-turn now may involve something like a paradigm shift.
“I think that it will be challenging to make an effective argument for bitcoin tail emissions. Much of the adoption of bitcoin was made from an argument that the mining schedule would fall off a cliff,” says developer Bryan Bishop.
Other figures simply refuse to be drawn into the debate, with one Bitcoin developer (who prefers to remain unnamed) replying to Cryptonews.com by suggesting that our questions are all “quite speculative,”and that “no one knows at this point in time” as to where monetary policy may end up.
Transaction fees alone
At the core of arguments that a tail emission is needed is the sub-argument that transaction fees alone won’t be enough to support Bitcoin and the mining it depends on.
“Transaction fees may be enough, but that would mean that fees would go up dramatically over time. I would rather see a super tiny amount of inflation and low transaction fees, than fees alone having to pay for the security provided by miners,” suggests Julian Hosp.
Casual observers may assume that Bitcoin developers would be strictly opposed to tail emissions. However, Bitcoin Core contributor Bryan Bishop also works on his own experimental digital currency Webcash, and in the latter’s case he admits that he’s considering adding inflation at the end of its supply schedule.
According to Bishop, such inflation is intended to “(1) allow people to continue mining, and (2) to pay for the server expenses or other operational costs.”
That said, Webcash isn’t a direct analog to Bitcoin, since “mining doesn’t secure the network, so there’s much less danger to this sort of alternative architecture,” Bishop adds.
Other commentators argue that transaction fees would be enough to secure Bitcoin, and that expense base layer fees would be offset by increasing adoption of layer-two networks such as Lightning.
“As Bitcoin adoption spreads around the world, onchain transactions will likely become in high demand and the transaction fees will rise accordingly. That, however, doesn’t mean that ordinary users will be priced out — it’s more likely that most of Bitcoin’s economic activity will happen on further layers such as the Lightning Network, with Bitcoin’s base layer (blockchain) serving the role of ultimate settlement,” says Josef Tetek.
This is also more or less the view taken by Nishant Sharma, who essentially argues that a rising BTC price will make transaction fees more viable.
“As Bitcoin’s usage continues to increase, the transaction fees earned by miners will likely grow inversely in relation to the decreasing block rewards. Additionally, if the market sentiment continues to drive bitcoin’s price up, it would increase both the income streams for miners,” he tells Cryptonews.com.
Set in stone?
Given these mixed views, it’s likely that the future will be determined more by practice than by predetermined decisions.
That is, if the Bitcoin network becomes relatively insecure or unstable in the future as a result of the drying up of block rewards, then more people will come around to the idea of tail emissions. If it doesn’t, and if transaction fees emerge as sufficient, then the weight behind a shift in monetary policy will likely be negligible.
Yet for some, there’s no chance of a change, and no desire right now to entertain the possibility of one.
“I think Bitcoin’s monetary policy is truly set in stone at this point and any attempt to change it will be met with an opposition stronger than 2017’s blocksize war. I will definitely be among those running a full node enforcing the 21 million limit,” says Josef Tetek.
On the other hand, miners carry the biggest influence in Bitcoin, and if a big enough majority supports a shift, then a shift will occur, with Bitcoin splitting (again) into two.
As Nishant Sharma concludes,
“With both Bitcoin and bitcoin mining becoming increasingly institutional, the discourse around such proposed changes will change and we may see protocol changes that were unthinkable in the past.”