Has The Bitcoin Hash Rate Gotten Too High?
Miners provide a last line of defense for securing the Bitcoin network against brute-force attacks from malicious actors who might accumulate a majority of SHA-256 hash rate. The more hashing power used to discover new blocks for the longest Bitcoin chains, the more secure the funds will be on the trillion-dollar network. Despite a significantly depressed bitcoin price, however, which is currently sitting more than 50% below its latest all-time high, the network’s hash rate continues growing and has set new record highs multiple times this year. In fact, the hash rate is the only bitcoin chart that is still moving to the right in this market phase.
But how much hashrate is enough? Is Bitcoin too many miners?
This article offers an unconventional and possibly unpopular view on hashrate subsidies. It provides a surface-level analysis of current hash rates levels from the perspective Bitcoin’s security would not have been significantly compromised if its hash rate fell from its near-record levels.
This idea does not concern energy concerns or mining activity. It does not consider the future of mining economic incentives, nor their effect on network security or a minimum viable havehrate (MVH), level for Bitcoin.
Who cares about too high a hash rate? A reasonable reader might ask (or message the author on Twitter): “Who cares about Bitcoin’s high hash rate?” The answer is twofold.
Sometimes the hash rate will drop in a few years after the next block rewards halving. This isn’t a very important development, but as bitcoin-denominated mining subsidies drop (again) by 50%, marginally less-efficient hash rate will inevitably be squeezed out of the market. The chart below shows slight immediate changes in bitcoin hash rate 30 days after each of the prior three halvings:
Also, mining revenue from transaction fees is very low. This fact has prompted loads of criticism about Bitcoin’s long-term security budget across the industry, from Bloomberg journalists to Ethereum researchers and others. One response to these critics is to rhetorically ask, “So what? ” Another approach is to hypothetically assume the argument is at least partially correct, that future transaction fee revenue cannot fully support financial incentives for indefinitely growing hash rate levels, and then to ask, “If decreased miner revenue causes hash rate to drop, how much is enough?”
The More, The Better
The mainstream approach (in the small community that is bitcoin mining) to hash rate growth is usually that more is always better than less. A marginal miner will make less revenue if they have a higher hash rate. But why not strive for so much hash rate through continued exponential growth of the mining sector that no outside entity would even think about committing a 51% attack on the network? This hash rate is where Bitcoin is today and it is a good goal to increase or maintain it. For hash rate growth, “the better the more” was a common mantra in the early years of Bitcoin’s existence. Enter the protocol’s mining subsidy.
Subsidies Create Excess
Satoshi Nakamoto created an extremely effective bootstrapping mechanism via the mining subsidy. Subsidize or die was the condition of Bitcoin’s very early years, and Nakamoto demonstrated general awareness of the protocol’s early fragility in their reaction to the 2010 WikiLeaks incident.
“No, don’t ‘bring it on.’ The project needs to grow gradually so the software can be strengthened along the way,” they wrote.
Subsidies can be any form of economic payment or privilege that is designed to promote or accelerate a desired outcome. Mining subsidies, which incentivize higher hash rates, are similar to agricultural subsidies that encourage the production of wheat, corn, and other commodities. Subsidies are tools for market distortion and should not be permanent features in any market. All indications point to Nakamoto recognizing this economic reality and halving the subsidy every 4 years. This will eventually lead to the subsidized mining revenue falling to zero.
And the subsidy works! Take the recent example of China’s recent mining ban. The mining sector’s astonishingly rapid recovery from the most hostile political development in its past demonstrates how strong the economic incentives for continuing mining. The hash rate did not fully recover six months after the ban. It also continues to set new records, as we have previously mentioned.
But all subsidized markets eventually face the question of excess.
How Much Hash Rate Is Enough? This article doesn’t attempt a precise number of how many exahashes are required to secure Bitcoin. Data that’s potentially helpful for deriving this number has been discussed at length by thought leaders like Paul Sztorc, Lyn Alden and others. It’s a good idea for bitcoin investors to think about how much they can afford to lose.
One miner thinks this number could be as much as 25% of the current hash rate, according to a recent episode of the “Stephan Livera Podcast.” Agreeing that the mining subsidy is likely funding hash rate the network doesn’t need on the episode, Braiins Insights Lead Daniel Frumkin said he “wouldn’t be overly concerned” about a 51% attack on the network in a scenario where hash rate was 150 EH instead of its current 200 EH level. The Bitcoin network is now more secure than ever, thanks to its hash rate at record highs. This article will not provide an in-depth analysis on minimum viable hash rates. Instead, it will encourage readers to consider that the hash rate may not always rise forever and that even if it does, Bitcoin’s security is still more than adequate.
This is a guest post by Zack Voell. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.