Breaking Satoshi

Effects of high Bitcoin fees on node count

January 25, 2020·Deryk Makgill

The argument is made in the BTC fork of Bitcoin that nodes serve essential security functions and should be kept as cheap as possible to run by limiting the block size, even if transaction fees go up. Everybody should be able to run a node, not just businesses and corporations.

The argument is also made that it is not the number of nodes that is important for security, but rather the number of nodes making economic decisions—making or receiving transactions on-chain.

By looking at the second, third and fourth order effects of these positions, and not just the immediately perceivable results, we can see that these two arguments contradict each other, and that in fact high fees make the network less secure at scale insofar as nodes do anything for security.

What?! Less secure? How now?

Yes, less secure, if nodes mean anything. Let’s look.

But it looks good on paper... Gaping Void / Paper

First order effects

The immediately seen effects of price-fixing the cost of running a Bitcoin node are an increase in the number of nodes on the Bitcoin network. So far we have no contradictions in the two arguments. The lower the price of running the node, the more people who can potentially run a node. Anyone from a Silicon Valley investor to a teenager in a small, rural village can afford to run it.

Thus, our Bitcoin developers laugh and praise themselves and their wise planning. They have secured Bitcoin! They have shown their knowledge!

But they are shortsighted. They are looking at the tree and not the forest, which they have poisoned by helping the one tree. They are only looking at what is immediately seen, but the good economist thinks long term into the future and thinks about the unseen consequences of any particular policy.

Second order effects

Because our wise developers limited the block size in order to fix the price of nodes, they have now limited the number of economic actors who can participate in the network at any one time.

The network is more valuable than the node... Gaping Void / Network

Some businesses must stop accepting Bitcoin because it is not economical to do so. Fees are too high and transactions take too long. Possible use-cases go unrealised entirely because they are now impossible, and no new node is run as a result for that particular use-case. Less people participate in Bitcoin because they cannot afford to use it anymore, so there are less people who have a reason to run a node.

Our Bitcoin developers have turned what would have been an ocean of possible nodes to choose from into a small pond because they didn’t think far enough into the future. And they say they are more secure!

They do not see that the more economic actors in a network, the stronger that network will be, and that more people means more nodes, even if those nodes cost more.

Third order effects

Suppose transaction fees keep climbing on the Bitcoin network as the developers have designed in their infinite wisdom. What happens?

While it may be true that our village teenager can still afford a node thanks to our developers, he lives on less than $10 a day and cannot afford to pay the on-chain transaction fees of the network. His node is useless from a security perspective because he cannot afford to make economic decisions with it.

Our Silicon Valley investor wants to accept Bitcoin for his products and services, but nobody can pay in Bitcoin on-chain, so his node sits largely unused as well.

Around the world, the story is the same. People begin using second-layer or custodial solutions to transact with Bitcoin because that is the only way it is affordable to use it. They can afford to run a node still, but they cannot afford to make economic decisions with it on-chain. Their nodes are useless for securing the network, so they don’t run them at all.

People problems, not tech ones... Gaping Void / People Problems

Do you see what has happened? By price-fixing the cost of providing security (running a node) and driving up the cost of using that security (transacting), our developers have killed the average person’s and business’s incentive to run a Bitcoin node. And they did all of this in order to keep the cost of running a node low so that more people could run them!

Fourth order effects

Since less and less people are using the Bitcoin chain, and more transactions are taking place off-chain, the number of nodes falls as we have said.

Eventually, nodes are run only by large businesses, corporations, banks and governments, not because they are the only ones who can afford to run a node, but because they’re the only ones who can afford to make economic decisions on-chain with that node.

We have in practice the result the developers claimed they wanted to avoid, despite our developer theories to the contrary. We have a small number of people making economic decisions with Bitcoin nodes, while the vast majority of people have no reason to run them or affordable way to make economic decisions with them.

If the security of BTC depends upon these nodes like they say, it might be in trouble.

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