Da Hongfei believes Bitcoin’s network security will diminish as block rewards decrease and BTC storage grows on other networks. In a recent CoinTelegraph article, Da expands upon three possible solutions to improve Bitcoin’s network security: increasing fees, integrating smart contract and DeFi support, and increasing the BTC token supply.

Bitcoin is secured through public key cryptography and a peer-to-peer network that validates its ledger. Miners perform computational heavy tasks to maintain the public ledger’s integrity through a proof of sequence of events witnessed, cemented in a block created every ten minutes.

Bitcoin miners receive BTC for this work in the form of newly minted BTC and transaction fees. This offsets the costs of equipment, labor, and energy required to run a mining rig.

If a malicious actor wants to attack the network, they must gain control of 51% or more of the hash rate. Therefore, the more miners contributing to the network and competing for rewards, the more secure the network. However, Bitcoin mining must be profitable to incentivize a large number of miners to participate.

Da believes that miners may not make enough income in the future to cover operational costs, jeopardising the security of the bitcoin network.

As the amount of new BTC minted in each block halves every four years, miners are made increasingly dependent on network fees. This isn’t an issue as long as Bitcoin remains the most used network. But in 2020, Bitcoin lost its transactional market share lead to Ethereum.

Da notes that with 2020’s growth of DeFi across ecosystems, as well as the migration of BTC storage to other blockchain networks, Bitcoin’s transaction activity is increasingly occurring on other chains. He estimates that by the end of 2021, up to 4% of BTC’s total volume will transact on Ethereum.

Ethereum network’s cumulative fees have surpassed Bitcoin’s this year, signalling [its] ability to deliver higher returns for users… Bitcoin will face a decrease in on-chain activity as well as a transaction fee insufficiency due to the rise of DeFi… There is now a very real possibility that Bitcoin-based transactions may disappear in the future.

Bitcoin miners may come to rely more on transaction fees just as an increasing number of transactions are occurring elsewhere. Today, it’s estimated that transaction fees subsidize up to 30% of mining costs.

Da surmises, “BTC is currently under heavy pressure to dramatically increase on-chain transactions as long as halvings continue.”

Da presents three solutions to ensure Bitcoin’s network security in 2021 and beyond.

Firstly, increasing transaction fees may be necessary to incentivize miners. Da examines three scenarios based on the Bitcoin network’s size relative to the gold market cap, and concludes that fees may need to raise to $60, $300, or even up to $1,600 to ensure network security.

Secondly, integrating support for smart contracts and capturing the DeFi movement on the network can attract users. Today, Bitcoin maintains 60% of the cryptocurrency market share. With smart contract support, the Bitcoin network may absorb a portion of DeFi activity. Such an increase in network activity would result in more transaction fees to reward miners.

Lastly, increasing BTC circulation or adopting a moderate inflation plan could increase miner costs subsidies. Da concludes, “Through this method, BTC will be able to stabilize miners’ income while maintaining more reasonable and less variable transaction fees.”

The full article can be found at the link below:
https://cointelegraph.com/news/the-butterfly-effect-why-defi-will-force-btc-to-break-its-21m-supply-ceiling

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