[Analysis] Research paper: A model for Bitcoin’s security and the declining block subsidy

The Bitcoin ($BTC) protocol is only secure when the cost of attacking the network is greater than the benefit received. The benefit includes the block rewards received and the miner-extractable value (MEV), defined as any form of monetary reward a miner could receive from attacking the network. This can include double-spends where they exchange bitcoin for another valuable good, and once the good is irreversibly claimed, roll transactions back to receive their bitcoin. Another form of MEV would be through the derivatives market by placing a short position on bitcoin assuming the price would drop after as users lose faith in the presence of an attack. The total benefit from block rewards and MEV needs to take into account the probability full nodes deviate from Nakamoto Consensus. The cost of the attack consists of the marginal cost of energy as well as the decrease in value of the fixed cost of hardware resulting from the drop in the price of bitcoin.

The report demonstrates that in its current state, Bitcoin is a well-secured network. However, the decreasing block subsidy represents a real threat as it sharply decreases the incentive to honestly secure the network. One solution proposed is instituting perpetual inflation, but that would be a highly contentious change disrupting a vital Schelling Point that is the immutable supply of bitcoin. Other solutions include increasing the demand for blockspace to increase transaction fees, implementing an adjustable block size to keep blocks crowded causing the same effect, or creating a privately-funded DAO to pay honest miners.