Security is a paid service. Bitcoin miners secure the network for profit, not ideology. The block subsidy currently provides ~90% of miner revenue, but halves every four years. By 2040, it becomes negligible, creating a ~$20B annual security budget shortfall that must be filled by transaction fees alone.
bitcoins-evolution-defi-ordinals-and-l2s
Blog
Bitcoin Fee Markets After Block Subsidy Declines
A technical analysis of Bitcoin's impending security budget transition. We examine the data, debunk the 'fee death spiral' narrative, and forecast how new use cases will create a sustainable, high-fee future.
introduction
THE INCENTIVE CLIFF
The $20 Billion Security Question
Bitcoin's security model faces a $20B annual deficit as block subsidies vanish, forcing a transition to a fee-only market.
Fee markets must scale 100x. Today's average fee is ~$2, insufficient to secure a $1.3T asset. For security to persist, average fees must reach ~$200 per block or transaction volume must increase exponentially. This necessitates layer-2 scaling solutions like Lightning Network and sidechain protocols such as Stacks to drive demand for block space.
Proof-of-Work is non-negotiable. Alternatives like shifting to Proof-of-Stake are antithetical to Bitcoin's design. The network's security budget will be dictated by pure economic demand for its settlement finality. This creates a direct link between Bitcoin's utility as a base layer and its resilience against 51% attacks.
Evidence: Post-halving in April 2024, the subsidy dropped from 6.25 to 3.125 BTC per block. Historical data shows fee spikes during congestion (e.g., Ordinals frenzy) briefly made fees 30-40% of revenue, proving the model can work but at a much higher sustained throughput.
key-trends
BITCOIN'S NEW ECONOMIC ENGINE
The Three Pillars of Post-Subsidy Fees
As block rewards diminish, Bitcoin's security will depend on three primary, scalable fee markets.
01
The Problem: Inelastic On-Chain Settlement
Base layer blockspace is a scarce, inelastic resource. Post-subsidy, fees for simple transfers will be volatile and prohibitive, threatening security if demand plateaus.
- Fee Spikes during congestion can exceed $50+
- Security Budget becomes purely demand-dependent
- User Experience degrades for routine transactions
~1-7
TPS Limit
$50+
Peak Fee
02
The Solution: Layer-2 & State Channel Batches
Scaling solutions like Lightning Network and rollup-like sidechains (Stacks, Rootstock) aggregate thousands of transactions into a single on-chain settlement, creating a predictable, high-volume fee market.
- Batch Settlement compresses 10k+ tx into one
- Recurring Revenue from channel opens/updates
- Enables microtransactions and DeFi primitives
10k+
Tx per Batch
< $0.01
Effective Fee
03
The Solution: Ordinals & Inscription-Driven Demand
Non-monetary use cases like Ordinals, Runes, and Bitcoin Stamps create fee demand independent of financial transfers, turning blockspace into a digital artifact canvas.
- New Demand Vector decoupled from ETH/BTC price
- Fee Floor Creation establishes a ~5-10 sats/vB baseline
- Cultural Asset Bitcoin as a global settlement layer for data
4+ MB
Block Usage
~5-10
Sats/vB Floor
04
The Solution: Programmatic Fee Markets via Covenants
Upgrades like OP_CAT and CheckTemplateVerify enable vaults, recurring payments, and decentralized swaps, creating automated, complex transactions that bid for block space predictably.
- Automated Bidding from smart contracts
- Enables Bitcoin-native DeFi (Ark, BitVM)
- Stable Demand from long-lived contractual logic
24/7
Demand Source
Ark, BitVM
Protocols
POST-SUBSIDY ERA
Fee Market Evolution: A Data Snapshot
Comparative analysis of Bitcoin's fee market mechanisms as block rewards diminish, focusing on economic security and user experience trade-offs.
| Key Metric / Mechanism | Current Model (P2P Fee Auction) | Proposal: Time-Based Fee Auction | Proposal: Ephemeral Anchoring (Drivechain) |
|---|---|---|---|
Primary Fee Pressure | Block space scarcity (1-4 MB) | Block space + Time preference (e.g., 10-min deadline) | Parent chain block space scarcity |
Avg. Fee per Std. Tx (2027E) | $15-85 | $8-60 | $0.50-5.00 + sidechain fee |
Security Budget (Post-2032 Halving) | ~0.5-1.5 BTC/block (fee-only) | ~0.5-1.5 BTC/block (fee-only) |
|
Max Theoretical TPS (Layer 1) | 7-10 | 7-10 | 1000+ (delegated to sidechain) |
Settlement Finality | ~60 minutes (6 blocks) | ~60 minutes (6 blocks) | ~1-2 weeks (peg-out security delay) |
MEV Resistance | Low (frontrunning, sandwiching) | Medium (deadlines reduce time priority) | Variable (dependent on sidechain design) |
Implementation Complexity | Native protocol | Soft-fork upgrade (e.g., BIP 118) | Soft-fork upgrade + sidechain ecosystem |
deep-dive
THE NEW FEE ECONOMY
The L2 Fee Sink: How Stacks, Merlin, and Lightning Redefine Demand
Bitcoin's post-subsidy security depends on L2s like Stacks, Merlin, and Lightning becoming primary fee consumers.
L2s are the primary fee sink. Post-2040, Bitcoin's security budget must shift from block rewards to transaction fees. L2s like Stacks (sBTC), Merlin Chain, and the Lightning Network aggregate and settle millions of user actions into single, high-value Bitcoin transactions, directly monetizing base-layer block space.
Demand shifts from users to protocols. The fee market's core customer changes from individuals sending BTC to protocol treasuries and sequencers competing for finality. This mirrors how Ethereum's EIP-4844 created a predictable fee market for L2 rollups like Arbitrum and Optimism.
Settlement compression creates fee density. A single Bitcoin block can finalize state for an entire L2 epoch. Stacks' Nakamoto upgrade and Merlin's ZK proofs batch thousands of transactions, paying fees that dwarf a simple P2P transfer, creating a high-stakes auction for block inclusion.
Evidence: Lightning's inbound capacity problem. The need to open/close channels already creates sporadic fee pressure. Scaling this model to Bitcoin DeFi via sBTC or RGB will institutionalize this demand, making L2 settlement the dominant driver of Bitcoin's security budget.
risk-analysis
POST-SUBSIDY REALITIES
The Bear Case: Where the Fee Market Fails
As block rewards diminish, Bitcoin's security model must transition to a fee-only regime, exposing critical vulnerabilities in its transaction pricing mechanism.
01
The Problem: Inelastic Demand vs. Volatile Supply
Fee markets require demand elasticity, but Bitcoin's base layer has none. Users need finality for high-value settlements, creating a winner-take-all auction for scarce block space during congestion.\n- Fee spikes become the norm, not the exception, pricing out regular transactions.\n- Security budget becomes pro-cyclical, collapsing during bear markets when fees drop.
1000x+
Fee Volatility
~0%
Demand Elasticity
02
The Problem: Miner Extractable Value (MEV) Capture
Without a lucrative subsidy, miners are financially incentivized to maximize revenue through transaction ordering. This leads to systemic risks.\n- Time-bandit attacks become economically rational, threatening chain reorganization.\n- User transactions are consistently front-run or sandwiched, degrading trust in fair execution.
$100M+
Annual MEV
>10s
Reorg Risk Window
03
The Problem: The L2 Fee Suction Effect
Efficient scaling layers like Lightning Network and sidechains drain fee revenue from the base chain. Security is a public good that L2s free-ride on.\n- High base-layer fees push activity to L2s, reducing the very fees needed to secure them.\n- Creates a tragedy of the commons scenario for blockchain security.
-90%
On-Chain Tx Share
$5B+
L2 TVL
04
The Solution: Drivechain & Merge-Mining
Proposed by Paul Sztorc, Drivechain allows for sidechain pegs secured by Bitcoin miners via merge-mining. This creates new fee markets without diluting security.\n- Miners earn fees from multiple chains, diversifying revenue streams.\n- Enables experimental scaling (like EVM sidechains) while anchoring to Bitcoin's PoW.
1-Way Peg
Security Model
0 New Tokens
Capital Efficiency
05
The Solution: Ordinals & Inscriptions as Demand Anchor
The emergence of digital artifacts (Ordinals, Runes) creates a new, fee-insensitive demand class for block space. This acts as a baseline security subsidy.\n- Provides inelastic, cultural demand that persists through market cycles.\n- Transforms blockspace from a pure financial commodity to a cultural ledger.
$500M+
Total Fees Paid
Non-Cyclical
Demand Profile
06
The Solution: Chaumian Ecash & Fedimint
Community custody models like Fedimint batch and settle transactions off-chain, using Bitcoin as a final settlement layer. This optimizes fee revenue for high-value finality.\n- Batching converts many small payments into one on-chain transaction, maximizing fee efficiency.\n- Creates a two-tiered market: cheap, private community cash vs. expensive, global settlement.
1000:1
Batching Ratio
Custodial Trust
Trade-off
future-outlook
THE ECONOMIC SHIFT
2040 and Beyond: The High-Fee Equilibrium
Bitcoin's security model will transition from inflation-driven block rewards to a fee-only market, creating a new economic reality for users and miners.
Block subsidy approaches zero by 2040, removing the primary incentive for miners. Security will be funded exclusively by transaction fees, forcing a fundamental redesign of the fee market. This is not a gradual change; it is a hard economic pivot.
High fees become the norm, not an anomaly. The current fee spikes during bull markets will represent the baseline equilibrium. This will price out simple P2P transfers, relegating the base layer to high-value settlements and L2 anchoring.
Security budgets will shrink unless fee revenue matches today's subsidy value. A $500K daily subsidy at $60K/BTC requires a permanent fee market of ~8.3 BTC/day. This creates a direct, volatile link between Bitcoin's price and its hash rate security.
Evidence: The 2024 halving cut the subsidy to 3.125 BTC. By 2036, it falls below 1 BTC. Miners like Marathon and Riot will face margin compression, accelerating consolidation and geographic shifts to the cheapest energy sources.
takeaways
BITCOIN'S POST-SUBSIDY REALITY
TL;DR for Protocol Architects
When block rewards vanish, transaction fees become the sole security budget. This is a fundamental shift, not a gradual change.
01
The Problem: Inelastic Security Budget
Today, ~90% of miner revenue comes from the subsidy. Post-2040, security must be funded purely by fees, creating a volatile and potentially insufficient budget.\n- Fee volatility threatens hash rate stability.\n- Low-fee periods could invite 51% attacks.
90%
Subsidy Share
2040
Cliff Edge
02
The Solution: Demand-Side Expansion (Ordinals, Runes, L2s)
Fee pressure must come from new, high-value use cases, not just payments. Ordinals & Runes have already proven demand for block space as digital artifact storage.\n- Creates fee competition between asset types.\n- Layer 2s (like Stacks, Rootstock) batch transactions, paying high-value base-layer settlement fees.
1000%+
Fee Spikes
$B+
Inscription Market
03
The Architecture: Fee Market 2.0 (Ephemeral Anchors, CPFP)
Protocols must design for fee predictability and user experience. This means mastering Bitcoin's native fee mechanisms.\n- Use Child-Pays-For-Parent (CPFP) to unstick transactions.\n- Design around ephemeral anchors for L2 contract interactions.\n- Implement RBF (Replace-By-Fee) strategies.
~10 blocks
CPFP Window
RBF
Critical Tool
04
The Hedge: Merge Mining & Off-Chain Auctions
Don't rely solely on Bitcoin's native fee market. Architect systems that can leverage alternative security models to supplement income.\n- Merge mining with other SHA-256 chains (e.g., Syscoin) shares security costs.\n- Off-chain fee auctions (inspired by MEV-Boost) could create efficient price discovery for block space.
SHA-256
Merge Target
Off-Chain
Auction Layer
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