The subsidy is security. Bitcoin's current $40B annual security budget is 90% block subsidy. Transaction fees contribute less than 10%. This is a massive, hidden subsidy.
bitcoins-evolution-defi-ordinals-and-l2s
Blog
Sustained Fees and Bitcoin Network Security
An analysis of Bitcoin's post-halving security model, examining whether fee pressure from Ordinals, Runes, and L2s can sustain the network's $40B+ annual security budget as the block subsidy declines.
introduction
THE SUBSIDY CLIFF
The $40 Billion Question
Bitcoin's security budget faces a $40B annual shortfall post-subsidy, forcing a fundamental rethink of its economic model.
Fee markets must scale. Post-2040, fees must replace the subsidy. Current ~$2M daily fee revenue must grow 50x. This requires ordinals-like demand or a fundamental shift in block space utility.
Layer-2s are a double-edged sword. Networks like Lightning and Stacks offload transactions, reducing mainchain fee pressure. They create a security cannibalization risk if they don't feed value back to L1.
Evidence: Bitcoin's hash rate follows price, not utility. A 50% price drop would slash security by ~$20B annually today. Post-subsidy, that security vanishes unless fees are real.
key-trends
SUSTAINED FEES & BITCOIN SECURITY
The New Fee Pressure Cooker
Post-halving, Bitcoin's security budget depends on fee revenue, creating a volatile new economic game for miners and users.
01
The Problem: The $0.5B Halving Shock
Every four years, the block subsidy is cut in half, instantly removing a massive revenue stream for miners. The 2024 halving slashed annualized miner revenue by ~$10.5B, forcing reliance on volatile transaction fees. Without sustained fee pressure, hash rate and thus network security become economically fragile.
-50%
Subsidy Cut
$10.5B
Revenue Gap
02
The Solution: Ordinals & Inscriptions
NFT-like assets on Bitcoin create a permanent, fee-paying demand sink. They proved fee markets can exist without pure financial transfers, generating over $300M in fees in their first year. This establishes a new baseline demand layer, but volume remains highly speculative and cyclical.
$300M+
Total Fees
4MB+
Block Size
03
The Solution: Layer-2 & Sidechain Settlements
Scaling solutions like Lightning Network, Stacks, and Rootstock batch thousands of transactions into single Bitcoin settlements. This aggregates fee demand, creating larger, more predictable fee payouts per block. It transforms micro-payments into macro-security contributions.
1M+
TPS Capacity
~10k tx
Per Settlement
04
The Wildcard: Runes & Fungible Token Mania
A new token standard launched at the halving, designed for efficient fungible tokens on Bitcoin. It creates a fee event tied to the halving cycle, potentially driving sustained congestion and high fees for weeks or months as new tokens are etched and minted, mimicking Ethereum's gas fee dynamics.
Halving Day
Launch Event
10x+
Fee Spikes
05
The Risk: Miner Centralization Pressure
Low and volatile fee revenue disproportionately harms smaller miners with higher operational costs. This risks consolidating hash power among vertically integrated, publicly traded miners with lower energy costs and capital reserves, potentially reducing the network's geographic and political decentralization.
Top 3 Pools
>50% Hash
Low Margin
Small Miners Exit
06
The Long-Term Bet: Bitcoin as a Sovereign Settlement Layer
The endgame is Bitcoin absorbing value settlement from other chains and traditional finance via bridges and custodians (think Coinbase, tBTC, Multichain). If Bitcoin becomes the final ledger for $1T+ in asset transfers, fee demand becomes institutional and inelastic, securing the network for decades.
$1T+
Settlement Target
Inelastic
Fee Demand
BITCOIN SECURITY ECONOMICS
Halving Math: Subsidy vs. Fee Reality
Quantifies the post-halving security challenge by comparing current subsidy dominance to required fee levels for equivalent miner revenue.
| Security Revenue Metric | Pre-Halving (Block 840,000) | Post-Halving (Block 840,001+) | Required for Parity |
|---|---|---|---|
Block Subsidy (BTC) | 3.125 BTC | 1.5625 BTC | N/A |
Avg. Fee Revenue/Block (BTC) | ~0.8 BTC | Projected: ~0.8 BTC | ~2.36 BTC |
Total Revenue/Block (BTC) | ~3.93 BTC | ~2.36 BTC | ~3.93 BTC |
Fee % of Total Revenue | 20% | 34% (Projected) | 50% |
USD Security Spend/Day (at $70k/BTC) | $47.2M | $28.3M | $47.2M |
Required Avg. Fee per TX (USD) | $15 | $15 (Status Quo) | $45 |
Security Budget vs. Ethereum L1 | 2.1x Larger | 1.3x Larger | 2.1x Larger |
Sustained Fee Pressure Viability | TBD |
deep-dive
THE SECURITY MODEL
Stress Testing the Fee-Only Future
This section analyzes the long-term security of Bitcoin's fee-only model against competing blockchains with alternative revenue streams.
The security budget flips. Bitcoin's security budget will transition from block subsidy dominance to fee market dominance post-2040. This shift creates a direct, volatile link between network usage and miner revenue, unlike chains with stable staking yields or MEV capture.
Fee competition is deflationary. A pure fee market creates a race to the bottom for transaction inclusion costs. This pressures miner margins and, by extension, hash rate, unless demand for block space grows exponentially to compensate. Ethereum's proposer-builder separation and EIP-1559 burning create a different economic dynamic.
Evidence: The 2023 fee spikes during the Ordinals frenzy demonstrated that high-value use cases can temporarily secure the network. However, sustaining that requires perpetual, non-speculative demand akin to global settlement traffic or Lightning Network micropayments at scale.
risk-analysis
THE SECURITY TRANSITION
Attack Vectors in a Low-Subsidy Era
As Bitcoin's block subsidy declines, transaction fees must become the primary security budget, exposing new economic vulnerabilities.
01
The Fee Volatility Death Spiral
Security budgets tied to volatile, mempool-dependent fees create a self-reinforcing risk loop. A price crash or prolonged low-fee period can slash hash rate, making a 51% attack cheaper and more likely, which further erodes confidence and fees.
- Attack Cost Plummets: Hash price can drop >80% during bear markets.
- Time-Bound Vulnerability: Windows of low security can last for weeks or months.
- Reflexive Risk: Lower security begets lower network value, reducing future fee potential.
>80%
Hash Price Drop
Weeks
Vulnerability Window
02
The Miner Extractable Value (MEV) Subsidy
In a low-subsidy world, miners will aggressively optimize for MEV to survive, centralizing power and corrupting protocol neutrality. This turns security providers into adversarial network participants.
- Centralization Force: Sophisticated MEV capture favors large, integrated mining pools.
- Protocol Corruption: Transaction ordering becomes a paid service, undermining censorship resistance.
- Security Distortion: Honest mining becomes unprofitable vs. extractive strategies.
>99%
Pool MEV Capture
Core Risk
Censorship
03
The Layer-2 Security Tax
Scaling solutions like Lightning and sidechains offload transactions, siphoning fee revenue away from the base layer. This creates a security deficit where L1 secures $10B+ in L2 value but is paid in pennies.
- Revenue Leakage: Fees are captured off-chain or on competing settlement chains.
- Misaligned Incentives: L2 users have no direct mechanism to pay for L1 security.
- Parasitic Security: High-value activity becomes decoupled from the security budget.
$10B+
L2 Value Secured
Pennies
L1 Fee Revenue
04
Solution: Ordinals & The Cultural Pivot
NFT-like inscriptions and BRC-20 tokens have demonstrated Bitcoin's ability to generate sustained, high-fee demand independent of pure monetary transfers. This creates a cultural subsidy for security.
- Demand Inelasticity: Fees for digital artifacts are less tied to BTC price volatility.
- New Economic Layer: Unlocks $1B+ in new fee market activity.
- Security Diversification: Reduces reliance on a single use case (peer-to-peer cash).
$1B+
New Fee Market
Inelastic
Demand Driver
05
Solution: Drivechain & Federated Sidechains
Proposals like Drivechain (BIP-300) formally tether sidechain security to Bitcoin's hash power, creating a fee-sharing model. Sidechains pay for their own security via a merged mining subsidy.
- Direct Fee Recycling: L2 activity directly bids for L1 block space and security.
- Hash Power Utility: Expands the use case and revenue for miners.
- Controlled Experimentation: Enables scaling without bleeding security revenue.
100%
Fee Recycling
Merged Mining
Mechanism
06
Solution: Chaumian Ecash & Silent Payments
Privacy-preserving protocols like Cashu and Silent Payments increase the utility and fungibility of Bitcoin, making high-value settlement on L1 more attractive. Privacy becomes a premium fee product.
- High-Value Settlement: Enables confidential large transactions on-chain.
- Fungibility Premium: Users pay more for enhanced privacy and security.
- Demand Catalyst: Creates a sustainable fee niche beyond transparent ledger entries.
Premium
Fee Product
High-Value
Settlement Niche
future-outlook
THE BLOCK SUBSIDY CLIFF
The Path to a Sustainable Security Budget
Bitcoin's security model faces a fundamental economic transition as block rewards diminish, forcing a reliance on transaction fees.
The subsidy halving is a countdown. Bitcoin's security budget is currently dominated by the block reward, which halves every 210,000 blocks. This predictable decay creates a hard economic deadline where transaction fees must scale to replace billions in annual miner revenue. The transition is not optional; it is a protocol-mandated stress test.
Fee market maturity is non-linear. Expecting a smooth, linear increase in fees is naive. The fee market will experience extreme volatility spikes during periods of high demand, similar to the 2017 and 2021 bull runs, but these must become the norm, not the exception. Sustainable security requires consistently high base-layer demand.
Layer 2 solutions cannibalize security. Protocols like Lightning Network and sidechains drive efficiency by moving transactions off-chain. This reduces the fee pressure on the base chain, directly attacking the long-term security budget. The very scaling solutions Bitcoin needs may undermine its economic model.
Evidence: Post-2024 halving, the block subsidy falls to 3.125 BTC. To match current $ security, the average fee per block must increase from ~0.1 BTC to over 3 BTC, a 30x multiplier on fee demand that current usage patterns do not support.
takeaways
SUSTAINED FEES & BITCOIN SECURITY
TL;DR for Protocol Architects
The post-halving era demands new, sustainable revenue models to secure the world's largest blockchain.
01
The Halving Problem: Security Budget Collapse
Block subsidy decays exponentially, leaving transaction fees as the sole security anchor. Without sustained high-fee demand, the hash rate becomes vulnerable to >51% attacks as security ROI plummets.
- Key Risk: Security budget could drop >90% by 2040.
- Key Metric: Fees must grow to >50% of total miner revenue long-term.
>90%
Subsidy Drop
>50%
Fee Target
02
Solution: Layer-2s as Fee Factories
Protocols like Lightning Network, Stacks, and Rootstock drive fee demand by enabling scalable smart contracts and fast payments. Their success directly translates to settled Bitcoin transactions.
- Key Benefit: Creates recurring, high-volume fee pressure.
- Key Entity: Ordinals/Inscriptions demonstrated latent demand, generating $200M+ in fees.
$200M+
Fees Generated
L2s
Demand Source
03
The Runes Protocol: Programmable Fee Markets
Casey Rodarmor's Runes fungible token standard is engineered for efficient UTXO management, creating predictable, sustained fee markets unlike one-time inscription bursts.
- Key Benefit: Optimizes block space usage, encouraging continuous minting/transfers.
- Key Insight: Aligns token issuer incentives with network security via fee burns.
UTXO
Efficient
Sustained
Fee Market
04
Architect for Fee Capture, Not Just Subsidy
Design protocols where economic activity must settle on-chain. Learn from Ethereum's EIP-1559 burn and Solana's priority fee models. Security is a continuous auction.
- Key Principle: Fee pressure must be inelastic to usage (e.g., storage rents, state commitments).
- Key Action: Integrate Bitcoin-native fee sinks into your tokenomics.
EIP-1559
Model
Inelastic
Demand Goal
ENQUIRY
Get In Touch
today.
Our experts will offer a free quote and a 30min call to discuss your project.
NDA Protected
Confidentiality24h Response
Time to ValueDirectly to Engineering Team
No Sales Fluff10+
Protocols Shipped
$20M+
TVL Overall