So I wrote down my thoughts on how cryptocurrencies have value in terms of dollar/fiat value in this article: https://paragraph.com/@iampritamg/why-does-bitcoin-have-value. But I still had some lingering question on how this holds up over time. Sure there is value in bitcoin transaction having the ability to transfer value over the internet and this demand for store of value plus having the store of value due to digital scarcity and right now the world values one Bitcoin at $120k, but I asked myself what happens after the upcoming bitcoin halvings.

The Bitcoin network's security relies on a system called Proof of Work (PoW). In this system, individuals and companies known as "miners" use powerful computers to solve complex mathematical puzzles. The first one to solve the puzzle gets to add the latest "block" of transactions to Bitcoin's public ledger and is rewarded with a certain amount of new bitcoin.

This reward creates a powerful incentive for miners to act honestly. They spend significant amounts of money on specialised hardware and electricity to compete. To attack the network—for instance, by trying to spend the same bitcoins twice—a malicious actor would need to control more than half of the network's entire computing power. This is known as a 51% attack.

Given how many thousands of miners are spread across the globe, acquiring that much computational power would be extraordinarily expensive. It would make far more economic sense to use that computing power to mine bitcoin honestly and earn the rewards. In short, it's more profitable to cooperate than to attack.

Think of it like this: why spend $10 on a sledgehammer to break open a box that only contains a $5 bill? The cost of the attack far outweighs the potential reward, making the contents of the box inherently secure. This economic principle is the foundation of the Bitcoin network's security.

Bitcoin miners earn revenue from two primary sources:

Block Subsidy: A reward of newly created bitcoin that the network automatically pays to a miner for successfully adding a new block of transactions to the blockchain.

Transaction Fees: Fees paid by users to miners as an incentive to include their transactions in a block.

The block subsidy that is awarded to miners is halved every 210,000 blocks, or roughly every four years. This is done because Bitcoin was intentionally coded with a fixed supply to make it a scarce digital asset.

This process, known as the "halving," serves a few key purposes:

• Controls Inflation: Unlike traditional currencies that governments can print at will (potentially leading to inflation), the rate at which new bitcoin is created is predictable and slows down over time. This controlled supply helps to maintain its value.

• Creates Scarcity: There will only ever be 21 million bitcoin. The halving ensures that the final bitcoin won't be mined until around the year 2140. This finite supply is a core feature of Bitcoin's design.

• Mimics Precious Metals: The system is designed to be similar to the mining of precious resources like gold. Initially, gold is easier to find, but as more is extracted, it becomes progressively harder and more expensive to discover new reserves. Similarly, the reward for mining Bitcoin decreases over time, making the creation of new coins more difficult.

By progressively reducing the issuance of new coins, the halving mechanism is designed to make Bitcoin a deflationary asset, meaning its purchasing power could increase over time if demand for it continues to grow. This predictable scarcity is a primary reason why many consider it a store of value.

For much of Bitcoin's history, transaction fees have not consistently risen to a level that would replace the diminishing block subsidy. This issue is one of the most debated topics when analysing the future of Bitcoin.

The total reward for miners, consisting of the block subsidy and transaction fees, is known as the "security budget." This budget pays for the hash rate that secures the network. The concern is that as the subsidy trends towards zero (the last new satoshis will be mined around the year 2140), the network must be secured almost entirely by transaction fees.

If transaction fees remain low, the total miner revenue will decrease. This could lead to:

• Reduced Hash Rate: Miners could become unprofitable and shut down their machines, lowering the network's total computational power (hash rate).

• Increased Centralization: Only miners with the absolute cheapest electricity and most efficient hardware would survive, potentially leading to centralization.

• Lowered Security: A significantly lower hash rate would, in theory, reduce the cost for a hostile entity to launch a 51% attack.

In order to account for the lower subsidy over time, one or all of the below things need to happen:

1. A High-Value Settlement Layer: The dominant theory is that Bitcoin's main blockchain (Layer 1) will not be for buying a cup of coffee. Instead, it will evolve into a global settlement layer for high-value transactions that demand the highest level of security and finality.

In this scenario, block space becomes an extremely valuable commodity. Corporations, governments, and second-layer protocols would be willing to pay significant fees for the final, immutable settlement of large transactions, much like paying for a secure armoured car transport versus a regular postal service.

2. The Role of Layer-2 Solutions: Technologies built on top of Bitcoin, like the Lightning Network, are crucial to this vision. The Lightning Network allows for near-instant, low-cost transactions that are bundled together off-chain.

• How it helps: Instead of every small payment needing space in a block, millions of transactions can occur on Layer 2. These networks will still need to use the main Bitcoin blockchain to open and close payment channels and settle final balances.

• Impact on Fees: This creates a dynamic where the main chain processes fewer, but more economically significant, transactions (the settlements from Layer 2), which can justify higher fees.

3. Rising Bitcoin Price: While miners are rewarded in BTC, their primary costs (electricity, hardware, salaries) are paid in fiat currency. Therefore, a significant increase in the price of Bitcoin can offset a reduction in the block subsidy. For example, a miner earning 0.1 BTC in fees when the price is $500,000 makes the same fiat revenue as a miner earning 1 BTC when the price is $50,000. Most long-term models assume a substantial rise in Bitcoin's value as a key component of future miner profitability.

4. Emergent Uses for Block Space: New innovations can unexpectedly create valuable use cases for Bitcoin's block space, boosting competition and driving up the transaction fees required to use it.

5. Charitable Mining: Companies and Nation states and Individuals who value the decentralisation ideals will continue to mine and secure the network

On Bitcoin being the settlement layer:

Currently Bitcoin has always been held in the regards of buy and hold, that's been the lore. I feel that Bitcoin will really start to add value once there's enough usage for what it was originally meant to be used for : electronic cash system. Unless people start using Bitcoin for actual transactions, it would not be able to live up it value.

On Lightning being the layer 2 for bitcoin:

Imagine you are trying to onboard 1 billion people onto the Bitcoin network, it would take about n years just to onboard everyone wherein you have to send some amount of bitcoin to every person's wallet just so that they can get started. Once they have some bitcoin on their wallets it would take n more years to open a lightning channel because that's an on-chain transaction. And if we do figure out a way to onboard a billion people onto the network, imagine how insane the fees will have become. Would you be able to pay $1000-$10000 just to open a lightning channel when there are cheaper options available? I guess the layer 2 networks would have to adapt to this onboarding problem

On Rising Bitcoin Price:

It's a risky assumption to believe Bitcoin's price will perpetually increase. If it stagnates or declines, the economic model for miners breaks down. Miners face significant upfront capital expenditure on hardware and ongoing operational costs for electricity. While they can absorb losses temporarily, prolonged periods of unprofitability are unsustainable and would inevitably force them to shut down their operations.

On charitable mining:

A trustless system must pay for its own security. Relying on charity is simply reintroducing a new form of trust—trust that someone else will bear a cost for your benefit—which is the very thing it was designed to eliminate.

In the end, Bitcoin is at a major turning point. For it to succeed, it has to prove it can be useful and grow to handle lots of people. If it doesn't, users might prefer easier "IOU" versions of Bitcoin, where a company holds your coins for you instead of you owning them yourself.

To prevent this, two things need to happen. First, the main Bitcoin network needs enough activity to generate fees that can pay miners to keep it secure forever. Second, it must scale using Layer 2s to handle fast and cheap payments for everyone around the world.

This leads to a future where the main network is used for huge, important money transfers, while most everyday shopping happens on these layer 2s. That way, you can still be in full control of your own money, and it will still be easy to use.