Bitcoin’s Transaction Fees are Becoming More Valuable Than Bitcoin Cash’s Block Rewards
Bitcoin and Bitcoin Cash have different strategies when it comes to payments.
In Bitcoin, the block weight limit is kept relatively low in order to keep the cost of operating a full node at a manageable level. The idea is to use the Lightning Network for payments with the base blockchain acting as a sort of settlement layer.
With Bitcoin Cash, there is a greater focus on cheap, on-chain payments today through the use of a larger block size limit at the cost of potentially making it more costly to participate in the system — although in practice Bitcoin Cash blocks are usually around one-twentieth or less the size of a normal Bitcoin block due to a lack of adoption.
If the monetary policies in Bitcoin and Bitcoin Cash are to be preserved, transaction fees will be the key incentive for miners to secure these networks over the long term.
Transaction fees become much more important on these networks as the block subsidy (the new bitcoin or bitcoin cash awarded to miners) is slowly removed over time. Once the block subsidy is gone, transaction fees are the key financial incentive for miners to secure the network.
Bitcoin and Bitcoin Cash developers have different views on how these transaction fees will accrue. On Bitcoin, the idea is there will be fewer transactions with higher fees, and with Bitcoin Cash, the goal is to have many on-chain, lower-fee transactions.
It should be noted that high transaction fees on Bitcoin do not necessarily mean high costs for individual users as the costs associated with on-chain transactions can be shared (see our recent post on this topic).
Recently, the daily transaction fees collected by Bitcoin miners have become more valuable than the daily block rewards collected by Bitcoin Cash miners. This means on some days the Bitcoin network would be more secure than the Bitcoin Cash network even if the 12.5 BTC per block subsidy were removed and the monetary supply were capped right now.
Looking at the Data
On April 3rd, the value of all Bitcoin transaction fees surpassed the value of all Bitcoin Cash block rewards for the first time since early February 2018.
A variety of factors have gone into Bitcoin transaction fees surpassing Bitcoin Cash block rewards once again: Bitcoin Cash was down around 77.5% against Bitcoin in 2018, Bitcoin blocks have become more congested lately (partially due to Veriblock), and Bitcoin Cash simply does not have many users to generate transaction fees of their own (Dogecoin has more blockchain activity).
What Does It All Mean?
All of this is obviously bad news for Bitcoin Cash.
As we explained last week, Bitcoin Cash will experience its first halving around 40 days before Bitcoin’s next halving. The 40-day window between these halvings could weaken Bitcoin Cash’s comparative security because miners will be less incentivized to mine that particular chain.
If Bitcoin fees were to rise higher than they are today around the time of Bitcoin Cash’s halving next year, it could make the related security issues even worse.
In short, the fact that Bitcoin miners are collecting more from transaction fees than Bitcoin Cash miners are collecting via block rewards is simply another indication that Bitcoin Cash has been unable to get anywhere near Bitcoin in terms of adoption, security, value, and a variety of other important metrics.
While Bitcoin is on its way to developing a fee market to provide long-term security to the network, Bitcoin Cash will potentially face a crisis in terms of how it will be able to secure the network without eventually changing its monetary policy and adding a perpetual block subsidy.