Bitcoin security question resurfaces as halving looms

The upcoming bitcoin (BTC) halving once again prompts us to ponder one of the most challenging questions in the bitcoin sphere: what does the future hold for the so-called security budget of this largest decentralized cryptocurrency network?

How secure will bitcoin remain post-halving, and what about in 10 years, 20 years? How are all these aspects interconnected, and what potential future scenarios might unfold?

Let's delve into how it all operates and explore potential outcomes.

Within the realm of bitcoin, various attack vectors exist, but miners play a crucial role in securing the blockchain to prevent tampering, such as double-spending BTC or creating a new chain. As more miners contribute to the network by deploying their mining rigs and increasing computational power (hashrate), the network becomes more secure – conversely, a decrease in participation weakens its security. Why? In theory, an attacker would need to control at least 51% of the computational power to manipulate records on the blockchain. However, according to Bitcoin mining experts, in practice, achieving a successful attack would likely require amassing a significantly larger portion of the hashrate.

Miners are motivated to mine and secure bitcoin through block rewards and transaction fees. Currently, a miner receives a 6.25 BTC ($416,000) reward when they successfully add a new block to the blockchain. Additionally, they collect fees from transactions included in the same block.

In March, miners recorded a historic collection of $2 billion, with $85 million stemming from transaction fees alone.

What is the bitcoin halving?

This is where the bitcoin halving plays a pivotal role. It's an automated process ingrained in the bitcoin protocol, occurring roughly every four years, that slashes the block reward in half. This action diminishes miners' revenues and decreases the new BTC supply entering the market. The next halving is projected to occur on or around April 20th of this year.

This indicates that mining becomes significantly less profitable, and less efficient miners may be compelled to deactivate their machines, thereby diminishing the computational power of the bitcoin network and, consequently, its security. Following the previous halving in May 2020, the hashrate plummeted by approximately 25% within two weeks, only to surge to levels roughly 20% higher than those before the halving by the year's end. Since the last halving, the third in bitcoin's history, the hashrate has skyrocketed by around 570%, once again allaying concerns regarding Bitcoin's security budget.

However, will this trend persist in the future? Especially considering that the block reward will continue halving every four years for over a century.

In the foreseeable future, while a decline in hashrate immediately after the halving is anticipated, bitcoin's computational power is expected to rebound and continue its upward trajectory as miners invest in more efficient machines, banking on the possibility of bitcoin's price continuing to rise. Even Bhutan is bolstering its position in the bitcoin mining industry, with plans to increase the kingdom's mining capacity from the current 100 MW to 500 MW by the first half of 2025.

Ensuring security budget

However, to maintain current levels of security, the bitcoin network will rely on the continued surge in the BTC price, increased network adoption, and the emergence of additional revenue streams for miners.

According to estimates from bitcoin company River Financial, bitcoin's security budget (comprising block rewards and fees) amounted to $9.5 billion in 2022. Based on its hypothetical scenarios, if adoption levels and fees remain constant, the price of BTC would need to reach $912,000 by 2042 to uphold the same budget. At the time of writing, BTC is trading at $66,630.

Thus far, the price of bitcoin has outpaced adoption growth, and while fee revenues have risen, they still constitute a small fraction of miners' earnings and are currently insufficient to offset the reduction in block rewards. Regardless, it's projected that the demand for bitcoin block space will surge alongside adoption, leading to increased transactions on the blockchain and, subsequently, higher fees. Recent advancements support predictions of fee growth, with new solutions introducing fresh use cases for bitcoin, such as NFTs (non-fungible tokens), among others. However, it remains uncertain whether these developments will suffice to counterbalance future halvings and the ongoing reduction in block rewards.

Meanwhile, the bitcoin mining industry continues to evolve, striving to enhance efficiency and explore avenues for cheaper electricity and new revenue sources. For instance, some miners are already generating millions through supplementary services like power grid balancing, further incentivizing their involvement in mining and the continued security of bitcoin.

Moreover, we may witness intensified debates concerning bitcoin's supply cap, which currently stands at 21 million bitcoins. Some proponents of bitcoin propose the notion of lifting this cap to ensure that the block reward continues to incentivize miners in the event of a stall in bitcoin adoption. However, this idea has largely been disregarded, with proponents of the existing hard cap arguing that raising it would simply create a separate blockchain, while the original bitcoin, with its hard cap, would continue to operate.

Unprofitable attack

Regardless, the central question in all these speculative scenarios remains: what constitutes a sufficient security budget for bitcoin? Even in previous years, when the bitcoin hashrate was considerably lower, the network was deemed secure and highly resistant to attacks.

As emphasized by River, "Obtaining this much [51%] hashrate externally would not just be a matter of capital. An attacker would need to obtain mining rigs at an unprecedented scale, source the power, and bring them online, all without any observer or participant making this public."

Meanwhile, theoretically, an attack from within is also plausible, suggesting that existing mining pools could potentially be utilized to assail bitcoin. However, this scenario is complex, as miners participating in such pools could readily switch their mining operations to another pool if the risk of a 51% attack were to materialize. This has precedent, as evidenced by the brief period when the now-defunct GHash.io mining pool momentarily exceeded the 51% threshold in 2014.

As of the time of writing, the two largest bitcoin mining pools, Foundry USA and AntPool, respectively control 34% and nearly 20% of the hashrate, totaling 54%. This implies that these two pools could, in theory, attempt to launch an attack on bitcoin. However, such an attack would be self-destructive for these pools, as it would trigger a collapse in the price of BTC, killing their own business in the process. Consequently, miners are incentivized to prioritize the security of bitcoin rather than attempting to undermine it.

This doesn't eliminate the possibility of non-profit-motivated attackers, such as state actors, attempting to target bitcoin. Nevertheless, as previously mentioned, such attempts would be exceedingly intricate.

Furthermore, as emphasized by bitcoin educator Andreas M. Antonopoulos in his renowned talk, an attacker would only gain control for a brief period of ten minutes before being expelled from the network, incurring significant losses and merely obtaining the opportunity to double-spend their own BTC. It's crucial to note that a 51% attacker cannot seize other users' BTC. Additionally, according to Antonopoulos, even if an attacker were to fork a new blockchain, they would encounter challenges in persuading users to adopt it.

However, as indicated by the same educator, a miner with no monetary incentives who controls the majority of the hashrate could indeed orchestrate a denial-of-service (DoS) attack on bitcoin. Yet, according to the educator, it would entail billions in USD, and ultimately, bitcoin would rebound, once again demonstrating its resilience.

With that being said, while all the aforementioned scenarios are theoretically possible, the bitcoin industry is currently focused on enhancing its security, adoption, and decentralization, discovering new use cases, and thereby increasing the demand for BTC. This would inevitably render such an attack even more challenging to execute in practice.