Eli Ben-Sasson, who is the co-founder and CEO of StarkWare, has proposed changing the fundamental principles of Bitcoin by removing its 21 million supply limit. This suggestion, discussed on social media, has met with significant resistance from the Bitcoin community, as altering the supply cap is as contentious as renaming the Mona Lisa.
How does Bitcoin's lost supply impact its future?
The crux of Ben-Sasson's argument lies in the fact that many Bitcoin private keys have been lost over the years. This includes instances where individuals have passed away without sharing seed phrases, hard drives containing Bitcoin have ended up discarded, and wallets from early years remain unused on outdated computers. Consequently, this leads to a diminishing pool of accessible Bitcoin, putting strain on the ecosystem even as the code heads toward its established maximum.
Current estimates indicate that approximately 3 to 4 million Bitcoin are lost forever, amounting to about 15% to 20% of the entire supply. This situation is projected to worsen as time progresses.
Ben-Sasson views this ongoing loss as a serious risk, as the Bitcoin network relies on miners who need to be incentivized to validate transactions. Presently, that incentive comes from two sources: block rewards, which consist of newly created Bitcoin, and transaction fees. The issue arises as the block reward is set to halve every four years and will eventually reach zero, making the network's dependence on transaction fees potentially unsustainable.
To address this issue, Ben-Sasson suggests implementing a new issuance strategy where the annual supply of Bitcoin would increase at a fixed rate of 4%. Such a strategy would provide continual incentives for miners while countering the ongoing loss of Bitcoin from the ecosystem.
Why is the Bitcoin community opposed to this proposal?
The response from Bitcoin enthusiasts has been overwhelmingly negative. Many who identify as Bitcoin maximalists regard any modification to the supply mechanism as a fundamental threat to Bitcoin's integrity. They argue that lost Bitcoins enhance the value of remaining ones; thus, if 4 million are irretrievably lost, the true effective supply stands closer to 17 million.
Moreover, governance poses a significant challenge. Bitcoin lacks centralized leadership, which means changing the issuance structure would require a broad consensus among node operators, miners, and developers. Previous conflicts over protocol changes have resulted in contentious forks, such as the introduction of Bitcoin Cash.
How does StarkWare fit into this conversation?
Understanding Ben-Sasson’s viewpoint is crucial, as StarkWare is a key player in the blockchain infrastructure space. Known for ZK-STARKs technology, the company is actively expanding its reach into the Bitcoin domain. If Bitcoin's mining ecosystem weakens due to block rewards declining, the security of all layers built upon Bitcoin—including StarkWare's applications—may falter.
In contrast to Bitcoin, Ethereum has taken a more flexible approach with its shift to proof-of-stake and the implementation of a fee-burning mechanism through EIP-1559, essentially redefining its monetary policy. Bitcoin's philosophy has resisted such flexibility, making it a fundamental difference between the two largest cryptocurrencies in how they manage their ecosystems.
What are the implications for Bitcoin investors?
As we anticipate further reductions in block rewards, expected to dip below 1 Bitcoin per block around 2036, the debate over whether transaction fees can maintain network security is expected to intensify. With 3 to 4 million Bitcoin permanently gone and the subsidy continuing its decline, investors should closely monitor the impact that revenue from transaction fees has in relation to the diminishing supply of block rewards. This balance will likely play a critical role in shaping Bitcoin's durability in the face of economic realities.