What can go wrong if demand for Bitcoin blockspace becomes taken up by non-Bitcoin uses?

The general heuristic is that anything adding demand for fees is good for security. This is true especially if a fee market doesn’t materialize in the next 15–20 years; todays fee rates are clearly not sustainable when the subsidy has dropped by a factor of 32, or 64, etc.

But the important question underpinning security is “security against what?” Certainly, more fees leading to more mining and more hash would make it very difficult for an angry nation state to 51% attack Bitcoin. But what if that’s not the only attack vector we’re worried about?

I’m offering here a couple quick scenarios that seem feasible within our universe. (I’m not an expert on the technical details about how permissively restrictive or restrictively permissive different opcodes may be — this is an economic rather than technical argument.)

Threats to monetary maximalism

Suppose The Great Western Stable Dollar is an asset with its own complicated consensus system, layer 2s and such, but the fundamental security model is based on storing hashes on the Bitcoin blockchain. Say this becomes wildly popular, and major financial institutions begin using it. Each GWSD transaction stored in Bitcoin’s blockspace affords thousands of payments on other channels, and so naturally, the demand rises — say financial institutions are willing to pay $1000 for each UTXO, whereas, the typical Bitcoin transactor would be only be willing to pay $300 for the same blockspace. In this case Lightning Network or whatever layer 2 that uses Bitcoin as unit of account is in direct competition for blockspace. The Bitcoin layer 2s are are directly up against well-funded, politically connected and centralized institutions. This could choke not only Lightning out but other Bitcoin denominated payments. So less pure Bitcoin transactions are made, and there is less Bitcoin development.

OK, but the fees and security budget are all paid in Bitcoin, so this is good, right? That part could be fleeting. Mining corporations are working with financial institutions to record GWSD transaction; these corporations all know each other, and now that costs have driven the average pleb out of directly transacting on the network, it’s not so difficult to find an arrangement by which most mining fees would be paid in GWSD.

Eventually, the “Bitcoin blockspace” no longer deals with Bitcoin, but is really just a settlement layer for The Great Western Stable Dollar. The mining “fees” are simply placeholder IOUs that are immediately settled in GWSD.

Introduction of Strategic mining via MEV, leading to centralization

There’s some interesting strategic mining that could eventually happen in Bitcoin, but most of it requires some cracks to appear before the strategic mining makes any sense. An easy example is the relationship between petty compliant mining and fee undercutting. The Petty Compliant strategy is when miners who are faced with a chain split choose to mine on the chain that leaves more fees on the mempool, regardless of the whether this chain is first-seen or not. If miners are actually doing this, they create an incentive for fee-sniping, where other miners intentionally create a split in order to try to claim a fraction of fees in a higher fee block. But they won’t do this unless there’s a large fraction of PC miners. On the other hand, PC miners won’t have reason to come into existence unless there are frequent splits. So the fee-undercutting scenario outlined in the “ instability” paper has a chicken-and-egg problem.

Once chain splits start to become frequent, it becomes more important for miners to develop offensive and defensive strategies to make sure they’re on the winning side of a race. One of the most obvious strategies is to form alliances — this could lead to some obvious bad places.

At the moment, there isn’t very much incentive for short reorgs or chain splits happening. To our knowledge chain splits are very infrequent. But, if there’s another ledger happening with different incentives, there could be new opportunities for someone to attempt to create and profit from short chain splits. Suppose someone would like to front run a DEX transaction and dangles a huge fee (out of band, or maybe not) for miners willing to assist with a short reorg.

Once miners start doing any sort of deviations from the “default” protocol, this opens up more opportunities for more deviations from the default protocol, and this could descend into chaos that resolves into centralization.

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