Note: This is strictly a post about Bitcoin as a payment system. If you have something to say about Bitcoin as a store of value, a bubble or a long-term investment, you are off topic.
That said, I want to think about the interaction between transaction fees, seignorage and the number of miners. I’m sure there are people who have thought far harder about this than I have, and I dare to expect that some of those people are reading this. I hope one or more of those people will let me know whether I’m thinking about it correctly.
It seems to me that at least in the short run, the following things are more or less fixed:
a) The cost of mining (call it C)
b) The maximum possible daily transaction volume (call it T)
c) The fee per transaction at which users demand exactly T daily transactions (call it F)
d) The daily seignorage earned by miners (that is the newly minted Bitcoins that a miner receives upon successfully completing a block). (Call it S.)
Now:
1) There is free entry into mining; therefore each miner has to earn C. If there are M miners, then the total revenue earned by miners is CM.
2) That total revenue breaks into two parts: Transaction fees, which total TF per day, and seignorage, which totals S per day.
3) So CM = TF + S, or M = (TF + S)/C , where everything on the right side of that equation is more or less fixed in the short run.
4) If the seignorage were to stop flowing (as it will on some fixed date in the near future), then the equation becomes M=TF/C.
5) Currently, the value of S is about 9 times the value of TF (these are my crude off-the-cuff estimates; see below). Therefore TF/C is about 10% of (TF + S)/C. In other words, when the seignorage disappears, the number of miners should fall to about 10% of the current number.
(Of course many of the things I am treating as more-or-less fixed can change, so this is a ceteris paribus calculation, not a forecast.) My questions (below the fold for those who are reading this on my website):
