Imagine you are going on vacation for a hundred years and you want your wealth to still be alive when you return. You decide to bury a vault containing:
- some gold bars
- A stack of $100 bills
- Your Bitcoin in Cold Storage
What do you expect to be the outcome when you return from your 100 year absence?
The gold bullion will remain in good condition. The $100 bills will physically degrade, and their purchasing power will likely be greatly diminished to the point that the bills will become worthless.
What about Bitcoin? What is the value of Bitcoin?
The answer depends on how the network worked during your long absence. If there were other people actively transacting, then the miners were securing the network and your bitcoins would be safe and valuable. If everyone put their coins in cold storage and joined you in your 100-year absence, transaction fees would drop dramatically, miners would go out of business, the network would atrophy and your coins would become worthless.
In other words, the backbone of the Bitcoin network is a group of miners who process transactions and maintain the integrity of the blockchain by spending time and resources. Since miners are compensated through transaction fees and predictably decreasing block rewards, transactions must occur in order for miners to have the funds needed to secure the network.
From the beginning, the philosophy of Bitcoin has been that those who use the network must work hard. Owning or holding a stake does not confer any special privileges. Proof of Work against Proof of Stake.
Unfortunately, Bitcoin holders do not work. Bitcoin holders expect others to compensate miners so that the Bitcoin holders’ stake maintains its value. By its current design, and perhaps unintentionally, Bitcoin holders do not live up to the ethics of Bitcoin.
Work while holding currency
The question becomes, “How to secure the network (i.e. pay miners) while holding the currency?”
I think the answer is to implement HODL_FEE, which would compensate miners for idle addresses.
In line with Bitcoin principles, HODL_FEE will be charged:
(a) to any address that has not had any coins in or out during the last 52,500 blocks, which is one-quarter of the halving period (about one year), and
(b) In an amount equal to 50% of the average transaction fee over the previous two weeks. Therefore, the holding fee will be reset in the same way as the difficulty adjustment.
HOLD_FEE is set to 50% MTF for two reasons: First, an address can avoid HODL_FEE by making a simple transaction, so we want HODL_FEE based on the current transaction fees, and second, HODL_FEE is set to 50% MTF so that miners can prioritize current transactions and then make HODL_FEE transactions with the remaining block space.
It is possible to make good faith arguments to increase or decrease the time and amount of HODL_Fee, but these parameters make intuitive sense.
HODL_FEE BENEFITS
Incentive Alignment – In addition to block rewards and transaction fees, HODL_FEE adds another mechanism to compensate miners, thus encouraging miners to maintain the integrity of the network even if transaction volumes drop. Miners will benefit the most as their coins will remain an effective store of value.
Cleans the dust – Blockchain is full of dust soil Addresses holding too small amounts of SAT to transact on. By one estimate, there are around 120 million addresses holding less than 1,000 SAT (~$0.65), while the average transaction fee for a relatively quiet 24-hour period in May was 3,100 SAT (~$1.90). With HODL_Fee, all 120 million addresses will be wiped and around 310 BTC (~$20 million) will be paid to miners to help secure the network.
There are about 20 million other addresses holding 1k-10k sats ($0.65-6.50) with about another 1,000 bitcoins (about $65 million) that will eventually be used to help secure the network.
This means a lot of network cleanup with only a small increase in circulating supply.
Unlocks Lost Coins – Unfortunately, it’s easy for coins to get locked in addresses where the owner dies, loses interest, or forgets their keys. HODL_FEE will return some of these coins to circulation, but at a very slow rate. If a dormant address has 1 BTC and HODL_FEE is 2,000 sats, it will take 50,000 years for the dormant addresses to be unblocked, which should give the owner plenty of time to wake up from their coma and get their coins back!
Testing your keys – A great side benefit of HODL_FEE is that it encourages owners to use their addresses, meaning they can test to see if they remember their keys at least once a year. This seems to be especially important in multi-signature scenarios.
Encourage network usage – HODL_FEE fees should increase network usage by encouraging holders to stake and/or spend their sats. Increasing network usage helps ensure that miners are properly compensated and that Bitcoin remains a store of value.
Arguments Against HODL_FEE
Taxation – HODL_FEE fees seem to go against libertarian principles because they are designed to force individuals to behave in a certain way (e.g. continue to hoard/spend) or pay a tax. Nobody likes taxes and nobody likes the idea of being taxed just for the sake of existing.
However, quarterly or annual custodial fees are very common in bank or brokerage accounts, and HODL_FEE fees are similar.
Most importantly, the Bitcoin philosophy revolves around Proof of WorkYou can’t get benefits from ownership alone. Bitcoin owners can’t expect others to secure the network, and then make Bitcoin a stable store of value.
Reduce Anonymity – HODL_FEE can reduce anonymity by encouraging individuals to make transactions (which can be monitored), consolidate their holdings into fewer addresses (which are more likely to be linked to the owner) or hold their coins on exchanges (which will not have to pay HODL_FEE due to their high transaction volumes).
However, anonymity always comes at a cost. People can build high walls, move to remote locations, use VPNs, etc., but each of these actions comes at a cost. For HODL users, the cheapest and easiest way to maintain anonymity while ensuring the integrity of the network is to simply HODL and withdraw HODL_FEE from their address every year.
Creating Unnecessary Transactions – HODL_FEE will create millions of transactions, either through actual HODL_FEE or by encouraging individuals to stake and spend. HODL-FEE transactions will be extremely lightweight and easy to calculate, and the incentives are designed so that miners process existing transactions before HODL-FEE transactions.
Regardless, there will be millions of new transactions, and the easiest solution is to increase the block size so that transactions can be processed efficiently and miners get more revenue to secure the network.
Final thoughts
The philosophy of Bitcoin is: Proof of WorkHODLers have to work too.
HODL_FEE:
- Is it fair?
- Intuitive and easy to understand
- Easy to program and calculate
- Encourages hoarding and spending.
- Miner rewards for maintaining network integrity
- Helps ensure that Bitcoin’s value is maintained.
Who is ready to write a personal business plan?
This is a guest post written by another guest, and the opinions expressed are entirely his own and do not necessarily reflect the views of BTC Inc or Bitcoin Magazine.