Imagine a scenario where you go on a 100-year vacation and you want your wealth to survive when you return. You decide to bury a safe that contains:
- Some gold bars
- A stack of 100 dollar bills
- Your Bitcoin in Cold Storage
What do you expect to happen when you return from your 100-year absence?
The gold bars will still be there in good condition. The $100 bills will have physically decayed and their purchasing power will likely have been dramatically weakened to the point where the bills are worthless.
What about Bitcoin? How much is Bitcoin worth?
The answer depends on how the network was functioning during your long absence. If other people were actively transacting, then the miners secured the network and your bitcoin is safe and valuable. If everyone puts their coins in cold storage and joins you in a 100 year absence, then transaction fees will plummet, miners will go bankrupt, the network will atrophy and the coins will be worthless.
In other words, the backbone of the Bitcoin network is a collection 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 to provide miners with the funds to secure the network.
From the beginning, Bitcoin’s ethos has been that those who use the network must work for it. Ownership or stake in it does not confer any special privileges. Proof of employment in return for Proof of commitment.
Unfortunately, HODLers don’t work. HODLers expect others to compensate miners so that the HODLers’ stake retains its value. By design, and perhaps unintentionally, HODLers do not live by Bitcoin ethics.
Working while you HODL
The question then becomes, “How can we secure the network (i.e. pay the miners) while HODLing?”
I think the answer lies in implementing a HODL_FEE, which compensates miners of inactive addresses.
In accordance with Bitcoin ethics, the HODL_FEE is charged as follows:
(a) to any address where no coins have entered or exited in the last 52,500 blocks, which is a quarter of the halving period (approximately 1 year), and
(b) in an amount equal to 50% of the median transaction fee over the previous two weeks. Therefore, the HOLD_FEE would be reset in a similar manner to the difficulty adjustment.
The HOLD_FEE is set to 50% MTF for two reasons: first, the address can avoid the HODL_FEE by making a simple transaction, so we want to base the HODL_FEE on the current transaction fee, and second, the HODL_FEE is set to 50% MTF so that miners prioritize current transactions and then make HODL_FEE transactions with the remaining block space.
There could be good faith arguments to increase or decrease the time and amount of the HODL_Fee, but these parameters make intuitive sense.
Advantages of the HODL_FEE
Aligns incentives – In addition to block rewards and transaction fees, the HODL_FEE adds another mechanism through which miners can be compensated, incentivizing miners to maintain the integrity of the network even as transaction volumes plummet. HODLers stand to benefit the most, as their coins remain an effective store of value.
Clear the Dust – The Blockchain is Littering with Dust addresses that hold amounts of sats too small to transact. By one estimate, there are ~120 million addresses that hold <1,000 sats (~$0.65), while the median transaction fee for a relatively quiet 24-hour period in May was 3,100 sats (~$1.90). The HODL_Fee would reset all 120+ million addresses to zero and pay ~310 Bitcoin (~$20 million) to miners to help secure the network.
There are another 20 million or so addresses with 1k-10k sats ($0.65-$6.50) containing another 1,000 or so Bitcoin (~$65 million) that would ultimately be used to secure the network.
That’s a lot of network clearing with only a minimal increase in circulating supply.
Unlocks Lost Coins – Unfortunately, it’s easy for coins to get stuck in addresses where the owner dies, loses interest, or forgets their keys. The HODL_FEE will bring some of these coins back into circulation, but very slowly. If a dormant address holds 1 BTC and the HODL_FEE is 2,000 sats, it would take 50,000 years for the dormant addresses to reset to zero, which should give the owner enough time to wake up from their coma and reclaim their coins!
Test your keys – A nice side benefit of the HODL_FEE is that it incentivizes owners to use their addresses, meaning they can test at least once a year to see if they still know their keys. This seems especially important in multi-sig scenarios.
Incentivizes Network Usage – The HODL_FEE should increase network usage by encouraging owners to stack sats and/or spend their sats. Increasing network usage helps ensure that miners are compensated appropriately and that Bitcoin remains a store of value.
Arguments against the HODL_FEE
Introduces a Tax – The HODL_FEE seems to go against the libertarian ethos, as it is designed to force individuals to either act in a certain way (i.e. keep accumulating/spending) or pay taxes. No one likes taxes and no one likes the idea of a tax just to exist.
However, a quarterly or annual custody fee is very common in bank or brokerage accounts, and the HODL_FEE is comparable.
The most important thing is that the Bitcoin ethos revolves around Proof of employment. You don’t just get benefits from ownership. Bitcoin owners can’t expect others to secure the network and then let bitcoin remain a stable store of value.
Reduces anonymity – The HODL_FEE can potentially 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 an owner), or hold their coins on exchanges (which do not have to pay the HODL_FEE due to their high transaction volumes).
However, anonymity always comes at a price. People can build high fences, move to remote locations, use VPNs, etc., but each of these actions comes at a price. For HODLers, the cheapest and easiest way to maintain anonymity while ensuring network integrity is to simply HODL and have the HODL_FEE deducted from their address every year.
Creates unnecessary transactions – The HODL_FEE creates millions of transactions, either through the actual HODL_FEE or by encouraging individuals to stack and spend. The HODL-FEE transactions are very lightweight and easy to calculate, and the incentives are designed so that miners process current transactions before HODL-FEE transactions.
Either way, there will be millions of new transactions and the easiest solution would be to increase the blockspace so that transactions can be processed more efficiently and miners get more revenue to secure the network.
Final thoughts
The Bitcoin ethos is Proof of employmentand HODLers have to work too.
The HODL_FEE:
- Is fair
- Intuitive and easy to understand
- Easy to program and calculate
- Encourages stacking and spending
- Rewards miners for maintaining network integrity
- Helps ensure Bitcoin retains its value
Who’s ready to write a BIP?
This is a guest post by Bob. The opinions expressed are entirely his own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.