Imagine you are going on vacation for 100 years and you want your wealth to survive when you return. You decide to bury a safe containing:
- Some gold bars
- A wad of 100 dollar bills
- Your bitcoin in cold storage
What do you hope will be the outcome when you return from your 100-year absence?
The gold bullion will still be there in good condition. The $100 bills will have physically deteriorated and the purchasing power will likely have weakened dramatically to the point where the bills no longer have any value.
What's happening with bitcoin? How much is bitcoin worth?
The answer depends on how the network performed during your long absence. If other people were actively transacting, miners were protecting the network and your bitcoins would be safe and valuable. If everyone is storing their coins in cold storage and they join you in a 100-year absence, transaction fees will plummet, miners will cease to operate, the network will atrophy, and the coins will be worthless.
In other words, the backbone of the bitcoin network is a set of miners who process transactions and maintain the integrity of the blockchain by investing time and resources. Since miners are compensated through transaction fees and block rewards that decrease predictably, transactions must occur in order for miners to have the funds needed to secure the network.
From the beginning, the basic principle of bitcoin is that those who use the network must work on it. Owning or participating in it does not confer any special privileges. Work test against Proof of Stake.
Unfortunately, HODLers are not doing the work. HODLers expect others to compensate miners so that the HODLers’ stake maintains its value. In the current design and perhaps unwittingly, HODLers are not living up to the spirit of bitcoin.
Working while keeping the HODL
The question is: “How to secure the network (i.e. pay miners) while HODLing?”
I think the answer is to implement a HODL_FEE, which would compensate miners from inactive addresses.
In keeping with the spirit of bitcoin, the HODL_FEE would be charged:
(a) to any address that has had no coins entered or left for the last 52,500 blocks, which is a quarter of the halving period (approximately 1 year), and
(b) an amount equal to 50% of the average transaction fee of the previous two weeks. Therefore, the HOLD_FEE would be reset in a similar way to the difficulty adjustment.
HOLD_FEE is set to 50% MTF for two reasons: first, address could avoid HODL_FEE when making a simple transaction, so we want HODL_FEE to be based on current transaction fees, and second, HODL_FEE is set to 50% MTF to make miners prioritize current transactions and then make HODL_FEE transactions with the remaining block space.
There are good arguments that can be made for increasing or decreasing the HODL_Fee time and amount, but these parameters make intuitive sense.
Benefits of HODL_FEE
Aligns incentives: In addition to block rewards and transaction fees, HODL_FEE adds another mechanism for miners to receive compensation, encouraging them to maintain network integrity even if transaction volumes plummet. HODLers will benefit the most, as their coins will remain an effective store of value.
Clearing the dust: The blockchain is full of Dust addresses that hold amounts of sats too small to transact on. By one estimate, there are ~120M addresses holding <1000 sats (~$0.65), while the average transaction fee for a relatively quiet 24-hour period in May was 3100 sats (~$1.90). With the HODL_Fee, all 120M+ addresses would be zeroed out and ~310 bitcoin (~$20M) would be paid to miners to help secure the network.
There are another ~20M addresses with 1k-10k sats ($0.65-$6.50) with another ~1,000 bitcoin (~$65M) that would eventually be used to help secure the network.
This represents a major cleanup of the grid with only a minimal increase in circulating supply.
Unlock lost coins: Unfortunately, it’s easy for coins to become locked in addresses where the owner dies, loses interest, or forgets their keys. HODL_FEE will cause some of these coins to re-circulate, but at a very slow rate. If a dormant address holds 1 btc and the HODL_FEE is 2000 sats, it would take 50,000 years for the dormant addresses to go to zero, which should give the owner plenty of time to wake up from their coma and recover their coins.
Test your keys: An interesting side benefit of HODL_FEE is that it encourages owners to use their addresses, meaning that at least once a year they can test whether they remember their keys. This seems to be especially important in multi-signature scenarios.
Encourages network usage: The HODL_FEE fee should increase network usage by encouraging holders to hoard sats 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
Introduce a tax: HODL_FEE seems to go against the libertarian spirit, as it is designed to force people to act in a certain way (i.e. keep hoarding/spending) or pay a tax. Nobody likes taxes, and nobody likes the idea of a tax just for existing.
However, a quarterly or annual custody fee is very common for bank or brokerage accounts, and the HODL_FEE is similar.
The most important thing is that the spirit of bitcoin is about… Work testThere is no profit to be made from ownership alone. bitcoin owners cannot expect others to protect the network and for bitcoin to remain a stable store of value.
Reduces anonymity: The HODL_FEE can potentially reduce anonymity by encouraging people to transact (which can be monitored), consolidate their holdings into fewer addresses (which are more likely to be linked to one owner), or hold their coins on exchanges (which will not have to pay the HODL_FEE due to their high transaction volumes).
However, anonymity always comes at a cost. People can build high fences, move to remote locations, use VPNs, etc., but each of these actions comes at a cost. For HODLers, the cheapest and easiest way to maintain anonymity while still ensuring the integrity of the network is to simply HODL and have the HODL_FEE removed from their address every year.
Creates unnecessary transactions: HODL_FEE will create millions of transactions, either through HODL_FEE itself or by encouraging people to hoard and spend. HODL-FEE transactions will be very lightweight and easy to compute, and incentives are designed to make miners process current transactions before HODL-FEE transactions.
There will be millions of new transactions anyway, and the easiest solution would be to increase the block space so that transactions can be processed efficiently and miners get more revenue to secure the network.
Final Thoughts
The spirit of bitcoin is Work testAnd HODLers need to work too.
The HODL_FEE:
- It's fair
- Intuitive and easy to understand.
- Easy to program and calculate.
- Encourages stacking and spending
- Reward miners for maintaining network integrity
- Help ensure that bitcoin maintains its value
Who's ready to write a BIP?
This is a guest post by Bob. The views expressed are solely his own and do not necessarily reflect those of btc Inc or bitcoin Magazine.
