Hodl fee explained

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Ah, the Bitcoin network. A beautiful symphony of cryptography, decentralisation, and…sometimes whiny miners? Yes, miners play an essential part in this ecosystem. What started as part of the Bitcoin core system, where everyone would mine themselves as part of running a node, has spun off into a specialised service and legitimate business.

While Bitcoin miners come in all shapes and sizes, those that are providing the majority of the hash rate are large industrial players who have sunk millions into their operations with the only aim of producing as much computation as possible.

Without a doubt, they provide a valuable service; they ensure that blocks are reliably secured and ensure there is a considerable barrier to overcome if you wish to attack the network.

The Bitcoin network essentially hires miners to provide security and computation and are paid from the fees generated by transactions and the newly minted Bitcoin from the block subsidy, which recently halved to its lowest issuance rate yet, 3.125 Bitcoin per block.

Every time the Bitcoin rewards are cut in half, you’ll find a cohort of miners who fall into the unprofitable range and have to close up shop, and when they approach those ranges, you’ll hear those miners cry bloody murder and look for a bailout.

While some serious discussions have been on miner sustainability and the fear of a possible doom loop of mining capitulation, some solutions venture into the camp of never going to fly.

For those unfamiliar, the HODL_Fee is a brilliant (note the sarcasm) idea where inactive Bitcoin wallets – the so-called HODLers – are magically taxed to subsidise miners.

You read that right.

Apparently, because some miners can’t turn a profit verifying transactions, they’ve decided we, the responsible hodlers who are actually using Bitcoin as intended, should be their personal ATMs.

It’s rather ironic considering that the genesis block is famous for encoding “Chancellor on the brink of second bailout for banks”.

And it really seems like a non-starter if you’re talking to a community of highly idealistic node runners, but let’s humour the idea and unpack this steaming pile of FOMO (fear of missing out) fueled nonsense, shall we?

How could the HODL_Fee work?

According to the rough proposal, the HODL_FEE would be charged:

  • To any address that had no coins going in or out for the last 52,500 blocks, which is one-quarter of the halving period (approximately one year), and
  • In an amount equal to 50% of the Median Transaction Fee over the previous two weeks. Therefore, the HOLD_FEE would be re-set similarly to the difficulty adjustment.

The HOLD_FEE is set to 50% MTF for two reasons: first, the address could avoid the HODL_FEE by making a simple transaction, so we want the HODL_FEE based on current transaction fees, and second, the HODL_FEE is set to 50% MTF so that miners prioritise current transactions and then conduct HODL_FEE txns with the remaining block space.

Where do these figures come from?

I don’t know, but apparently, it would be or could be changed through “good faith arguments,” adding unnecessary complexity and Mexican stand-offs on rates every so often, which kind of seems like more of a costly distraction for everyone involved.

Are all HODLers really expected to get together every year, reflect on how much we want to be taxed for stashing our purchasing power in Bitcoin, and then update our consensus rules?

Nah, I’ll pass on that drama. Next, we will be having FOMC meetings, too.

Miners, you’re not stockbrokers; stay in your lane

First things first, miners are not your stockbrokers. They signed up to play a vital role in the network, securing transactions and receiving block rewards for their service.

It’s a business, baby!

And just like any business, if the cost of mining outweighs the profits, well, tough noogies.

Adapt, innovate, or fold – that’s the capitalist way (or should we say the Crypto-capitalist way?).

If you over-invested, took out debt, or didn’t insulate yourself against possible down cycles and now have a cash flow issue, all I can offer you is a tissue.

You are not managing my money; I’m doing it myself. Am I getting compensated for the node I run, the wallets I’ve set up, or the hardware I’ve purchased? Directly, no, but indirectly, yes, in terms of increased Bitcoin purchasing power.

But why should we make a special distinction for miners?

They knew what they signed up for and knew it wasn’t a guarantee you’d make a profit by buying ASICs, caveat emptor? Am I right?

HODLers owe you nothing.

The miners’ proposal essentially boils down to this:

“Hey HODLers, you’re making money by holding Bitcoin, so share some with us!”

Here’s the thing, fellas: nobody owes you a living.

We, the HODLers, are taking a calculated risk by holding Bitcoin, believing in its long-term value. We’re not passive leeches sucking the life out of the network.

We’re the fuel in the tank, keeping the whole thing running.

No one’s coming to save us if we’ve lost our coins. No one thanks hodlers when they don’t dump into bear markets. No one thanks hodlers for providing liquidity every day, week, and month so miners can sell into the demand hodlers generate.

Why should hodlers be seen as a pinata to pop when the going gets tough?

HODL_Fee: Just another tax disguised as innovation?

This whole HODL_Fee thing feels eerily similar to the tail emission debate. Remember that?

It was another attempt to line miners’ pockets by introducing perpetual inflation into Bitcoin.

Thankfully, that one went down the memory hole.

However, the underlying sentiment remains: miners want more money and are willing to bend the very fabric of Bitcoin to get it.

Fear-mongering and the fragile miner business model

Let’s not forget the fear-mongering.

“The network is dying!” they cry. “Transaction fees will plummet!”  

Hold on a second.

The Bitcoin network is tougher to stomach than a week-old kombucha.

It’s designed to adapt. If large miners fail, that just means Bitcoin will become more decentralised—a good thing, right?

If miners start falling like flies and ASICS flood the market, don’t you think HODLers will look to acquire these machines for themselves, for the opportunity to support the network where they hold their wealth and for the opportunity to stack some KYC-free Bitcoin?

Just like there will always be a buyer for Bitcoin as the price tanks, there will be buyers for ASICS.

Survival of the fittest, Not the fee-dependant

Here’s the bottom line:

The Bitcoin network thrives on competition. If a miner can’t make a profit, they should step aside and let someone who can take their place. The network doesn’t owe them a living, and HODLers sure as heck don’t.

This isn’t a charity; it’s a revolution.

So, Dear miners, Here’s a life hack

Here’s some free advice for our miner friends: become more efficient! Invest in better hardware, negotiate cheaper electricity rates, or – gasp – maybe even lower your margins a tad. The beauty of the free market is that it rewards innovation and efficiency.

Embrace the HODL, not the entitlement

Instead of whining about a HODL_Fee, why not embrace the very thing that makes Bitcoin valuable – its scarcity? After all, the limited supply fuels the price appreciation HODLers (and miners, for that matter) enjoy.

Fob it off to a side chain

If you think a HODL_Fee is something the market would tolerate, why do you think you need to force it on the base layer?

Why not spin up a merged mined sidechain or a drivechain if you can ever get BIP300 to go through? Set up the fee structure and see if anyone tolerates it.

Let Bitcoin be Bitcoin

The Bitcoin network is a marvel of human ingenuity. It doesn’t need to be fixed, and it doesn’t need a HODL_Fee or any other band-aid solution and interventionist policy designed to prop up inefficient miners.

We’ve already seen that in the fiat system and we wanted to get away from it, why re-introduce the failures of the old system?

Let it evolve organically.

Let the strong survive, and let’s all stop taking ourselves – and Bitcoin – so darn seriously. After all, a little laughter never hurt anyone (except maybe for the fragile egos of some entitled miners).

So, the next time someone mentions a HODL_Fee, take a deep breath, remember the power of decentralisation, and maybe even crack a joke. Because, in the grand scheme of things, this whole debate is about as absurd as a squirrel trying to mine Bitcoin with a glorified nutcracker.

Disclaimer: This article should not be taken as, and is not intended to provide any investment advice. It is for educational and entertainment purposes only. As of the time posting, the writers may or may not have holdings in some of the coins or tokens they cover. Please conduct your own thorough research before investing in any cryptocurrency, as all investments contain risk. All opinions expressed in these articles are my own and are in no way a reflection of the opinions of The Bitcoin Manual

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