Bitcoin Security Budget Explained: Fees vs Block Subsidy

Bitcoin’s security budget is the total reward that pays miners to secure the Bitcoin network. It comes from two sources: the block subsidy and transaction fees. Today, the subsidy still funds most of that budget, but every halving reduces it. Over time, Bitcoin’s security increasingly depends on whether fees can grow enough to replace the shrinking subsidy.

What is Bitcoin’s security budget?

Bitcoin’s security budget represents the total compensation paid to miners roughly every 10 minutes to secure the network. Unlike traditional systems with fixed security allocations, this budget is dynamically generated and distributed within the network, serving as the financial backbone that supports integrity and trust. The security budget has two components: the block subsidy (newly minted bitcoin) and transaction fees paid by users.

As Bitcoin’s price has increased over time, miner revenue has grown despite block rewards being halved every four years. This economic incentive is critical because a higher security budget makes it more expensive to carry out a 51% attack, which makes Bitcoin more secure. The security budget effectively sets the cost threshold that malicious actors must overcome to compromise the network’s integrity.

What makes it up: fees vs block subsidy?

Block subsidy

The block subsidy is a set amount of new bitcoin that miners receive for mining a block, currently 3.125 BTC per block. This is newly minted bitcoin that enters circulation through mining. The subsidy generates roughly $45 million in daily revenue for miners, but it will continue to decline through halvings until it reaches zero around the year 2140. The block subsidy is Bitcoin’s primary inflation mechanism and currently dominates miner compensation.

Transaction fees

Transaction fees are paid by users to incentivize miners to include their transactions in blocks. They operate on a free market principle where users can choose their fee level. Transaction fees currently contribute roughly $300,000 per day to miner revenue, making up less than 1% of total miner income. During periods of high demand, fees can spike dramatically. On December 22, 2017, fees made up 78% of the total block reward. Unlike the fixed block subsidy, fees vary based on network congestion and user demand for block space.

Why does block subsidy matter most today?

The block subsidy currently generates roughly $45 million in daily revenue for miners, while transaction fees contribute only about $300,000 per day, representing less than 1% of total miner income. This large gap highlights Bitcoin’s heavy reliance on inflation based rewards rather than fee based security. In recent periods, the block subsidy has accounted for 98.4% of miner revenue, with transaction fees making up 1.6%. The subsidy provides the economic backbone that helps sustain enough hash power to secure the network against 51% attacks.

Without the predictable block subsidy, miners would face extreme revenue volatility driven mainly by congestion and user demand. The block subsidy has already fallen to 3.125 BTC per block and will ultimately reach zero around 2140, but transaction fees have not consistently bridged the gap. This creates structural concerns about long term miner economics. For now, the block subsidy remains the critical mechanism supporting Bitcoin’s security budget and incentivizing miners to dedicate computational resources to network protection.

How does halving change the security budget over time?

Bitcoin halving occurs roughly every four years when the block reward is cut in half, helping ensure that only 21 million bitcoin will ever be created. In April 2024, the latest halving reduced the block reward from 6.25 BTC to 3.125 BTC, and by 2032, the block reward will fall below 1 BTC. This creates what some call the halving security squeeze: as the block reward decreases, so does a major portion of miners’ income, and if transaction fees do not rise to compensate, network security could theoretically decline.

Bitcoin’s long term security model anticipates the eventual phase out of the block subsidy, which will approach zero around the year 2140. If adoption levels and fees remain constant, Bitcoin’s price would need to reach $912,000 by 2042 to maintain the same security budget as today. However, after the previous halving in May 2020, hashrate initially dropped by about 25% within two weeks, then rose to roughly 20% above prior levels by year end, with hashrate increasing by around 570% since then. This highlights Bitcoin’s resilience, though long term sustainability remains debated.

How can transaction fees secure Bitcoin long term?

Bitcoin’s security model is designed to shift from charging holders through inflation to charging those who transact, making a fee based security model the long term vision. For this transition to work, Bitcoin must maintain what some call a persistent fee market: sustained demand for limited block space that generates enough miner revenue. In 2023, transaction fees accounted for 21.7% of mining income, the highest level since 2017, driven by activity such as Ordinal inscriptions and BRC 20 tokens that increased competition for block space.

The viability of fee based security depends on three key factors. First, increased adoption and network activity must drive consistent demand for on chain transactions. Second, Layer 2 solutions like the Lightning Network, which can process up to 1 million transactions per second with fees typically around $0.001, must generate enough activity that channel openings and closings create sustained base layer demand. Third, as more people want to transact while block space remains limited, Bitcoin can maintain a persistent fee market that compensates miners adequately. By 2140, miners will rely entirely on transaction fees, making the health of Bitcoin’s fee market critical to whether the network can stay secure with purely voluntary user fees.

Why is a fee only security model risky (or not)?

A fee only security model raises serious concerns, but the issue remains debated. If Bitcoin reaches a state of very low velocity, with holders relying on custodians or wrapped BTC without paying meaningful on chain fees, the fee based security model could weaken. A decline in fee revenue could increase centralization, where only well resourced mining entities remain competitive, threatening Bitcoin’s decentralized nature and long term stability. A major concern is cash flow volatility: transaction fees are market driven and fluctuate with supply and demand, potentially causing large swings in hashrate.

Critics warn of severe vulnerabilities. Currently, fees represent only 0.25% of Bitcoin’s market capitalization, well below the 0.5% to 1.5% threshold some argue is needed for robust security. As block rewards shrink, more weight shifts to transaction fees. If usage does not grow, that base thing and security guarantees weaken. Optimists argue the system is partly self correcting: if on-chain demand is low, fees fall, which can change incentives and usage patterns until a new equilibrium forms. Even so, revenue instability, especially for smaller miners, raises concerns about centralization, although the Bitcoin ecosystem has many decades to adapt and develop solutions.

Conclusion

Bitcoin’s security budget still relies heavily on the block subsidy today, but halvings steadily shrink that support and push Bitcoin toward a future where transaction fees must carry more of the load. Whether a persistent fee market can reliably replace subsidies will determine how resilient Bitcoin remains against attacks, how stable miner incentives stay, and how decentralized the network can be over the long run.