Launching a new cryptocurrency is challenging, needing miner compensation through new issuance (diluting holders) or transaction fees (requiring long-term demand). Bitcoin successfully navigated this quagmire.
Matthew Kratter
Jul 2, 2024July 2, 20243 min read3 minutes read
Bitcoin University
Bitcoin University is an educational channel devoted to Bitcoin, financial freedom, and self-sovereignty. Matthew also covers relevant macro and financial news.
Bootstrapping Bitcoin
Let’s talk about Bootstrapping Bitcoin. This video is a follow-up to yesterday’s video about Kaspa, which proved to be very controversial. You can watch that if you want to understand some of the background, but it’s unnecessary.
Today, we will discuss Proof-of-Work (PoW) and how to bootstrap a network like Bitcoin.
PoW is definitely the best consensus mechanism for reasons we’ve discussed in previous videos.
Under PoW, miners can be paid in two ways: the issuance of new coins, which dilutes existing holders through monetary inflation, or transaction fees, paid by network users.
Satoshi’s compromise was to bootstrap the network by initially paying miners with newly issued coins, as there was minimal transaction demand. The reward halves every four years, or every 210,000 blocks, hoping that transaction fees will eventually compensate for the declining revenue from new coins.
Failure Mode #1: Occurs when not enough people use the new money, and miners starve from a lack of transaction fee revenue.
Failure Mode #2: Occurs when the block size is increased to keep transaction fees low, which prevents a robust transaction fee market from developing. Giant blocks require more node storage, verification work, and internet bandwidth, causing latency issues.
Miners must transition from block subsidy to transaction fee revenue, hoping enough people worldwide use the money and run nodes. Bitcoin was fortunate; 93.9% of its 21 million coins have been mined, with 19,400 reachable nodes.
Although Kaspa does many things right, it may not be so lucky.
Kas.fyi
As of today, 83.9% of Kaspa has been mined, but only 280 nodes exist. By July 10, 2026, 95% of Kaspa will have been mined. If demand for Kaspa doesn’t grow, its miners may face trouble.
PoW miners have real-world costs, like hardware and electricity, and need compensation either through new issuance or transaction fees. Kaspa’s fast issuance schedule helps initially but may harm long-term mining sustainability.
MaximalMining on Twitter noted that he sold over 10 million Kaspa and believes it’s just another altcoin.
Bitcoin has survived the transition from block subsidy to transaction fee revenue due to its rising fiat price and a fanatical group of HODLers who run nodes, demand to be paid in Bitcoin, and encourage merchants to accept it. These actions create transaction fee revenue for miners.
Hodlers become stronger through their journey, moving from high to low-time preference living, prioritizing exercise and nutrition, and creating new Bitcoiners with good values.
Bitcoin culture is organic and strong, making it impossible for new coins to compete. New coins often become flashes in the pan or pump-and-dumps, unable to achieve long-term organic demand and growth.
In conclusion, when it comes to cryptocurrencies, there’s really only Bitcoin.
Bitcoin University is an educational channel devoted to Bitcoin, financial freedom, and self-sovereignty. Matthew also covers relevant macro and financial news.
Matthew Kratter is the founder of Bitcoin University YouTube channel, which currently has over 235,000 subscribers.
Before going down the Bitcoin rabbit hole, he founded and ran Trader University, focusing on trading and investment strategies for stocks, options, and futures. Given his hedge fund background and decades of trading experience, Matthew provides a unique perspective.
In late 2019, after finally recognizing Bitcoin’s importance, he began liquidating his stocks and other investments and moving his savings into Bitcoin.
Now, Matthew is all in on Bitcoin, devoting the majority of my time to producing Bitcoin educational content on YouTube and on this site.
In his free time, he enjoys skiing and hiking in the Rockies with his wife, kids, and dogs.
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