Miners, who secure Proof of Work (PoW) chains by expending energy, thereby building an economic obstacle to monopoly power, rely on a combination of block rewards and transaction fees to cover their costs — this may be referred to as the Security Budget (SB)(H/T Jordan McKinney).

With block rewards set to halve every four years, PoW chains will be increasingly at the mercy of transaction fee revenue as the dominant source of funds for the SB.

Meanwhile, as the ratio between SB and Network Value decreases, the risk:reward for attackers increases. This ratio may be referred to as the Security Factor (H/T again to Jordan McKinney).

FR ostensibly assumes that the SB for existing chains has always been at an equilibrium state — any lower and the chain would be insecure: any higher and users would be overpaying. If SB has not been at an equilibrium state then FR provides no insight as we don’t have a benchmark for what minimum percentage of economic volume and/or network value would be sufficient to secure the chain.

Under these assumptions, one may deduce that a low FR is a desired metric.

A low FR means that users can transact securely while simultaneously paying a minimal % of each transaction as a fee. Conversely, a high FR means that users have to pay a high % of each transaction as a fee in order to transact securely.

Back to Bitcoin

With a FR of 0.41%, BTC seems to be in good shape. BTC’s FR is far lower than that of Zcash(6.70%), Decred (9.54%), and even Ether (1.16%).

One might be forgiven for presuming that users will be more than willing to pay this percentage to BTC miners for their services.

But to truly understand the implications of FR it is necessary to understand what multiple of existing transaction fee revenue would be required to reach the FR.

Fee Ratio Multiple (FRM)

And so I present the Fee Ratio Multiple (FRM), which, as it turns out, is equal to:

Miner Revenue [Block Reward + Transaction Fees] / Transaction Fees

FRM is explicitly about security, which should be considered the foundational layer of the chain stack. By looking at FRM we can deduce how secure chains will be once block rewards disappear.

Further, FRM implicitly measures the strength of an assets properties as a Store of Value. A low FRM suggests that an asset can maintain its current security budget (miner revenue) without having to rely on an inflationary subsidy. Conversely, a high FRM suggests that an asset will require heavy inflation via block reward subsidies in order to maintain its existing security budget.

FRM can only be applied on a block reward halving cycle basis — i.e. for BTC, looking at FRM in the period between 2012–2016 and then 2016–2020.

This is because FRM has to trend towards 1 as block rewards become negligible. By measuring over 4 year periods you keep block reward as a constant and measure its changing relationship with transaction fees.

As with FR, FRM only works under the assumption that SB has been sufficient up until now.

A Few Words on NVT:

FRM is not the same as Network Value to Transaction (NVT), which is calculated as Price * Supply / Transaction Count.

NVT is used to measure a chain’s strength as a payment network compared to its market value — a low NVT may suggest that a network is undervalued compared to the service it is providing as a settlement layer.

NVT and FRM will not always be correlated. A chain could feasibly have a high number of transactions and a low network value, and therefore a low NVT, while simultaneously having a high FRM depending on the current size of block rewards and average transaction fee.

Moreover, NVT is far easier to spoof than FRM: one merely need spam the network with low fee transactions. By contrast, significant manipulation of FRM would by definition require significant cost as FRM measures the aggregate value of transaction fees rather than count.

Methodology

FRM can be calculated on various time frames.

Perhaps the most obvious path would be to take miner revenue (transaction fees + block rewards) from a single day and then divide that number by transaction fee revenue from that same day.

Below is an illustration of FRM calculated on a ‘daily basis’ for Bitcoin over a 1 year period.