Bitcoin's Future as a Settlement Network May be Jeopardized: Galaxy Warns About Lack of Value to Settle
In the world of Bitcoin, a series of significant changes have been unfolding. One of the most noticeable shifts is the decline in fee revenue for miners. Transactions that once competed aggressively for block inclusion are now occurring elsewhere, leading to a growing number of blocks that clear at almost no cost to users, averaging just 1 satoshi per virtual byte or less.
This decline can be traced to several structural changes, including the retreat of OP_RETURN transactions back to roughly 20% of transactions. As a result, the Bitcoin fee market has entered an unusual phase, raising questions about the network's economic security.
Another concern arises from the fact that millions of coins remain in legacy formats like P2PK and P2PKH, which are inherently vulnerable to quantum attacks due to exposed public keys. However, the adoption of P2WPKH and Taproot has grown in the Bitcoin network. P2WPKH has dominated unspent balances, while Taproot continues to gain traction for advanced use cases. Supporters argue that these outputs, though vulnerable, do not increase the burden on the UTXO set because they are provably unspendable.
The Bitcoin Halving in 2025 saw miners receiving 3.125 BTC in block rewards. Despite this, the network's security risks are being assessed due to the growth of off-chain "paper Bitcoin" and the uncertainty surrounding the level of usage needed for long-term security. As reliance on off-chain transactions grows and fees dry up, Bitcoin's long-term security hinges on a level of usage that remains uncertain.
Almost half of the blocks in recent months have not reached maximum weight, revealing an unusually thin mempool. This, coupled with the decline in non-monetary activity like Ordinals and Runes in late 2024, has led to a sharp drop in on-chain usage. The Bitcoin network risks becoming a "settlement layer without sufficient settlement activity" as activity shifts toward ETFs, custodial platforms, and faster alternative L1s.
Critics warn that OP_RETURN transactions consume scarce blockspace that could otherwise be used for monetary transactions, sparking concerns about spam and sustainability. However, Bitcoin Core's upcoming v30 release could allow larger and multiple OP_RETURN outputs per transaction, potentially alleviating some of these concerns.
The median daily fees have fallen more than 80% since April 2024. This decrease in 2025 primarily occurred because the daily transaction volume dropped by about 25% compared to 2024, and the fee-to-reward ratio reached its lowest in nine years at 1.21%, indicating a normalization after unusually high fee levels in 2024.
As the Bitcoin network continues to evolve, it faces both challenges and opportunities. The network's economic security is being questioned due to the declining fee market and the increasing exposure of miner incentives to fluctuations in organic demand. However, advancements like the adoption of P2WPKH and Taproot, as well as potential changes in the OP_RETURN transaction limit, offer promising solutions for the future. The key will be striking a balance between security, efficiency, and innovation as Bitcoin navigates these changes.
