The security of a PoW chain is of utmost importance to its users and investors. Often, people look at hashrate as an indicator of security. However, this can be misleading. The Security Ratio (SR) is a more reliable metric for understanding the real security of a PoW chain. It's important to note that higher hashrate is primarily a function of Moore's Law and does not necessarily translate to higher security. On the other hand, the Security Ratio offers a better perspective on the economic security aspect of PoW chains.
We consider the Security Ratio (SR) to be the most fundamental metric for tracking economic security, as other isolated metrics, such as hashrate or dollars spent, do not take into account the size of the system they are securing. SR is also currency independent. By incorporating the system's size, the Security Ratio provides a more comprehensive understanding of a PoW chain's true security.
Security Ratio formula
Security ratio, expressed per million units, represents the incentives for miners to maintain the security of the network. The higher the security ratio, the more block rewards are available for miners, which should, in theory, lead to increased mining activity and, consequently, a more secure network.
There are 2 main types of security ratio in general:
- Security ratio based on total block rewards (Security Ratio)
- Security ratio based on transaction fees (Fee Security Ratio)
The Security Ratio
The Security Ratio is an important indicator for assessing the security of a proof-of-work (PoW) chain, such as Bitcoin.
By monitoring the Security Ratio, stakeholders in a PoW chain can make informed decisions about the security of the chain and take appropriate measures to maintain its integrity.
Calculation of Security Ratio is simple and can be determined as follows:
ratio (SR) = Total Block rewards Total Circulation supply * 1 000 000
Block rewards represent the total reward that a miner receives for mining a block. This includes not only newly minted coins, but also all transaction fees from that block.
* SR is calculated for block rewards and circulation supply in each specific time period (block, day, month, year...)
Since the security ratio is calculated on a unit basis, it is independent of the currency expression, such as dollars.
Average Bitcoin security ratio for BTC block 783761 is then calculated as follows:
*A block is the most basic unit of time. If we do SR of a certain calendar timeframe such as day, month or year, we take an average value of all blocks falling within the given period.
The Fee Security Ratio
The Fee Security Ratio focuses solely on the transaction fees paid by users, rather than incorporating newly minted coins as part of the block rewards.
This ratio provides a more accurate representation of the security level ensured by transaction fees alone.
Fee Security Ratio can be calculated using the following formula:
ratio (FSR) = Total Transaction Fees Total Circulation Supply * 1 000 000
* FSR is calculated for block rewards and circulation supply in each specific time period (block, day, month, year...)
The Fee Security Ratio highlights the proportion of network security derived from transaction fees, making it an essential metric to understand a blockchain network's sustainability in the long run. As block rewards diminish over time, particularly in networks with a decreasing issuance schedule like Bitcoin, transaction fees become increasingly critical for maintaining network security.
Comparing Fee Security Ratios among blockchain networks with similar market capitalizations can provide valuable insights into the sustainability and long-term security of these networks, as it shows their reliance on transaction fees to incentivize miners and secure the network.
Comparing Security ratios of various blockchains
It is important to keep in mind that when comparing the security ratios of different blockchain networks, it is optimal to compare those with similar market capitalizations. This is because a higher security ratio for a smaller blockchain (e.g., $10 million market cap) does not necessarily mean it is a more secure chain than, for example, Bitcoin with a lower security ratio but a significantly larger market cap (e.g., $500 billion).
Larger market cap cryptocurrencies, such as Bitcoin, have a more extensive and distributed network of miners, which inherently provides a higher level of security. In contrast, smaller market cap cryptocurrencies, even if they have a higher security ratio, may still be more susceptible to attacks due to their relatively lower hash power and smaller mining communities.
Therefore, comparing security ratios of blockchain networks with similar market capitalizations provides a more meaningful and accurate assessment of their relative security levels.