Bitcoin transactions can only be verified by mining, a process in which powerful computers solve complex algorithms in order to add new blocks of verified transactions to the blockchain. The process is deliberately engineered that way to prevent people from taking over the network by force in a 51% attack by making it prohibitively expensive to do so, as the cost of the hardware and electricity required to mine at that level would be astronomical.
Mining is itself a very costly process, with miners being rewarded with fees subsidized by the block reward built into the network protocol. For every block of transactions mined, miners receive 12.5 Bitcoin.
However, over time the block reward halves, and then halves again – it started out at 50 BTC per block mined. Every 4 years the mining reward is reduced by 50%, meaning miners get less and less BTC over time (although it’s possible that the BTC will be worth more in future to compensate).
However, along with the constantly reduced block reward, there’s also the fact that Bitcoin has a finite supply of 21 million BTC – the last BTC will be mined around the year 2140 at the current rate of mining. What happens then, when there’s no more block reward?
Can A Fee Market Sustain Bitcoin Mining?
Ideally, the fees that are currently just partially subsidizing Bitcoin mining will take over from the block rewards entirely and act as the only source of income for miners. Of course, for that to be remotely economical, Bitcoin will need to be far more widely adopted – the electrical cost of Bitcoin mining currently eclipses the energy consumption of the entire nation of Ireland, completely dwarfing the fees (in the last 24 hours, the total sum of transaction fees was a mere $135,000, a very tiny fraction of the amount required to power the network).
“Nothing much is expected, they will be used like everything else exchanging hands all the time for goods and services like money does and like it is doing right now as well, the difference is that the bitcoin will continue growing in value.”
Miners who have invested millions into their hardware may not be able to recoup their costs at the current rate of mining rewards – CryptoCompare figures show dismal ROI periods for miners, some of which have recently become outdated to the point that they’ll never repay their own cost as the price of BTC mining verges on breakeven.
It’s possible that mining fees will need to increase in order to incentivize miners to continue their important work – without them the network would collapse and Bitcoin would become worthless and unusable with no transactions being verified. Newer mining hardware is also the answer, as companies like Bitmain constantly upgrade to more efficient models to scale with the increasing difficulty of Bitcoin mining algorithms and mining competition.
“If bitcoin will be successful in the future, the price will rise. This will keep mining profitable even though absolute value of block reward will diminish. (example: 12.5 BTC in USD today is much more than 50 BTC were in 2009).
When block reward falls very low or disappears it’s not unreasonable to expect the computational capabilities of the network will be so much larger that the amount of transactions transacted over bitcoin will fill blocks with sufficient fees to keep mining profitable. Besides, mining is a competition on the market for whatever is earned by block reward + fee.
Even if there is less revenue to be gained, there will still be miners that will keep competing for it as long as their costs are covered. On the topic of bitcoin as a payment method. If it won’t be bitcoin it will be a different cryptocurrency IMO.”
Of course, the issue with fees being increased is that the usability of the cryptocurrency as a method of payment for everyday goods and services is affected – nobody wants to pay $1 in fees for $10 worth of goods, and Bitcoin fees are too high for many as it is already at $0.64.
If Bitcoin is to continue its success as a speculative commodity and a store of value, the increased fee structure makes sense. Bitcoin will essentially be a luxury item bought to either preserve or potentially increase the value of an invested sum. People will have no issue paying a higher fee for a speculative investment. However, if Bitcoin is to replace or compete with fiat currency in any way, the issue of fees must be approached very carefully.
While it’s something that concerns many in the space, Bitcoin developer Jimmy Song feels that it’s simply something to keep an eye on and that the market will “figure it out” over time, as all markets do (one way or another).
Song essentially makes a case for the Lightning network and higher fees, stating that scaling with a constantly increasing block size like Bitcoin Cash would require the currency to be inflated at some point, making it less attractive to mining. Song goes on to add that the added security from more confirmed transactions will drive up fees, but states that the long waiting times associated with this will be handled by the Lightning Network second layer scaling solution off chain.
Song is optimistic that the market will naturally adapt in an organic way that will allow Bitcoin to fill a niche organically and enable miners to earn money through fees whether it be the increased amount spent on speculative investment on an ever-volatile currency or the low, affordable fees generated by a huge amount of microtransactions as Bitcoin is adopted and used to pay for clothes, food, luxuries, services, and everything paid for with fiat currency today.
So what happens when the last Bitcoin is mined? What is clear is that the Bitcoin protocol will be forced to adapt whether the community wants to or not. The mining reward might not run out for 20 years, but as Song predicts, the community will plan ahead and a new reality will set in. Lets all hope that Bitcoin is still around.
Follow us on twitter @cryptoiscomin