What happens when mining rewards end?

Jul

What happens when mining rewards end?

#Bitcoin, #Blockchain, #Crypto, #Cryptocurrency, #Mining

News

The 2020 Halvening is just one of a series of further supply reductions in Bitcoin’s future. What happens when miners rely solely on transaction fees for revenues?

Over the course of Bitcoin’s history, tx fees have played a changing role in the way miners are rewarded. In the past, the proportion of miners’ income that was composed of block rewards and transaction fees respectively has been quite different.

In normal times, transaction fees currently account for around just 2% of miners’ income. At the time of writing, tx fees provide miners with 30-50 BTC per day, while block rewards provide 1,800 BTC.

As block rewards decrease (May 2020 being the next Halvening event), tx fees will become more and more important – and so will bitcoin’s price. Bitcoin can only remain secure if the cost of attacking the network is high compared with the potential benefits of doing so. In other words, as overall rewards decrease, price must increase if Bitcoin is to survive.

Bitcoin’s daily rewards are currently around 0.01% of the value of its overall market cap. In the past, this has been much, much higher – for example, when MtGox first opened back in July 2010, it was 0.21%. Not only were block rewards higher (50 BTC instead of 12.5 BTC), but there were fewer BTC in existence, so the diluting effect of new coins was larger.

There have been a few rare occasions when tx fees made up a significant proportion of mining rewards. On one day in December 2017, tx fees accounted for a third of revenues: miners received over 900 BTC in tx fees, plus 1,800 BTC in block rewards. But that really was unusual. As Bitcoin’s rewards reduce over the coming decades, block rewards are going to drop dramatically.

It is very difficult to game out what is likely to happen, but there are a handful of obvious conclusions:

Since block rewards halve every 4 years, the importance of tx fees becomes disproportionately more important. Tx fees must do far more than double to offset the difference.
The more txs Bitcoin supports per day, the better.
However, since block space is limited, tx fees may need to rise significantly to ensure total revenues are high enough – much like they did in December 2017.
Additionally or alternatively, regular miners will need to supplement revenues with income from second-tier solutions like the Lightning Network.

In short, the cost of attacking the network must be sufficiently high as a proportion of network value, and in the long term that cost is directly related to miners’ income. History suggests that 0.01% of network value in mining rewards per day is easily enough to secure the network. It is unclear whether 0.001% or 0.0001% will be enough.

Bitcoin, after all, is still a colossal experiment. It’s one we love and think has a bright future, but there are no guarantees.