What happens when all Bitcoin are mined?
In the year 2140, the last bitcoin halving is expected to take place. Many people wonder what will happen to bitcoin when the miners, who are responsible for the security of the network, no longer receive block rewards for the work they have done.
Bitcoin is the first asset in history with a proven absolute scarcity. This scarcity is verifiable by any network participant and is governed by an algorithm in bitcoin's public source code. Therefore, bitcoin is often considered «digital gold» and thus an attractive store of value.
A block is added to the bitcoin blockchain on average every 10 minutes. With each block mined, the miner receives compensation in the form of bitcoin. This remuneration, the block reward, consists of the block subsidy and transaction fees. This allows miners to cover the resources expended.
However, the block subsidy halves every 4 years. This event is also known as bitcoin halving. This process will continue until about the year 2140. Then the block subsidy of one satoshi (smallest bitcoin currency unit) per block will decrease to zero.
As block subsidy tends toward zero, many bitcoin skeptics believe that low miner revenue leads to lower security, thus impacting Bitcoin's value.
The hashrate reflects the security of the bitcoin blockchain. If the block hashrate drops, miner revenues are threatened and at the same time the security of the Bitcoin network is threatened. However, several factors come together to allow miners to continue to mine profitably despite a halving of block subsidy, thus maintaining the security of the Bitcoin network.
Miners' revenue consists of the block subsidy, the new bitcoin mined, and the transaction fees paid on a transaction. This sum is called the block reward. So while the block subsidy is halved, the transaction fees remain the same.
Bitcoin's block size is limited. Thus, on average, only about 2,000 to 3,000 transactions can be processed per block. If the demand for space in the block increases, transaction fees can be expected to rise as users compete with each other to include their transaction.
The long-term trend shows that bitcoin adoption is steadily increasing. Therefore, the demand for transactions on the network is increasing and thus transaction fees are expected to rise to compensate miners.
In a few decades, when the block reward becomes too small, the transaction fee will be the main compensation for mining. I am sure that in 20 years there will be either a very large transaction volume or no volume at all.
A miner's expected revenue depends on its proportional share of the total bitcoin hashrate. Thus, if other miners are forced to cease operations due to halving, the proportional share of revenue for the active miners is all the greater if they have managed to remain profitable despite halving.
As the overall hashrate decreases, the Difficulty of mining also decreases. For miners who continue to mine, halving can lead to higher profitability by eliminating competition and increasing the probability of finding a block and receiving the reward.
As computers become faster and the total computing power used to generate bitcoin's increases, the difficulty increases proportionally to keep the total new production constant. So it is known in advance how many new Bitcoins will be created each year in the future. The coins must first be distributed somehow, and a constant rate seems to be the best formula.
Mining hardware and the whole infrastructure around bitcoin mining is constantly improving. The introduction of ASICS miners led to more efficient proof-of-work calculations. If a miner can increase the energy efficiency of its mining hardware and thus reduce costs, this can offset an additional part of the revenue lost through halving.
The whole mining infrastructure around it can also be optimized and made more efficient through experience and technological progress (hardware, cooling, building, location, external & internal processes, etc.).
Energy prices fluctuate over time and geographically, but energy costs, the largest part of a mining company's operating costs, are generally declining over the long term. If the miner can reduce its energy costs over a four-year period, it can absorb the future loss of revenue.
Miners act economically and face free competition. They are forced to find cheap sources of energy to remain competitive in the long run.
Bitcoin mining is geographically independent. A miner can locate his operation wherever the cheapest energy can be found in the world. This allows miners to operate in remote locations that are unsuitable for other businesses. The cheapest power is where a large supply meets a simultaneous low demand. These are usually places with surplus energy.
The price of bitcoin also has a huge impact on the profitability of bitcoin mining. The vast majority of miners still pay their costs with fiat money (dollars, euros, etc.). So if the price of bitcoin doubles over a four-year period, a miner can offset a 50 percent drop in block subsidy.
The price should rise if demand remains the same, based on the simple theory of supply and demand. Between all halvings to date, the price of bitcoin in U.S. dollars has risen more than enough to compensate miners for the 50% decline in block subsidy.
While fees for transactions on the blockchain are expected to increase, it is not necessary for all bitcoin transactions to be processed on the bitcoin blockchain. Additional second layers, such as the Lightning network offer cheaper and faster transactions while reducing the burden on the blockchain.
All of these factors help ensure that miners, and therefore the security of the network, are preserved after a halving. In fact, past halvings have not significantly affected the hashrate. On the contrary, the bitcoin hashrate has continued to reach new highs.
As block subsidy approaches zero, transaction fees will become an increasingly large part of block rewards. Miner revenue, and thus bitcoin's security, will be entirely dependent on these fees.
Skeptics have expressed concerns about whether the fees will provide a sufficient level of security. While these concerns are valid, the continued growth of the bitcoin network shows otherwise.
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