When we talk about bitcoin and mining we’re always referencing the built in cap. You see, there is stipulation within the code of bitcoin, that there will only be 21 million bitcoins. Never more. After all the mining that may be mined (which should happen around 2140), new bitcoins will no longer be in circulation.
The bitcoin blockchain was developed based on the principle of controlled supply, that is, there is only a fixed amount. Newly minted bitcoins can be mined every year until a total of 21 million coins have been minted. After 21 million BTC have been mined, the network will operate in a similar way as it is now, which is an important difference for miners.
However, before continuing let’s explain the process of mining. Every ten minutes or so, bitcoin miners “discover” a new block and solve a cryptographic puzzle. Successful miners can use the puzzle to add newly discovered blocks to the blockchain
In return for finding blocks, miners receive a fixed amount of bitcoin for their work, called “block rewards.” When bitcoin was first launched, the reward was set at 50 BTC, but every 210,000 new blocks reduced the reward in half, which happens roughly every four years. Therefore, as time passed, the block reward dropped to 25 BTC, 12.5 BTC, and 6.25. BTC. So far, three and a half have been completed.
The last bitcoin halving was in May 2020, reducing the block reward to 6.25 BTC. The next halving is expected to happen by 2024, meaning the block reward would be 3.125 BTC. bitcoin miners can continue to receive large block rewards until the new bitcoin ceases to circulate, and a total of 21 million BTC have been minted. As of this writing, 18.5 million BTC have been produced, which is 88.3% of the largest supply minted in more than a decade, but as the re-creation of bitcoin gradually decreases, the minting of the last Bitcoin will take another 120 years.
So what happens then?
After minting 21 million bitcoins, miners can still participate in the block detection process, but will not receive any rewards in the form of bitcoin block rewards. However, that’s not the only way to get rewards, bitcoin miners can also get all transaction fees included in each newly discovered block. Transaction fees currently account for only a small part of miners’ income, because miners currently mine about 900 BTC (approximately $39.8 million) per day.
However, miners earn 60-100 BTC ($26-4.4 million) as transaction fees every day. This means that transaction fees currently only account for 6.5% of miners’ income, but by 2140 they will increase to 100%. The question however is whether or not this will disincentivize miners? Well, according to Simon Kim, CEO of VC fund “Changes to the Bitcoin ecosystem and its place as a key currency in the virtual world could drive significant changes in miner adoption even after the block rewards stop.”
Indeed, moving to a reward structure based solely on transaction fees will almost certainly break the mining network, because very few bitcoin miners can profitably mine bitcoin if they only receive 6.5% of their typical reward. Should BTC explode, much more than it has already, then the competition for block space would surge as well. This in turn will surge the importance of transaction fees.
This does bring the question of whether proof of stake (or otherwise known as staking) is something the Bitcoin can benefit from. Well, this solution wouldn’t fix the main problem of limited supply, it would however fix another problem that comes with mining bitcoin and that’s the environmental impact. However, as of February 2021, there is no work that can provide evidence of bitcoin staking protocols being developed and there are no proposals to improve bitcoin.
What we’ve explained is one side of the coin as bitcoin miners would be sufficient with the transaction fees. However, the switch to a reward structure based on transaction fees will deal a huge blow to miners as they can only get 6.5% of the reward they received today. This brings the question: “What if bitcoin miners stop mining bitcoin altogether?”
This is a very hypothetical situation, of course, some miners would remain, but what if most miners, or even all miners, stop mining bitcoin? The bitcoin network will change forever in many ways. You can still see which wallet addresses contain bitcoins and how much, and you can also see the complete history of each bitcoin transaction.
However, new transactions need to be confirmed through mining. When miners stop producing new blocks, it becomes necessary because it will become impossible to actually spend bitcoin in the future. This is a doomsday warning for the bitcoin network, but many people believe that even if transaction fees are their only reward, miners will stick to it.
There have been some studies done that show that transaction fees won’t be enough, but let’s remember that from now until the last bitcoin is mined, that’s 120 years away. So a lot can change between now and then, not that anyone reading this piece right now will be alive in 2140 to see it.
(Note: The above thought piece covers the wider VA industry, and may not be an activity that Arabian Bourse Limited (ABX) is looking to be licensed to undertake.
ABX has received in-principle approval from Financial Services Regulatory Authority of Abu Dhabi Global Market (ADGM) and is currently in the process of obtaining an FSP. ABX aims to be the first of its kind fully regulated, virtual asset MTF and custodian in the region focused on institutional and retail investors.)