After all Bitcoins are mined, will mining still be a profitable business?

Author | Fiona produced | Vernacular Blockchain (ID: hellobtc)

The most direct reward for mining is the block reward. Take BTC for example, currently each block mined will receive a block reward of 12.5 BTC (about 325,000 RMB at the current price).

However, this reward will be halved every four years or so , and will be halved to 6.25 BTC around May 2020. When all BTC are mined (around 2140), no new Bitcoin will be produced. Even if the price of the currency goes to the moon, the block reward will be zero. Will miners have to change their jobs en masse?

In fact, the current income of miners consists of two parts: block rewards + transaction fees (Coinbase+Fees) . However, at present, compared with block rewards, the proportion of transaction fees is still very low (as shown in the figure below). Block rewards are still the main source of income for miners, and the average proportion of transaction fees is less than 2%.

▲ Transaction fee ratio-2019/2/28 (Source: fork.lol)

As shown in the figure below, among the rewards of the ten blocks, the highest transaction fee is 0.54 BTC (about 13,000 RMB), and the lowest is only 0.06 BTC (about 1,500 RMB).

Currently, the average number of transactions per Bitcoin block is about 2,000:

▲ Number of BTC packaged transactions-2019/2/28 Unit: transaction/block (Source: fork.lol)

So what does the transaction fee pay for? Simply put, it is the cost that miners bear when packaging transactions.

In order to ensure the security of point-to-point transactions, in addition to transaction information, the transaction data is also encrypted and digitally signed, thereby generating relevant script information. Before packaging into blocks, miners need to verify the legitimacy and double-spending of transaction data: including whether the transaction output comes from UTXO, whether the balance of the transaction initiator's address is sufficient, etc.

As the volume of transactions increases, the miners will have to perform more and more calculations in the processing process. In order to complete these tasks, miners need to have corresponding equipment, sufficient storage space and bandwidth. In theory, these costs should be paid by transaction fees (some people think that in order to increase the volume of transactions, the lower the transaction cost, the better. However, in reality, if sending transactions does not require any time and cost, it will greatly increase the possibility of someone launching a dust attack and cause network congestion).

▲ Average transaction fee - 2019/2/28 Unit: Satoshi/Byte (Source: fork.lol)

Currently, the transaction fee for Bitcoin is 20.59 satoshis per byte (on a daily average). The transaction fee alone is far from enough to cover the cost of miners, let alone make a profit.

So if income mainly depends on block rewards and transaction fees are not high, what should we do when all BTC is mined?

Because of the current income structure, there was a view that as block rewards decrease, low transaction fees are unsustainable. In order to ensure that miners have the motivation to continue mining, either the price of Bitcoin rises or the transaction fees increase (price increase), but I believe that under the current circumstances, a transaction fee increase is definitely not a good idea.

However, more people believe that mining technology will develop rapidly in many years, and it is very likely that mining chips will be small and cheap enough to be installed in various devices. Mining will change from a large-scale, asset-intensive industry to a very daily and ordinary thing, and every user can also participate in mining.

In addition, the decline in block rewards is a relatively long process and will not suddenly return to zero. During this period, miners have enough time to keep up with the times and explore more diversified income models.

But no matter what, transactions generate value, whether from the perspective of actual benefits or ecological construction, the scale of transactions is extremely important. As Satoshi Nakamoto once said, in the next 20 years, Bitcoin will either have an amazing transaction volume or no transaction volume. At present, the transaction volume of more than 2,000 transactions per block needs to be further improved through the development of technology and the market.

When all 21 million bitcoins are mined, do you think it is likely that transaction fees will increase? Why?