How will Bitcoin Miners be paid in the future?

The question of how miners will be paid in the long run, after mining subsidy rewards disappear is a much debated topic in Bitcoin.  For those who don’t know, mining rewards are set to half every year until they finally reach zero sometime in the year 2140.  How the Bitcoin mining ecosystem will remain profitable (and thus healthy) is up in the air.  Miners are important as they provide security to the Bitcoin network because they convert real world energy into network security to guard against attacks from malicious forces.  Therefore, the more decentralized and diverse a mining ecosystem is, the better for Bitcoin.

So what will happen when mining rewards disappear? Well, some miners feel that transaction fees should rise up to fill up the shortfall.  As Ang Li puts it from an excerpt of the a recent article at Bitcoin.com

The incentives that Satoshi Nakamoto designed in the Bitcoin whitepaper are not enough to sustain mining for long, Li feels, adding that as the block reward halves every four years, miners income will continue to decline. According to him, keeping the block size where it New 22 Petahash Mining Pool Signaling Bitcoin Unlimitedis now will not provide enough incentive and therefore has to be reconsidered. Li also believes that only a larger mining transaction fee will maintain the balance. “By increasing block size, and transaction numbers, the fees will gradually replace the block reward, providing enough incentive for the miners to defend the bitcoin hashrate. This is the fundamental way to achieve healthy development of the whole ecosystem.”

Therefore, if transactions all pay the same amount, the more transactions that can be processed per second (ie the throughput of the system) the more profit the miners will make and thus can offset the declining rewards.  If we use this as the yard stick, it is obvious then that the txs/s that the network can process should double every 4 years in order to keep pace and keep the mining ecosystem intact in its current form.  Any shortfall of this target will result in some of the less efficient miners to stop mining due to their costs not being offset by their revenues.  When miners shut off due to declining revenues this shrinks the size of the mining market as a whole, and is unlike normal miner atrophy or natural turnover of unsuccessful miners, as this is an actual shrinking of the market pie.

So how do we increase the transaction processing capacity of the network? Simplest way is to just increase the maximum blocksize by the desired amount.  So just double the blocksize and thus double the number of txn/s capable of being processed every 4 years until 2140 and we should be good right?

Well not exactly.  That’s because if the blocksize were to grow at such a rate, it is unclear whether or not some lessor miners may be pushed out of the system due to the fact that they wouldn’t be able to handle the larger blocks. In addition, network full-nodes which historically should be runnable on systems as low spec’d as Raspberry Pi’s may be unable to keep up with the growing blockchain size and bandwidth demands.  Although it is unclear whether that would actually be a problem, it is probably safer not to push it if an alternative was available, or so one would think.

This sentiment of transaction fees picking up the slack seems to be shared by most of the core developers as well, though they see it in a slightly different way.  Core developers, especially those at Blockstream, believe that individual fees per transaction should rise via a ‘fee market’ as opposed to just having a larger number of equally low fee txns.  This is seen in their push for more of the ‘daily commerce’ flows to be done on (yet to be deployed) 2nd layer networks like Lightning, and only the large settlements and Lightning channel open/close operations should be done ‘On-chain’.  Thus fewer transactions, but each one is much more expensive than they are now.  Perhaps even as high as $10 each. It would also logically stand to reason then that they expect that on average the on-chain network txn fee should double every 4 years in order to keep the miners healthy. In the last 6months alone, due to this Core edict being applied defacto due to the fact that blocks are running full presently, transaction fees have risen from 0.07 to ~0.60 USD from volume backlog pressure alone (actually ~200satoshis/byte).  Miners have been experiencing a slight profit windfall due to rising fees, but this bonus is short lived.  It comes at the expense of pushing txn volume to other altcoins to handle the overflow, for people who can’t or are unwilling to pay the higher fees for priority settlement on the Bitcoin blockchain.  Thus the miners are getting more money for mining, but at the cost of network growth and flow volume which is going elsewhere.  As those altcoins like Ethereum and DASH and Litecoin start handling more and more volume, their value goes up and thus their price vs fiat does as well, in a chain reaction that could potentially have them overtaking Bitcoin as the most favored ‘store of value’ blockchain.

So this doesn’t sound that good.  But what is the alternative?  How can miners get paid? One other less spoken about possibility is that the price of BTC just must rise to compensate.  In other words, the price of BTC with respect to fiat should double every 4 years.  This presumably could be the case if more and more people found bitcoin useful and bought it.  In fact, if increased the blocksize moderately, which should allow for more txn/s, that should bring more new users onto the system, and perhaps the price appreciation can make up the difference in the miners profit shortfall.  Additionally, once those new users and flow is there, if the miners wanted to increase the fees, they could always mine smaller blocks in order to trigger fee competition as well, if they so wished.  That is the thinking of Bitcoin clients such as Bitcoin Unlimited and Bitcoin Classic.

One would hope that among these 2 models of replacing the mining subsides the market and network can find a happy medium.

/EOL

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