How are miners compensated for their services ?
Miners spend money on hardware and electric power to add new blocks to the blockchain. Without miners no new blocks will be added to the Bitcoin blockchain – no new transactions being confirmed.
Miner is not minning blocks because he is in love with Bitcoin ideology, rather he aims to make a profit by minning.
Miners are running a business, which has investments and generates income. They will continue to operate until they feel they are making a profit on their investment.
Miners are compensated with Bitcoins from block rewards and tips that users pay for including their transactions to the blockchain.
Minner will continue operating until outputs are more than inputs for his minning business.
Bitcoin has fix supply
Bitcoin block rewards get cut in half every four years.
Last Bitcoin will be mined in 2140. After which Bitcoin minning reward will fall down to 0.
What will happen when all the Bitcoin is mined ?
Miners will only be compensated by miner tips as there will be no block reward after 2140.
Only those miners who are still profitable will continue operating.
Combined computing power of all the miners still operating has to be greater than the computing power required to pull off a 51% attack in order for Bitcoin to survive.
Worst case scenario
In the worst-case scenario: Tips are not large enough to incentivize large number of miners to participate in minning. As a result computing power backing Bitcoin falls.
A hacker buys a lot of computing power from cloud services like Amazon AWS and launches a successful 51% attack on Bitcoin network.
As a result value of Bitcoin falls. More miners leave the network as they are no longer profitable. It becomes even easier for hackers to launch a 51% attack.
The downward spiral continues till Bitcoin finally collapses.
Best case scenario
In best-case scenario, tips are sufficient incentive to keep large number of miners operating. The computing power backing Bitcoin network is more than the computing power required for 51% attack.
Which scenario will play out ?
I believe that only layer 2 scaling solutions like lightning network that bunch a lot of users transactions will be able to pay large amount of transaction tips.
Whereas it will not be possible to generate large tips from regular users doing routine transactions.
In this scenario, Bitcoin will not just be a store of value that is difficult to move around. Rather a currency that a lot of people are using for daily transactions, each paying a small fee that adds up to a large sum which incentivizes large number of miners to back Bitcoin network.
Other arguments like cost of energy and computation becoming cheap does not have impact on survival of Bitcoin because they affect miners as well as hackers in the same way.
Another argument that Big players holding large amount of Bitcoin will step in if miners stop minning.
That will be a rational thing to do if you hold large amount of Bitcoin and do not want its value to disappear.
However, It will not work because:
- Tragedy of commons – everyone will try to freeload, thinking that someone else will do it.
- Big players will have to incur heavy costs daily to maintain large amount of computing power backing Bitcoin network. Whereas hacker has to accumulate large computing power just once to hack the system.
Nothing drastic happens in 2140 when Bitcoin block reward falls down to 0.
Bitcoin halving is a gradual process, that is known to all the market participants well in advance.
Till now Bitcoin hash rate has been rising in spite of all the halvings.
This has been possible only because value of Bitcoin has been growing like crazy which has adequately compensated miners to keep minning.
Value of Bitcoin is growing because it is seeing a greater adoption every year(Kind of like ponzi scheme).
The value of Bitcoin will not keep growing like this forever. That is the time when halving will force unprofitable miners to close their operations, possibly reducing Bitcoin hash rate.
It is also possible that community makes changes to Bitcoin protocol to keep it alive, like:
- Transitioning to proof of stake.
- Increasing the maximum supply to continue block reward.
- Some new breakthrough that we cannot imagine right now!
However, these are tough decisions to coordinate and even more difficult to anticipate their second-order consequences.