The May Block Halving Is A Reminder That Eventually Block Rewards Will Go To Zero And Miners Will Depend On Transaction Fees, But Will Transaction Fees Be Enough To Keep Bitcoin Secure?

April 21, 2020 / by Zachary Mashiach

The highly anticipated May block halving is coming in only three weeks, with the halving date expected to be May 12. Aside from the halving being the spark that potentially ignites a major Bitcoin (BTC) rally via drastically lowering selling pressure from miners, the halving is also a stark reminder that eventually Bitcoin’s (BTC) block rewards will go to zero. At that point the Bitcoin (BTC) miners will depend on transaction fees. This article explores what will happen at that point, and if transaction fees will be enough to sustain the security of the Bitcoin (BTC) network.

Currently the Bitcoin (BTC) block reward is 12.5 Bitcoins (BTC), and after May 12 it will decline to 6.25 Bitcoins (BTC). At current prices, this is a decline in miner revenue from $13 million per day to $6.5 million per day. Miners are hoping that the price of Bitcoin (BTC) will double due to the halving, or at least rise significantly. If the price of Bitcoin (BTC) does not rise then miners will lose 50% of their revenue, which is enough to wipe out the profit margin of most mining operations.

Zooming out to the future, approximately every four years there will be another block halving. Therefore, in 2024 the block reward will decline to 3.125 Bitcoins (BTC), in 2028 the block reward will decline to 1.5625 Bitcoins (BTC), in 2032 the block reward will decline to 0.78125 Bitcoins (BTC), in 2036 the block reward will decline to 0.3906 Bitcoins (BTC), and so on and so forth. The block reward will decline below 0.1 Bitcoins (BTC) in 2044, below 0.01 Bitcoins (BTC) in 2060, and hitting zero in 2140 once the block reward declines below one satoshi.

As the block reward approaches zero in the coming decades, Bitcoin (BTC) miners will become more and more dependent on transaction fees. Essentially, every Bitcoin (BTC) transaction includes a transaction fee which is sent to miners, and miners receive transaction fees in addition to the block reward.

In fact, one of the primary reasons that Bitcoin (BTC) transaction fees exist is so that miners will continue to have an incentive to secure the network as the block reward approaches zero.

Currently Bitcoin (BTC) transaction fees per day are 10-40 Bitcoins (BTC), with a rough average of 20 Bitcoins (BTC) per day, which is approximately 1% of the Bitcoins (BTC) that miners receive from block rewards.

Therefore, in order for transaction fees to replace Bitcoin (BTC) block reward revenue at this point, transaction fees would have to be 100X higher. Since currently transaction fees are $0.30 to $1 per transaction, this means transaction fees would have to be $30-$100 per transaction in a world where block rewards go to zero and miners depend completely on transaction fees.

Obviously, fees of $30-$100 per transaction would cripple the usability of the Bitcoin (BTC) network, and would make other payment methods like credit cards or cash preferrable. Therefore, rising transaction fees would limit Bitcoin (BTC) adoption, and ultimately would lower mining revenue.

Of course, the hope is that Bitcoin (BTC) will at least double in value after every block halving, which has been true so far in history, and if that happens block rewards will continue to be enough to sustain Bitcoin (BTC) miner revenues. However, there will come a point where there are essentially very little to no block rewards, and miners will completely depend on transaction fees.

A common sense solution to this problem is to increase Bitcoin (BTC) adoption so that there are orders of magnitude more Bitcoin (BTC) transactions. If there are orders of magnitude more Bitcoin (BTC) transactions, then transaction fees will not have to rise to sustain miners revenues, since more people will be paying transaction fees.

However, the Bitcoin (BTC) network is essentially at the limit of its scalability, with Bitcoin (BTC) blocks often hitting the 1.2 mb limit, meaning that they are completely filled and cannot contain anymore transactions.

Therefore, the solution to the problem of block rewards dropping to zero long term, at which point miners will need to obtain all of their revenues from transaction fees, is to make the Bitcoin (BTC) network more scalable. Fortunately, there are decades until this becomes a problem, and hopefully the Bitcoin (BTC) community can figure out this scalability problem over the coming decades. Further, not only would increased scalability guarantee that miners continue to have sufficient revenue from transaction fees, but also it would increase Bitcoin (BTC) adoption, so it is a win-win situation.

On a final note, it is crucial to fix this problem for the safety of the Bitcoin (BTC) network. If block rewards approach zero in the future and scalability has not been fixed, causing miners to receive only a small fraction of revenue from transaction fees relative to the revenue they receive from block rewards currently, then the hash rate will crash.

If the hash rate crashes, this means there will be vast amounts of Bitcoin (BTC) mining equipment sitting idle, and a bad actor could use this equipment to 51% attack the network.

Therefore, it is crucial to make Bitcoin (BTC) sustainable and secure long term via increasinging the scalability of the network, so that enough transactions can be sent on the network in order to sustain miner revenues as block rewards approach zero. Otherwise, the hash rate will crash, and that could lead to 51% attacks and possibly the end of Bitcoin (BTC).

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