What Happens When the Last Bitcoin is Mined?
When it comes to Bitcoin, one of the first things people learn about this digital currency is that it has a maximum supply of 21 million coins. This distribution and creation of new bitcoins happens through a process known as Bitcoin mining, where miners use computers and electricity to validate transactions, earning new bitcoins as a reward.
This raises the question — what happens after the last Bitcoin is mined? In short, Bitcoin miners will transition from receiving new bitcoins as rewards to relying exclusively on a transaction fee-based reward system, expected to occur around the year 2140. Before we go any further, let’s explore some key concepts in Bitcoin, including how bitcoins are mined and the current reward system, as these are vital in understanding how Bitcoin’s incentives will change in the future.
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How are new Bitcoins Mined?
Bitcoin mining involves employing computers (known as ASICs) and computational power (electricity) to solve cryptographic calculations, propose new blocks of transactions to the network, and get rewarded with bitcoin and earn transaction fees for doing so. Bitcoin nodes then verify the blocks the miners propose to ensure the transactions are valid and adhere to the rules of the Bitcoin network. This collaborative effort ensures no single entity can unilaterally dictate the state of the network, preserving the decentralization that is core to Bitcoin.
Currently, roughly 19.6 million of the 21 million bitcoins have been mined and are in circulation, representing 93.56% of the total supply. However, the final 6.44% of bitcoins will be mined over the course of the next 116 years in ever-decreasing amounts thanks to a hard-coded supply shock that halves the issuance of bitcoins per block every four years.
Bitcoin’s Current Reward System
The current incentive to mine Bitcoin primarily stems from the ability to earn new Bitcoin, however, transaction fees are also rewarded to those mining Bitcoin and they’re becoming an ever larger piece of the economic reward.
In the current era, a Bitcoin miner receives a reward of 6.25 bitcoins in addition to transaction fees. On days characterized by low congestion on the Bitcoin Network, these transaction fees typically range from 1% to 6% of the total block reward. However, there are numerous instances where transaction fees constitute a substantial portion of the overall reward, as seen in early 2023 when it comprised 43% of the total block rewards.
Additionally, in 2023, the transaction fees in block 788695 surpassed that of the block subsidy. The block distributed 6.7 BTC in transaction fees and 6.25 BTC from the block subsidy, a healthy for the network. As shown in the chart below, there has been a significant increase in fees as a percentage of the total block reward since 2017.
In essence, Bitcoin miners derive income from two sources built into the network: the block subsidy and transaction fees. The block subsidy rewards 6.25 bitcoins every 10 minutes and is halved every four years in a process known as the halving. The transaction fees are the fees paid by users of Bitcoin to have their transactions included in a block, the higher the fee users pay, the faster the transaction will clear and vice versa. Eventually, the halving will reduce the block subsidy to zero (around the year 2140) and Bitcoin miners will rely solely on transaction fees as their reward.
Looking Ahead: Transaction Fees Alone
While still in the distant future, the year 2140 marks a critical juncture for Bitcoin, where miners will shift from being rewarded with new bitcoins and transaction fees to relying on transaction fees exclusively. The evolving dynamics of transaction fees within the Bitcoin network offer a glimpse into this future. Once a minimal component of the block subsidy, transaction fees have grown steadily reflecting the increasing level of activity and transactions on the Bitcoin blockchain. During certain periods, transaction fees have even outpaced the block subsidy, reflecting their increased prominence within the Bitcoin ecosystem.
The shift toward a fee-centric system introduces a spectrum of opportunities, challenges, and unknowns. The market-driven nature of transaction fees fosters a system where users determine the value of timely transaction processing, and by relying only on transaction fees, miners will likely be more responsive to these fees. This economic model aligns with the core principles of Bitcoin where a competing free market for block space comes to life. On the other hand, some critics of Bitcoin argue transaction fees alone will not be enough to sustain the network over the long term. The truth likely lies somewhere in between, but ultimately there are simply too many unknowns to make a final prediction.
As the adoption and usage of Bitcoin increase, so too will the baseline fees for miners. 2023 and 2024 serve as compelling examples of the growing demand for Bitcoin and its ability to provide inflation-proof, uncensorable, and unseizable currency to anyone with a mobile device and internet connection. Should the current level of activity on the network persist, there is no doubt that transaction fees will continue to escalate. As we navigate the future of post-mining Bitcoin, the interplay between transaction fees, user demand, and miner incentives will undoubtedly shape the resilience and adaptability of the network as a whole.