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Bitcoin

The Incentives of Bitcoin Miners

I came across this interesting question on Bitcoin Stack Exchange.

What happens to the bitcoin network when the miners all stop in the future?
What happens to the bitcoin network when the miners all stop, years in the future after all the bitcoins have been mined? How will the network continue to function? Won’t bitcoins then be useless? What would be the incentive for an individual to continue using computational power to service all the transactions? Isn’t this like a ticking time bomb or is there something I’m not getting?

Demioprax

If I were to rephrase this question, it would be something like this, “What incentives do Bitcoin miners have to keep mining?”

I thought this might be an interesting question to tackle, especially since we just had a halvening today! So let’s dive into it.

Why do Bitcoin Miners mine?

Bitcoin miners earn money, every time they guess a correct answer to a problem.

As more people participate in guessing, the problem gets harder and harder.

If you get a correct answer, you win money. Currently that reward is 6.25 bitcoin. This is why Bitcoin miners mine. To get Bitcoin.

What happens in the future?

As time goes on, the amount of Bitcoin will approach 21 million. When we hit 21 million, there will not be a reward for the miners. Now, if there is no reward for the miners, why would they mine? I don’t work for free. You probably don’t either! The miners probably would feel the same way.

The good news is that Satoshi already thought of this problem. We can pay for miners to accept our transactions, think of it as a tip. So if I send 1 BTC, I’ll add a tip (known as a fee) so it can get accepted by a miner.

A Bitcoin block contains on average around 1600 transactions. With 1600 tips, the miners can replace their previous reward, with tip rewards.

What are the incentives?

To make it very simple and to directly answer our question we asked earlier (remember? We asked, “What incentives do Bitcoin miners have to keep mining?”).

The incentives are simple: Bitcoin miners are motivated by Bitcoin. As the reward rate of Bitcoin goes down, the fees (tips we send on every transaction) go up, replacing the income lost.

Also, as long as Bitcoin maintains and raises in value, it could be considered very valuable to mine. Even if the reward is very little (6.25btc vs the original reward, 50 btc), the 6.25 btc earned now is worth much more than the 50 btc were worth at the time of earning.

Conclusion

Bitcoin miners are incentivized by money. They currently earn money through rewards, and a little bit through fees. In the future they can earn all their money through fees. Also, the price of Bitcoin is very important to the miners, because if the price was $0.00, they couldn’t make very much money from mining the bitcoin.