Michael Nielsen is a respected scientist with a knack for explaining abstruse technical stuff and the author of a textbook on quantum computing. In an excellent technical essay, required reading for those who want to understand Bitcoin in-depth, Nielsen explains just how and why Bitcoin works:
“For [the blockchain] to have any chance of succeeding, network users need an incentive to help validate transactions. Without such an incentive, they have no reason to expend valuable computational power, merely to help validate other people’s transactions. And if network users are not willing to expend that power, then the whole system won’t work. The solution to this problem is to reward people who help validate transactions. In particular, suppose we reward whoever successfully validates a block of transactions by crediting them with some infocoins. Provided the infocoin reward is large enough that will give them an incentive to participate in validation. In the Bitcoin protocol, this validation process is called mining. For each block of transactions validated, the successful miner receives a bitcoin reward.”
I think one of the most important lessons from the brief history of Bitcoin is that the people in the street, the “unwashed masses,” will actively participate in world-changing experiments if they can see credible prospects of financial benefits. Of course, the lesson is not new – the settlement of the New World and the Industrial Revolution were world-changing experiments, and the people flocked to participate en-masse because they could see the money.
Nielsen explains that, if things continue to evolve predictably according to the current Bitcoin protocol, the very last bitcoin will be mined by the year 2140. Does that mean that people will stop mining (maintaining the Bitcoin network) after 2140, and the Bitcoin system will collapse? No, explains Nielsen, because the miners will still be compensated with transaction fees:
“So in 2140 CE the total supply of bitcoins will cease to increase. However, that won’t eliminate the incentive to help validate transactions. Bitcoin also makes it possible to set aside some currency in a transaction as a transaction fee, which goes to the miner who helps validate it. In the early days of Bitcoin transaction fees were mostly set to zero, but as Bitcoin has gained in popularity, transaction fees have gradually risen, and are now a substantial additional incentive on top of the 25 bitcoin reward for mining a block.”
That makes sense, with the reservation that at this moment transaction fees are not “substantial.” Perhaps the only way to keep miners motivated is to gradually increase transaction fees until the become really substantial. But that would eliminate one of the main competitive advantages of Bitcoin – its low transaction fees. Bitcoin is a much better way to transfer value than Western Union because the transaction fees are much lower, and that’s what persuades people to use Bitcoin instead of Western Union. But if the intrinsic cost of Bitcoin transactions were much higher because the miners receive substantial transaction fees, the competitive financial advantage of Bitcoin over Western Union would be lost.
If the post-mining phase of the Bitcoin economy is to begin in 2145, perhaps we should just ignore it. 2145 is far away, why should we be concerned about something that happens at mid next century?
But that’s the theoretical, mathematical end of mining. I am more concerned about the practical end of mining that happens when mining is no longer profitable enough for the vast majority of Bitcoin users. In this practical sense, aren’t we already in the post-mining phase? I don’t mine because the little (if any) profit that can be made mining today isn’t worth the time and effort, and I guess most Bitcoin users would agree.
Also read: Bitcoin Mining Difficulty Decreases for First Time in Almost Two Years
Of course a new altcoin can be created to make mining (of the new altcoin) profitable again and thus provide incentives to new miners, but the new miners would be maintaining the new blockchain, not the Bitcoin blockchain.
In summary, my concern is that: 1) In the post-mining phase of the Bitcoin economy there won’t be sufficient incentives to maintain the Bitcoin blockchain, and 2) We are already in the post-mining phase of the Bitcoin economy for practical purposes. It follows that the Bitcoin system may start collapsing anytime now.
That contradicts the standard position of Bitcoin enthusiasts, but I feel that the issue hasn’t been fully explored. So I started a discussion on Bitcointalk and the Facebook group “Bitcoin and the Internet of Money” to gather objections and counterpoints.
One objection is that there are enthusiasts who maintain the blockchain not for financial benefits, but for ideological reasons.
I think that objection is weak. I am an enthusiast who runs a full Bitcoin node on a server to contribute to keeping the blockchain working and public, but how many people do that? We as a society have a very poor record when it comes to maintaining the commons. It seems to me that Bitcoin would never have taken off without monetary incentives for “the masses,” and would inevitably crash if the incentives are taken away.
Another objection is that once the Bitcoin economy becomes huge, orders of magnitude bigger than it is today, miners will be able to make real money with transaction fees, not because individual transaction fees will be higher but because there will be many more transactions. That makes a lot of sense, but we must get there first, and how do we get there if miners give up?
But there are many objections to my concern that miners will give up. Those with enough money to open an ASIC farm, and those who live in places with very low electricity costs, are still able to make money mining. That is true, but I feel that those people represent but a very small fraction of the total. I am persuaded that the rise of Bitcoin was mostly due to a large network of smalltime users running the full Bitcoin software and generating coins, and I am afraid that there is no incentive for them anymore.
Most commenters object to considering the current phase a “post-mining phase.” It is, instead, a “professional mining phase.” The advent of professional mining instead was foreseen by Satoshi Nakamoto in 2010:
“The current system where every user is a network node is not the intended configuration for large scale. That would be like every Usenet user runs their own NNTP server. The design supports letting users just be users. The more burden it is to run a node, the fewer nodes there will be. Those few nodes will be big server farms. The rest will be client nodes that only do transactions and don’t generate.”
So, mining is only for a few large operators that invest substantial money in mining farms in far away places with low temperatures and low electricity costs, and it can only be expected that the trend toward professional mining will continue. But if only a few large operators maintain the blockchain, then the stability of the Bitcoin system is threatened by 51% attacks.
An objection to that is that many operators have successful business models, reputation and important investments as part of the Bitcoin economy, on the stability of which they depend to continue making money. Therefore, they will be forced to protect the network from 51% attacks and other threats. An interesting possibility is that merchants, exchanges and other Bitcoin business may set up their own mining operations, even at a loss, to protect the stability of the Bitcoin system.
I wish to thank all those who have participated in the discussion and helped to clarify this important issue. In summary, the community’s answer to my initial question – “Who maintains the post-mining Bitcoin network and why?” – is simple: “miners” and “for the fees.”
What do you think of post-mining Bitcoin? Are we already in a post-mining phase? What happens next? Comment below!
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