The Price of Bitcoin Needs to Increase for the Digital Currency to Survive

Journalist:
December 6, 2016

Seven years ago, Bitcoin had essentially no price. For a time, bitcoins were worth pennies. Mining them was far more simple, as one could even use CPUs. These days, a Bitcoin costs over $750.

This is a trend that will need to persist if the decentralized network wants to continue existing, and here’s why.

Miners in the Bitcoin system mine (produce) the bitcoins. Their process also helps to secure the network from attackers. They don’t do this for free, however, as for each mined block, a miner (many of which are now industrial) can earn 12.5 bitcoins. Over time, however, the block reward decreases as the rate of bitcoin’s mined decrease.

In 2044, the block reward will be 0.195 BTC. This might not be enough bitcoins to entice people to mine the digital currency, which is a hardware intensive and costly production. There are also many other current “alt-coins” people might wish to mine instead, easier and less expensive such investments may prove.

To be sure, in part thanks to the deflationary nature of Bitcoin’s mining schedule, resulting in fewer bitcoin’s being produced over time, it’s reasonable to suspect the Bitcoin price could increase sufficiently where that 0.195 BTC block reward in 2044 is worth more, maybe even a lot more, than it is today.

“Without a block reward, immediately after a block is found there is zero expected reward for mining but nonzero electricity cost, making it unprofitable for any miner to mine,” writes numerous Princeton researchers in “On The Instability of Bitcoin Without the Block Reward” [PDF] from earlier this summer into Bitcoin mining incentives.

The August 2016 report details the two types of incentives for miners, including block rewards and transaction fees. Block rewards earn miners far more than transaction fees currently. Over time, transaction fees are anticipated to increase.

“There has been an implicit belief that whether miners are paid by block rewards or transaction fees does not affect the security of the block chain,” the researchers write. “We show that this is not the case.”

They add:

Our key insight is that with only transaction fees, the variance of the block reward is very high due to the exponentially distributed block arrival time, and it becomes attractive to fork a “wealthy” block to “steal” the rewards therein. We show that this results in an equilibrium with undesirable properties for Bitcoin’s security and performance, and even non-equilibria in some circumstances. We also revisit selfish mining and show that it can be made profitable for a miner with an arbitrarily low hash power share, and who is arbitrarily poorly connected within the network. Our results are derived from theoretical analysis and confirmed by a new Bitcoin mining simulator that may be of independent interest. We discuss the troubling implications of our results for Bitcoin’s future security and draw lessons for the design of new cryptocurrencies.

While the Princeton research outlines that decreasing mining profitability might inspire fraudulent activity against the mining apparatus of Bitcoin itself, the lack of incentives overtime could by then have led to the adoption of another blockchain, such as Ethereum or otherwise.

As the researchers summarize it succinctly: “Without a block reward, immediately after a block is found there is zero expected reward for mining but nonzero electricity cost, making it unprofitable for any miner to mine.”

Disclaimer: The views expressed in the article are solely that of the author and do not represent those of, nor should they be attributed to CCN.

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