Bitcoin is the largest and oldest cryptocurrency in the world. With a price of $46,370.35, it is the most expensive cryptocurrency out there, and it has the biggest market cap of all cryptocurrencies. Recently, Bitcoin hit a milestone marker with 90 percent of its finite supply already being mined and circulating in the market.
Diminishing returns of Bitcoin miners
When Bitcoin was developed in 2008, the pseudonymous developer of the world’s first cryptocurrency Satoshi Nakamoto ensured that there was a limit to the number of Bitcoins. Nakamoto ensured that only 21 million units of Bitcoin would ever exist in a move to control inflation. Out of the 21 million units, 18.9 million Bitcoins have already been mined, representing over 90 percent of the cryptocurrency’s maximum supply.
New Bitcoin tokens are put into circulation by a process known as Bitcoin mining. Mining of Bitcoin involves solving complex cryptographic mathematical puzzles using the processing power of a computer to verify and validate a block of transactions occurring on the blockchain network. Miners compete with each other to solve the puzzle first. The first one to solve is awarded compensation in Bitcoin.
Nakamoto also devised a system where the rewards that miners received from mining are halved every four years. The mining process awarded 25 Bitcoin for every verified transaction in 2012, but after being halved in 2016 and 2020, it now only awards 6.25 Bitcoins.
The halving process will continue every four years, further reducing the rewards until all Bitcoins have been mined. As the amount of Bitcoin awarded keeps reducing, the amount of processing power needed to mine a single Bitcoin will increase as well. It is for this reason that experts predict that it will take until 2140 to completely mine all the Bitcoin supply.
Some claim that Bitcoin might not reach the 21-million limit. This is due to the fact that the Bitcoin blockchain uses the bit-shift operator system. Within the system, the algorithm rounds the decimal points to the closest possible integer. This makes calculations easier, but leads to losses in the Bitcoin subunit or Satoshis. Satoshis, or SATs, are a fraction of a Bitcoin
Other issues like ‘lost’ Bitcoins, which are tokens stored in wallets whose keys or addresses have been forgotten, also reduce the amount of Bitcoins in actual supply.
What happens when all Bitcoins are mined?
As the supply of Bitcoins from mining keeps getting reduced, the token may see an increase in prices due to its scarcity. But what exactly may happen nearly 120 years in the future is hard to predict since the Bitcoin ecosystem is still fairly underdeveloped.
While Nakamoto had envisioned Bitcoin to be a medium of monetary exchange, the crypto is currently being used as a token of value storage instead. It is for this reason that Bitcoin’s dwindling supplies might be contributing to its rising prices instead of being protection against inflation.
Perhaps the change that might be the most-well understood is how miners earn Bitcoins, or money in the ecosystem. With the dwindling rewards from Bitcoin mining, miners would slowly find that they would need to increase their processing power in order to get the rewards while also slowly making less money for each successful operation.
Instead of relying on mining rewards to cover their operational costs, miners will instead be using increased transaction fees to recoup their costs. Miners will still be essential to the ecosystem to confirm transactions of Bitcoins as well.
It is possible that the underlying code of Bitcoin may be changed to increase the limit of 21 million Bitcoins. Other developments in side-channel networks, like the Lightning Network, can cause changes in the Bitcoin ecosystem as well.
(Edited by : Shoma Bhattacharjee)
First Published: IST