Many cryptocurrencies limit the number of tokens that can be minted in their lifecycle. This is done for many reasons, such as controlling inflation, creating an artificial scarcity, raising the price, and increasing the popularity of the token.
One of the most well-known hard hats is the Bitcoin stable supply of 21 million BTC. The token was created in 2009 with this hard cover being an integral feature of its tokens. Since then, 90 percent of all BTC has already been mined. And as we near the bottom line, many are wondering what will happen to the bitcoin infrastructure when all 21 million bitcoins are mined.
Will it be harmful to the network or will it have a positive effect? Let’s find out.
Understanding Bitcoin’s Fixed Supply
We don’t know much about the mysterious creator of the Bitcoin network, Satoshi Nakamoto. His identity remains one of the biggest mysteries in the crypto community. However, based on the implementation of the Bitcoin Blockchain, we can be sure of what he wants from the network.
As explained in his famous white paper, the Bitcoin network aims to create a digital currency that is the opposite of fiat currency. With the global economy reeling from the infamous market crash of 2008, BTC needed to be completely decentralized and not controlled by banks or central authorities. It must also be resistant to inflation.
The network’s revolutionary distributed ledger system has created a transparent and immutable decentralized network that does not depend on any third party.
To control inflation, Nakamoto has included a stable source of BTC in the network code. The limited supply also makes BTC a scarce asset that could drive its price up in the future.
There will only be 21 million bitcoins, and to ensure a continuous flow of liquidity, the coins will be minted at a fixed rate. New bitcoins enter circulation only when a new block is mined. Currently, it takes 10 minutes to mine a new block.
Nakamoto also added a feature whereby the number of bitcoins produced by each block is halved every four years. Initially, in 2009, miners would receive 50 bitcoins to add a block. Four years later, this is down to 25 bitcoins, and this cycle will continue until there are no more bitcoins left to mine.
So far, nineteen million bitcoins have been mined, leaving only 2 million to be mined in the future. But the last 2 million coins will take most of the time due to the aforementioned reduction feature. Experts predict that the remaining bitcoins will be mined by 2140.
Effects on miners
Mining is the process of verifying transactions and adding new blocks to the Bitcoin network. Miners solve complex mathematical puzzles by spending their computational power to validate and add blocks. For their participation in the network, miners are given block rewards (a specified number of bitcoins) and transaction fees.
The block award is halved every four years. In 2012, it was halved to 25 bitcoins, and dropped to 12.5 in 2016. Today, miners can only earn 6.25 bitcoins for every new block. Eventually, the maximum supply will be reached, and miners will not receive bitcoins to produce new blocks. At that time, they will only receive transaction fees for their participation in the network.
Miners need expensive computing devices to mine bitcoin. Currently, most miners and mining companies use block rewards to offset the operational cost of mining and make a profit.
But with mining rewards halved every four years, the cost of operating a mining operation will eventually exceed the rewards miners earn. This can happen even before the fixed supply is reached. However, if the bitcoin price increases over time, the decline in block rewards should compensate. The only question is, what happens when all the coins are mined.
In theory, if a miner validates enough transactions, the fees earned can help offset the lost block rewards. But the amount of the transaction fee will depend on the state of the network in the future.
Impact on consumers and merchants
The limited supply of bitcoin will make it something even more scarce. Bitcoin scarcity will likely trigger a buying frenzy. With the emergence of FOMO, the price of the asset will increase exponentially as many people want to buy Bitcoin.
One of the biggest issues is that even if all bitcoins were mined in the future, there would be no more than 21 million bitcoins in circulation. According to Chainalysis, a blockchain analytics company, a fifth of all bitcoins have already been mined. Many of these bitcoins are in wallets that are no longer accessible due to lost passwords or physical hardware damage.
First posted: IST