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What will happen, specifically to the price of Bitcoin and transaction fees when the block reward drops to a negligible amount?

Today, each block reward is approximately worth 25 * $300 = $7,500. To generate a tantamount reward as today, with (an assumed) 4000 transactions per block at today's exchange rate, the average transaction fee would have to be $1.87.
Under these assumptions that would put Bitcoin out of business in terms of being an affordable way to make everyday transactions, especially micropayments.

Now I know that block size is mutable so does this mean it's inevitable? Or does it mean that the price of BTC will have to rise to at least the cost to mine a block divided by the transactions per block multiplied by the exchange rate to be worthwhile? Doesn't this then mean that the value of Bitcoin outside it's functional value, is then ultimately determined by the block size which markets don't have control of?

Does BTC fiat price increase to meet the collective cost of actually hashing the transaction block or does the total block transaction fee value determine it?

My point is, when transaction fees are the ONLY incentive to mine (and that will happen eventually as a certainty) the total sum of the transaction fees must match the cost of mining the block they were included in. If the block costs more to mine than the value of the transaction fees in a block, miners (most) will shut down. At least so many will shut down that the network becomes insecure and Bitcoin will die.

  • I'm not really sure where to start with this. Why would the price of BTC rise if the block reward fell? Why wouldn't the existing difficulty adjustment make mining easier if some miners left? – Nick ODell Jul 19 '15 at 6:14
  • Welcome to StackExchange. This question is a poor fit for SE - it might be better in a forum instead. It's extremely long, and it invites discussion more than it invites answers. – Meni Rosenfeld Jul 19 '15 at 8:07
  • Hi Dave, welcome to Bitcoin.SE. Your question had a bit of a "wall of text" effect on me, so I've trimmed it to the essential thoughts to make it more accessible. Please feel free to further edit it. Especially, I've removed portions where you guess at an answer. Please focus on laying out the topic in questions, and leave it to answer posts to provide explanation. If you can answer one of your own questions, you may add your own answer. – Murch Jul 19 '15 at 14:38
  • @Dave: as others have said this isn't the best fit for SE: but we always appreciate thoughtful new members in the community, like yourself. Welcome! – Wizard Of Ozzie Jul 20 '15 at 8:58
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You've completely failed to mention the difficulty retarget mechanism in your analysis. If the block reward drops, miners will quit until the difficulty is low enough that the remaining miners will break even. This will happen regardless of what the new reward per block is, the only thing that changes is the new difficulty/hashrate. (There is some subtlety in that the retarget mechanism takes time to kick in, but if the drop is gradual that's not much of a problem.)

With low hashrate, the network is less secure. This is why we need to come up with ways to make sure transaction fees are sufficient to fund an acceptable level of mining. (A limit on the data size of blocks is a possible such way, but not a very effective one IMO.)

But the drop in reward will not magically cause the price to go up. The price is determined by the market.

  • With low hashrate, the network is less secure. And with less secure transactions the markets drop down. And with markets dropping down miners are quitting. I think that I can predict nearest future :) – amaclin Jul 19 '15 at 14:58

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