At the end of the day, it's a very simple calculation for them: electricity costs in, Bitcoin value out. No matter where their Bitcoin reward comes from, they will not (for long anyway) spend more on BTC then they are rewarded.
> If the market cap of bitcoin stays the same, then the mining reward in terms of energy will decrease.
NO! The simple rules of arbitrage would ensure that more miners would be incentivized to beef up their electricity spend to mind faster to win the reward (again, block rewards or transaction fees, doesn't matter).
Bringing back in transaction fees-- I don't think anyone really knows what they will be, but it will be a long time until the dynamics of that are more important than the dynamics of the block reward halving and the market cap.
Miners care about where their bitcoin comes from. Let's imagine the case where 100% of their income comes from the block reward and 0% from fees (seeing as this is nearly the case right now):
1. the block rewards are getting CUT IN HALF every once and a while. If the price of bitcoin stays the constant, their rewards in terms of dollars will be CUT IN HALF. The only way for their income (the upper limit on they can spend on electricity, hardware, etc.) to increase is for the price to increase by more than DOUBLE every time the mining reward gets cut in half.
2. the block rewards increase the supply of bitcoin, decreasing the market cap/price over time. It depends on the emission schedule. Even if the block reward was a constant 1 bitcoin per block, then you would just have a different (logarithmic) inflation/block reward graph with the same characteristics.
Let's say tomorrow, the income is cut in half. All of a sudden, most of these miners would become unprofitable and stop. However as a result, the cost of mining will go back down to 0.5 BTC. It's a self balancing system but that also means that it's fundamentally flawed for reasons mentions by previous commenters in this thread.
True, but the hypothesis in your original comment, that energy expenditure will equal Bitcoin total market cap, does not follow. As other commenters here note, with each block reward halving, the energy required to mine a new block becomes more and more decoupled from the price of Bitcoin itself. In the distant future when block rewards are minimal and fees make up the majority of miners' rewards, only miners who can utilise the cheapest sources of energy will be able to mine profitably, which in the "negligible-block-reward" era will be for the lowest fees. And people making transactions will not pay more fees than they need to, so the existence of miners able to mine profitably for lower fees will in turn bring down average fees. I think all of this should be uncontroversial; it simply follows from the Bitcoin protocol and the work of Adam Smith.
So, given these incentives and Bitcoin's difficulty adjustment mechanism, in the future the only miners capable of making profit from mining will be those with access to the cheapest forms of energy. Anyone who can mine for marginally lower cost is going to push out other miners. This will likely mean the majority of the energy used for Bitcoin mining will come from otherwise wasted energy - such as flare gas, remote hydro not economical to transmit to where people actually live, excess wind and solar supply when demand don't line up, that kind of thing. (And, as an aside, it's probably not going to involve burning lots of oil and gas, since these are more useful to humans in other ways and will therefore cost more.) Obviously more efficient hardware will have the same effect, so there will also be an incentive there. In the end it will have very little to do with Bitcoin market cap and far more to do with the availability across time and space of cheap energy.
Only to a point. Since a limited number of transactions can fit into a block, users competing to get their transactions mined in a timely manner will drive the fees up. That price point can be well above the cost of many forms of energy.
So as long as Bitcoin is still valued and there are enough people wanting to make transactions, there will still be miners burning useful energy.
The direct block reward goes to zero over the years, but the miner's fee will still be a positive amount.
Each miner will be competing for the miner's fee, and will buy more electricity if they can mine more blocks (and get more miner's fees).
The rewards will be proportional to the market cap of bitcoin. If it goes up, so will the investment in electricity.
> making sweeping statements here
The sweeping statements that poster made are the results of a microeconomics analysis.
There is a large & "efficient" market competing for bitcoin mining rewards by buying more electricity.
This is tapping into laws of economics on the level of supply/demand curves: Well studied scenarios that become more accurate the more efficient the market is.
Yes.
>Each miner will be competing for the miner's fee, and will buy more electricity if they can mine more blocks (and get more miner's fees).
Yes.
>The rewards will be proportional to the market cap of bitcoin. If it goes up, so will the investment in electricity.
No.
You're conflating two different things here: A reward-dominated bitcoin and a fee-dominated bitcoin.
The reward takes money from bitcoin owners in the form of inflation. It decreases the market cap by increasing supply.
The fees take money directly from bitcoin users.
In the reward-dominated case, miners are funded by new demand for bitcoin, which props the market cap up. In the Fee-dominated case, miners are funded by bitcoin users who compete with each other for limited bandwidth. In either case, the money being given to miners by these two parties is always greater than or equal to the money spent on mining (power, hardware).
What we've seen so far is a reward-dominated bitcoin in which demand is very high and the market cap increases as the block reward decreases. I predict the demand will stabilize and the reward will continue to decrease. This means there will be less mining. Eventually the reward will asymptotically trend to zero in which case bitcoin will become fee-dominated.
Fees are dependent on the supply/demand for bitcoin bandwidth (the supply is a static 1MB/10 mins), not market cap or price.
And the fundamental idea behind proof-of-work that they amount of work you're "proving" must be enough to make double-spend attacks infeasible. If the electricity cost to mine a block is low enough compared to the value that could be gained by a double-spend attack (which is of course comparable to total BTC market cap), then the network is not secure.
It does matter. Block rewards are a transfer of value from bitcoin owners, which increases as people BUY bitcoin. Block fees increase as people USE bitcoin. Those are two separate things. What we are seeing now is mining that goes far beyond the mining necessary to secure the network, and that's due to (temporary?) speculative demand which increases the value of the block reward.
>And the fundamental idea behind proof-of-work that they amount of work you're "proving" must be enough to make double-spend attacks infeasible.
well, infeasible by a single antagonistic party. There's also the cost associated with the depreciation of the hardware. Even if mining somehow required no electricity, then the network would still be secure because there is some Time-Value cost associated with owning computer hardware.
>If the electricity cost to mine a block is low enough compared to the value that could be gained by a double-spend attack (which is of course comparable to total BTC market cap), then the network is not secure.
I agree. I think bitcoin will eventually succumb to selfish mining attacks.
"It does matter."
Miner do not care, so it does not matter.
This is amazing to watch. hn_throwaway_99 complains that he only gets handwaving and circular arguments against this, only to get multiple answers which are exactly that.
Mining will always spend a large chunk (>50%? depends on the complete distribution of efficiency off all miners) of rewards on electricity. A quick search shows this to be 0.5% of all electricity used in the world. If Bitcoin price goes up 10x right now, this would shortly increase to around 5%.
But, there is also a thing that miners still have to pay electricity in dollars or whatever, so they are forced to sell on exchanges. This creates a downwards pressure on Bitcoin price.
Currently this could be somewhere around $billion per month. So, you need a billion a month of fresh sucker money, just for the bitcoin price to stay the same.
There's some dependence in the fees, since they'll be paid in Bitcoin, and that there's still the odd new Bitcoin being made, but you're still being paid per transaction, unrelated to the value of the bitcoins in the transaction
People will enter the market which pushes up the difficulty / electricity and hardware consumption until profits are brought back down to a normal level.
If the price goes down and it costs more electricity to produce a Bitcoin that is economically viable, people will leave because the juice isn’t worth the squeeze.
So the same relationship works inversed too - difficulty to mine and electricity consumption is related to market cap / price from an econ perspective. I agree with your point on Bitcoin hype, but the production side is just economics and people trying to make a buck if there is money on the table.