How do Bitcoin mining rewards work after all coins are mined?

Bitcoin has a hard cap of 21 million coins, meaning that only 21 million bitcoins will ever be created. This cap is a critical part of Bitcoin’s economic model, ensuring scarcity and supporting its value. But what happens to mining rewards after all 21 million coins are mined? This is a crucial question, especially for miners who rely on block rewards for revenue.

The Current Reward System

Currently, Bitcoin miners receive two types of rewards for mining a block:

1. Block Subsidy: A fixed number of new bitcoins released with each mined block.
2. Transaction Fees: The fees users pay to have their transactions included in a block.

The block subsidy reduces every four years in an event known as the Bitcoin halving. When Bitcoin launched, the block subsidy was 50 BTC. After successive halvings, it has dropped to 6.25 BTC as of 2024, and it will continue to halve every four years until it reaches zero.

After 2140, the block subsidy becomes zero. This means miners will no longer earn new bitcoins from block rewards.

How Will Miners Get Paid After All Bitcoins Are Mined?

Once the last Bitcoin is mined, transaction fees will become the sole source of income for miners. Here's how it works:

1. Transaction Fees as Incentive
Every time a Bitcoin transaction is processed, the sender pays a fee. These fees are collected by the miner who adds that transaction to the blockchain. Currently, transaction fees are a small portion of total mining revenue, but after the 21 millionth Bitcoin is mined, they will be the primary revenue source for miners.

2. Fee Markets and Priority Transactions
Since fees will be miners' only income, fee competition may increase. When the network is congested, users might offer higher fees to prioritize their transactions. This dynamic could increase fees in the future, especially during high-demand periods like bull markets.

3. Security of the Network
A potential concern is whether transaction fees alone will be sufficient to keep miners incentivized. If fees are too low, fewer miners may participate, reducing the network's security. To address this, it’s possible that fees could rise to compensate for the loss of block subsidies.

What Are the Risks and Possible Outcomes?

1. Higher Transaction Fees
As more people compete to have their transactions included in a block, fees may rise. This could lead to higher costs for users. If fees become too high, it might discourage people from using Bitcoin for everyday payments, but Bitcoin could still thrive as a store of value.

2. Reduced Mining Participation
If fees don't provide enough incentive, some miners might leave the network. This would reduce Bitcoin’s hashrate, making it more vulnerable to attacks like 51% attacks. To counter this, Bitcoin's design adjusts the mining difficulty so that blocks are still mined every 10 minutes on average.

3. Scaling Solutions
Technologies like the Lightning Network aim to reduce on-chain transactions by enabling cheaper, off-chain payments. This could reduce the demand for block space, thereby affecting miners' ability to earn high fees. However, fees could still increase due to limited block space.

How Much Could Miners Earn From Transaction Fees?

Transaction fees vary significantly based on network usage. During high-demand periods (like bull markets), fees can spike, sometimes exceeding the block subsidy. For example, during 2017's bull run, fees skyrocketed as users scrambled to move funds.

If similar market conditions exist after all Bitcoins are mined, miners could still earn significant revenue from fees. It’s possible that transaction fees could fully replace block subsidies over time.

Summary

After all 21 million Bitcoins are mined (around 2140), miners will no longer receive a block subsidy. Instead, they will rely solely on transaction fees. This shift raises questions about fee market dynamics, network security, and miner incentives. If the transaction fees are high enough, miners will continue to support the network. If fees are too low, however, the network's security could be at risk. Potential solutions include scaling technologies like the Lightning Network, which might reduce congestion and fees, but also reduce miner revenue.

Bitcoin’s design ensures it can adjust mining difficulty and transaction fees dynamically, so it is well-equipped to handle this transition. In the end, the success of this shift will depend on the demand for Bitcoin transactions and the economic incentives for miners.