Sometimes numbers really matter, especially if you want to demonstrate how far an industry has come along in a short period of time. Bitcoin has done just that, when you measure the cumulative value of fee revenue streams to the mining industry. Recent news stories about Bitcoin’s halving event in May of 2020 have focused everyone’s attention on block awards being slashed in half from 12.5 to 6.25 BTC per block. The cumulative total collected to date is $15 billion, but miners have also collected a sum of $1 billion in transaction fees, a revenue stream that will grow in importance over time.
The mining profession will definitely feel the pressure when awards are cut, but not near as much if Bitcoin valuations rise in tandem with the halvening. Even it that “rise” does not happen and many believe it has already been baked into Bitcoin’s current price, you need not shed any tears for miners. If you do the math at current prices, there will still be roughly $3 billion on the table to fight over in the year following the event. Competition will heat up, which will favor the more modern “rigs”, a survival of the fittest, as it were.
Today’s news, however, is more about transaction fees, a little known aspect of the Bitcoin eco-sphere, as well as for other token systems. There are operating costs that must be covered, and the mechanism is to charge the sender a fee to confirm his transaction and include it in a new block. From today’s perspective, the mining award overshadows the fee by a multiple of “15X”, but over time, the 6.25% of total revenue will grow in share of gross mining income streams.
Jameson Lopp, CTO of bitcoin management startup Casa, explained to reporters at Coindesk:
Over the long run, the transaction fees will eventually have to replace the block [subsidy]. There’s a reason why it’s called the block subsidy in the code. It’s because it is subsidizing the security of the network. The understanding all along is that this subsidy via inflation will have to be replaced by the people who are paying to use the network via transaction fees.
For now, however, a few industry observers are quite happy to celebrate the $1 billion level milestone. Bryan Aulds, founder of bitcoin wallet Billfodl, waxed quite eloquently to reporters that:
This milestone is a really cool milestone just because it shows how much people value block space. And that it’s something people don’t mind paying for, which I think is really important moving forward.
The total of BTC collected has been nearly 205,000, which, at today’s prices, yields $2 billion or so, a more impressive figure.
Transaction fees rarely get discussed, but they do play and will play a much larger role going forward to secure the network and prevent unwarranted usage. This larger role falls into three categories:
- Discouraging Spam: According to Jameson Lopp: “When you create a transaction, you’re able to use bandwidth and write data onto the hard drive of anyone running a node on the network. If there’s no cost to doing that then you can saturate everyone’s bandwidth and fill up everyone’s hard drive.”
- Confirmation Prioritization: Daniel Steinberg, VP of crypto mining consultancy Navier, notes: “It’s very simple: you pay more, you get your transaction accepted more quickly. So that mechanism is a fair way to participate in a pending transaction pool.”
- Transaction Finality: Pierre Rochard, founder of consultancy startup Bitcoin Advisory, explains: “In aggregate, the transaction fees plus the block subsidy provide for the probabilistic transaction finality of the bitcoin system. The greater this finality is, the less time transactors have to wait before having confidence that the transaction will not be censored or double-spent.”
All in all, the mining profession will get more complicated as time marches on. As Lopp predicts:
You have to start thinking more about the game theory around miner profitability and what would happen if the profitability of a miner becomes a lot more volatile.
It appears that miners have more to adapt to than just next May’s halving event.