After all possible bitcoins have been created, and perhaps even before then, the continual “halving” of mining rewards will cause the amount of the reward to fall below the cost of the work. In any event, once all 21 Million bitcoins have been created, it will be impossible to mine for reward coins at all. After that, the only point of running a mining rig will be to earn transaction fees. The bottom line is that the ultimate viability of Bitcoin is entirely dependent on what happens with transaction fees.
The question is: Will the post-reward transaction fees be large enough to keep the vast Bitcoin network functioning properly. Or stated the other way round, when the 21-Million-bitcoin mark has been reached, will the network have evolved to be decentralized enough – vast enough – to foster genuine internal competition for transaction fees?
Or is there a risk that computing power on the network could be “partially centralized?” Centralized enough to allow miners to gouge users with high transaction fees. Worse yet, as we approach the 21 Million mark, could we reach a point where the rewards for mining are so low that more and more marginally profitable miners just quit – and where the remaining miners are those with enough market power to demand higher (and higher) fees. What’s to prevent them from colluding with other high-volume miners to impose higher fees?
By definition, the fees will have to be large enough to keep the network running constantly. Ideally, aside from all the scaling problems facing the network, it will have to be “distributed” enough in an economic sense so that competition for transaction fees will maintain the fees at the “just right” level: high enough to keep millions of nodes and miners in business, but no higher. What is unclear is whether the design of the Bitcoin system – with its decreasing and ultimately evaporating mining rewards – creates a destabilizing incentive in favor of monopolization of the mining process. What is clear is that there are already some crypto insiders who think Bitcoin mining has begun to become too centralized already. Will the design of the Bitcoin system drive it further towards monopolized mining?
And if so, does the existence of alternative cryptocurrencies provide a sufficient check? Perhaps the Bitcoin miners would find that if they charge too much, their revenues will fall because users shift to transacting in altcoins. So they lower their fees to attract more users and thereby maximize their revenue. They may even find a way to use a revenue-maximizing algorithm to keep fees “just right.” But if they controlled enough of the network to do that, wouldn’t that mean the mining process itself was more “centralized?” How much “centralization” could be tolerated before the users’ trust in decentralization fell apart? Or would we just end up having to trust the centralized bitcoin miners the same way we have to trust our bankers today?