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Monday, April 19, 2021

TRACKING WITH CLOSEUPS: Bitcoin Miners Increasingly Supported by Transaction Fees

As Bitcoin has matured, the compensation (“reward”) paid to miners for solving a hash and publishing a new block of transactions on the blockchain has steadily fallen following the rule in the original design. The reward Rn for publishing block number n is:

Rn = BTC 50 / 2⌊(n + 1) / 210000)⌋

Thus, the first blocks to be mined received a reward of BTC 50 each, while at the present time (around block number 679750), compensation has fallen to BTC 6.25 per block.

For Bitcoin to be sustainable, the community of miners must continue to find the undertaking profitable. If it becomes a losing proposition, they'll abandon the task and Bitcoin transactions will not be verified and confirmed on a timely basis by a large and diverse enough community of miners to ensure the integrity of transactions.

The idea was that, over time, as the volume of Bitcoin transactions grows, transaction fees paid by users of the currency, while remaining affordable to them, would grow so that miners would continue to find it profitable to clear transactions even as their revenue from coining new Bitcoin continues to fall (eventually to zero, after all Bitcoin has been mined, around the year 2140).

Today I performed an analysis to see what progress is being made toward that goal, and the results are encouraging. I analysed blocks mined in the 24 hour period between 2021-04-18 12:08 UTC (block 679691) and 2021-04-19 12:00 UTC (block 679783), a total of 93 blocks, with a mean time of 15.5 minutes per block (compared to the goal of 10 minutes per block, but note that this period began on a Sunday). The current reward paid to miners for a block was BTC 6.25 for all blocks. When a miner publishes a block, in addition to this standard reward, they collect the transaction fees associated with all transactions they include in the block—the transaction fee is set by users who submit transactions, and miners generally choose the transactions which, based upon their length in bytes and the fee offered, will generate the most revenue for them. Transaction fees for blocks during this period varied from a minimum of zero (two blocks, 679774 and 679779, contained no transactions and thus earned their miners no additional income) to a maximum of BTC 2.864 (block 679703), with a mean value of BTC 1.828.

Thus, for this 24 hour period, transaction fees accounted for 22.6% of the total reward of BTC 751.27 earned by miners, with BTC 581.25 due to the standard reward for mining a block. While transaction fees still account for less than a quarter of miners' revenue, if Bitcoin continues to become a mainstream mechanism for transferring funds and transaction volume grows apace, it seems plausible that transaction fees will eventually provide the majority of income to miners, which will motivate them to continue their essential services as difficulty increases and block rewards decline.

Posted at April 19, 2021 19:41