Whether you’re interested or not in Bitcoin, you’ve come to understand that its supply is hard-capped. Thus, the number 21 is forever associated with Bitcoin. It represents the maximum number of BTC that can be in circulation. This arbitrary limit to the Bitcoin supply was chosen by Satoshi Nakamoto.
No one really knows why the mysterious Satoshi Nakamoto chose this 21 million figure, although several hypotheses, more or less solid, have already been put forward.
In any case, many people are wondering what will happen when all the BTC have been issued. Don’t worry, this limit will not be reached tomorrow. Indeed, as I write this, 18,736,950 BTC are already in circulation.
This leaves 2,263,050 BTC to be issued in the future. This represents 11% of the total supply of Bitcoin.
Since Bitcoin’s monetary policy is programmatic, we can estimate when the last BTC will be issued. This brings us to the year 2140 if things continue as defined by Satoshi Nakamoto for the operation of the Bitcoin network.
To understand why many people wonder what will happen when all the BTC have been issued, it is necessary to look back at how the Bitcoin system works. For some, this will just be a reminder, but for many newcomers, it will be an opportunity to better understand how Bitcoin works.
New BTC are issued via mining
To function properly, the Bitcoin Blockchain requires some users to make their computing power available to the network to validate blocks of transactions.
This computing power is used to solve the famous “mathematical puzzle” that underlies the Bitcoin consensus algorithm, the Proof-Of-Work.
When designing the Bitcoin Blockchain, Satoshi Nakamoto looked for a way to encourage individuals to become miners to maximize network security. Indeed, the more computing power available on the network, the more difficult it is to hack into the network via a takeover attack of 51% of the computing power.
A Bitcoin reward is given to miners as an incentive
To incentivize miners to make their computing power available to the Bitcoin Blockchain and thus secure the network, Satoshi Nakamoto has set up a Bitcoin reward mechanism.
Thus, new BTCs are issued when a block of transactions is validated in what is usually called mining. Currently, when a block of transactions is validated, the miners who have performed this validation will share a reward of 6.25 BTC.
For every 210,000 validated blocks of transactions, the Bitcoin Blockchain automatically divides the amount of this reward by two. This is better known as Bitcoin Halving. In May 2020, after block 630,000, the Blockchain Bitcoin has performed its third Halving with the reward going from 12.5 BTC to 6.25 BTC.
Similarly, after block 840,000, approximately in 2024 at the current pace, another Halving will take place, dropping the reward to 3.125 BTC per block of validated transactions.
In the future, the number of new BTC issued will become inexorably scarcer. In addition to this famous reward, miners are paid via transaction fees, the amount of which is currently much lower than this reward.
Once all the BTC have been issued, only the fees will remain to incentivize miners
As the Bitcoin reward allocated to miners validating a block of transactions decreases, some predict a significant increase in transaction fees.
Why? Quite simply because miners will have to find a new financial incentive to make their computing power available to the Blockchain Bitcoin.
With transaction fees rising sharply, it would then become almost impossible to use Bitcoin as a means of payment or a medium of exchange. Bitcoin could become just a store of value with users favoring holding BTC over making transactions with their BTC.
However, to prevent transaction fees from becoming too high and for miners to continue to secure the Bitcoin network profitably, there is a solution.
With mass adoption by the general public of Bitcoin as a means of payments or a medium of exchanges, the volume of transactions would become so large that even reduced transaction fees would be sufficient to incentivize miners to make their computing power available to secure the network.
Satoshi Nakamoto was betting on such a scenario in a message posted on the Bitcoin Talk forum in February 2010 when he was asked if the fees would still be sufficient for miners to consider their activity profitable when there would be no more reward in BTC:
“Right. Otherwise we couldn’t have a finite limit of 21 million coins, because there would always need to be some minimum reward for generating. In a few decades when the reward gets too small, the transaction fee will become the main compensation for [mining] nodes. I’m sure that in 20 years there will either be very large transaction volume or no volume.”
So Satoshi Nakamoto saw only two possibilities for Bitcoin: it would become a phenomenal success or a total failure. There is no room for half measures because for the network to survive when all the BTC have been issued, the volume of transactions will have to be large enough to make the miners’ activity still profitable.
Too low a transaction volume could lead to a centralization problem of the Bitcoin network
If the Blockchain Bitcoin does not reach a sufficiently large number of users, the volume of transactions will not be sufficient for miners to continue their work while maintaining reduced transaction fees.
In fact, more and more miners would be tempted to leave the Bitcoin Blockchain and make their computing power available for other Blockchains, for example.
A mass departure of many miners would necessarily imply a reduction in their number, which would reinforce the centralization of the Bitcoin Blockchain.
The security of the network would then rest in the hands of a limited number of actors, which is a significant risk for Bitcoin.
A significant increase in transaction fees could also occur
If the volume of transactions does not reach a sufficient threshold to guarantee the profitability of the mining activity through transaction fees alone, a significant increase in transaction fees could occur.
The Lightning Network was created to anticipate this scenario. It has just reached 10K active nodes.
The Lightning Network places the Bitcoin Mainnet as a central bank. The nodes of the Lightning Network then become local banks that only have to make transactions with the central bank on an ad hoc basis. This limits the number of transactions made on the main network.
Transaction fees would no longer be an issue since they would be limited to a few one-time transactions. The bulk of Bitcoin’s use as a means of payment in everyday life is via a 2-layer solution like the Lightning Network.
The most likely scenario remains that of a sufficient increase in the volume of transactions
In my opinion, the most likely scenario remains a sufficient increase in the volume of transactions to keep the mining business profitable just with low transaction fees.
This was Satoshi Nakamoto’s original idea, and so far everything is going in that direction. Bitcoin adoption continues at a rapid pace as the network has already surpassed 100 million users as of September 2020.
Over the next decade, Bitcoin will be heading towards one billion users.
Finally, of course, we should not forget that it is only in 2140 that all BTC will have been issued. This leaves plenty of time for Bitcoin’s adoption to continue to accelerate and for the volume of transactions to increase as well.
So there’s no need to worry too much about this problem, which has already been taken care of by long-time Bitcoiners.