Bitcoin is becoming rare
On May 11th, 2020, something called the Bitcoin Halving happened in the Bitcoin network. This is an important event that happens roughly evey 4 years. The importance of this event extends to how Bitcoin works and how it enforces one of the main, if not, the main attribute of Bitcoin as a deflationary digital currency.
Limited Bitcoin Supply
To understand the implications of the Bitcoin Halving, it is important to understand how Bitcoin enforces the limit on its quantity. In a traditional fiat-based system, the money supply or the issue of new bank notes is controlled by a central entity, which is predominantly the central bank. Although there are rules defining when new notes can be issued, they are rarely enforced and as such, this has a definite impact on the issuance of new money.
Bitcoin, on the other hand, has a very specific and verifiable hard limit on how new Bitcoins are issued and when they will stop being issued. Bitcoins are created each time a miner creates a new block and this acts as a reward for miners. This reward is halved every 210,000 blocks or roughly every 4 years. Based on this decreasing progression, it is expected that the last Bitcoins will be mined in the year 2140.
A question that comes very often is what happens to miners after the year 2140 in terms of rewards. Miners do not only get rewards in terms of new Bitcoins which are created for each block, but also from transaction fees. After 2140, miners will still expect to get their transaction fees as a reward.
Will there be enough Bitcoin?
Another question that often comes to the forefront is whether the limit of 21 million Bitcoins is enough for general usage. Before going into the implications of this hard limit on the number of Bitcoins that will ever be created, it is important to also point out that the real supply of Bitcoin at any point in time will be less than what was created. The reasons for this could be one of the following:
- A lot of Bitcoins have been ‘lost’ because they were sent to addresses which are not spendable.
- People may have lost their private keys and this will render Bitcoins in these wallets or addresses unspendable, and as such unusable.
As such, the real supply of Bitcoin will be well below the 21 million Bitcoins that will be created. The real supply of Bitcoin does not have any real relevance since Bitcoin, being a digital currency, can be subdivided into more and more denominations. Currently, the smallest denomination for a Bitcoin is a Satoshi, which represents 0.00000001 Bitcoin. Should the need arise in the future, the denominations can still be extended to allow for more granular transactions. Currently, in some second-layer networks like the Lightning network, 1 Satoshi is being divided by 1000 to allow for more granular payments.
Bitcoin is unique
Bitcoin as a currency is unique in the sense that it provides a way to ensure a limit on its issuance which is not enforced by a single central authority, but instead by hundreds of thousands of participants in the Bitcoin network.
Suyash Sumaroo is the lead developer at Cryptofish (www.cryptofish.com) and is also the founder of Codevigor (www.codevigor.com), and Horizon Africa (www.horizonafrica.io), companies focused in the development of Blockchain solutions.