Bitcoin mining is the backbone of its blockchain: it maintains the incentivizing system for miners and the integrity of the ecosystem by supporting the transaction ledger. Without mining, the blockchain wouldn’t be as secure as it is, and transactions would be more challenging to verify. Newer cryptocurrencies and blockchains indeed work without this mining process, as it consumes a lot of energy, but Bitcoin couldn’t continue operating without it.
The efforts of Bitcoin miners led to the development of today’s ecosystem. Both the coin and the blockchain were subjects of innovation up to the point of worldwide adoption by governments. This movement paved the way to success and provided numerous opportunities for Bitcoin. Now, anyone can buy Bitcoin with debit card, credit card or bank transfer and sell it as easily.
As great as it is, mining is a complex process. To understand it and how miners contribute to Bitcoin’s success, we’ll discuss an essential aspect of it: the fee-to-reward ratio.
What Does the Fee-to-Reward Ratio Tell Us?
As we know, miners are rewarded for mining with transaction fees for each block added to the blockchain. But there’s an approximately fixed number of rewards available, which is downsized during every halving that occurs every four years. So, the ratio between these two is the fee-to-reward metric which has a massive impact on the stability of the blockchain.
The ratio measurement is calculated by dividing the transaction fees by the total block reward. Depending on the answer, we can guess the stability of the BTC blockchain. For example, miners’ rewards are greater than block rewards if the ratio exceeds one. This happens when users are willing to pay more for their transactions to be validated as fast as possible.
There’s also the case of the ratio being equal to one, which is when fees and block rewards are equally a part of a miner’s income. Of course, there’s also the case for the ratio to be less than one ―this is when the demand decreases, so users are not that happy to pay more.
Why is the BTC Fee-to-Reward Ratio Important?
This metric holds a significant contribution to analyzing the crypto market because it showcases what’s happening with customers’ needs, indicating the price situation of Bitcoin. Here are only a few aspects determined by the fee-to-reward ratio:
- The condition of miners’ incentives. When miners’ first concern includes transactions, whose fees are considerable, confirmation times are faster, and the security network improved, which can be seen the ratio has an increasing tendency;
- The overall market sentiment. The fee-to-reward indicator can be interpreted along with user behavior since it shows when more people want to use Bitcoin or when the demand slows down, so fees are lower than usual;
- The state of the market. Of course, if the fee-to-reward aspect presents sudden changes, it may be possible that the market also changes, so user preferences are easier to spot, showing how much the network can adapt to new things;
How Can We Tell If the BTC Network is Economically Sustainable?
Some experts believe that a higher fee-to-reward ratio means a prosperous ecosystem. That’s because higher income for miners seems to be backed by bigger block rewards. Still, others consider a balanced ratio the perfect way for the network to become a fee-centric model.
What Will Happen to the Ratio When Bitcoin Mining Ceases?
Of course, Bitcoin mining won’t last forever, and it’s expected that the last Bitcoin will be mined around the year 2140. After that, miners will get their rewards from transaction fees, but this is only a supposition based on what we currently learned about the blockchain ecosystem.
It may be possible that the fee-to-reward ratio won’t be as important as it is now, but it indeed will have a say in controlling transaction efficiency. A factor that will continue to affect the metric will include users’ transaction fees. The post-mining stage will still impact the way users pay a certain amount of fees for their transactions to be processed faster, so if someone wants lower prices, they’ll also have to wait longer for confirmation.
How Can Bitcoin Be Mined?
There are numerous ways miners can get rewards, including various computational power technologies, which are more or less beneficial in accordance with a miner’s level of expertise. The following rigs represent the usual ways of mining:
- CPU mining was one of the most popular and efficient systems back in the day. Although it was profitable during Bitcoin’s first years, not its hash rate the network made it less famous;
- GPU mining is usually used along with CPU systems. These systems are able to handle an increased number of transactions, which is why they’re combined with CPU;
- FPGA mining is a less expensive version of GPUs. They’re more energy efficient and are also easy to configure to mine on any kind of cryptocurrency;
- ASIC mining rigs are the preferred systems at the moment since they’re faster, use less power compared to other rigs and are continuously improved;
- Cloud mining is performed by renting an ASIC and using cloud computing resources without having to buy, install or maintain hardware or software solutions for the long run;
It’s true that nowadays, regardless of the mining solution you choose, if you’re not prepared to withstand the competitive market, it may be possible that the bills exceed the income. That’s because miners need powerful, expensive mining rigs that can work 24/7 to yield considerable returns.
At the same time, some periods are so unproductive that not many users will pay significant transaction fees, which can go on for longer. So, miners have to be prepared to face market volatility as well. Unfortunately, despite their important role in the Bitcoin ecosystem, they have no say regarding their compensation.
The fee-to-reward ratio is the relationship between a miner’s reward and the fees that users pay for their transaction to be checked. It is essential for those who analyze the market and miners’ situation because it can indicate a great or poor dynamic depending on where it’s situated.