RE: The Bitcoin fees are drastically down! 😲 Very cheap to transact suddenly!
Not a dumb question! :)
It changes automatically based on the hashrate, to keep generating blocks at more or less the same rate. If the hashpower increases then blocks are found quicker by the miners, and thus processing time increases. But also... the amount of Bitcoin being mined goes up as blocks are found quicker. This is the reason why the difficulty adjusts, to ensure that blocks keep getting found at a steady pace to keep the amount of new Bitcoin that hits the market at a steady pace.
Otherwise instead of taking 22 years for all the Bitcoin to be mined, it would be sped up and all the Bitcoin would be mined in months, possibly weeks! I imagine the amount of hashrate is about 1000x higher than a few years ago. Without a difficulty adjustment, this means there would be 1000x more Bitcoin found than in the past. This would obviously have a very negative effect on price.
Essentially, the less Bitcoins are mined, the more valuable each Bitcoin gets. This is why the difficulty mechanisms exists, in order to guarantee a steady, but declining, influx of new BTC as time goes on.
Fast transactions are awesome with faster blocks for users, I agree. But long term, it is better to keep the difficulty adjustment in order to ensure this system stays operational for years to come instead of suffering hyperinflation!
Thanks, that does make somewhat sense. :-)
Still though, wouldn't it be a better solution to reduce the reward per block instead of increasing the difficulty of processing them?
And what happens in 22 years when there are no more Bitcoins to mine; will the difficulty stop increasing then?
Reducing the reward per block means that miners get even less reward. See, a higher hashrate means that more miners joined the network and thus the block reward needs to be 'shared' by all of them (actually one finds it and the others don't but over time it averages out). In other words: a higher hashrate already means that you'll find less blocks, because there is more competition. Your profit ratio as a miner goes down.
If the block reward would be further reduced, not only would they find fewer blocks due to competition, but when they do they would also find less Bitcoin. This makes it doubly less rewarding to mine Bitcoin, giving an even lower incentive to mine Bitcoin.
It's a precarious balance, and yes many people feel like this system can be improved. However it is hardcoded into Bitcoin and thus would require a hardfork (like Bitcoin Cash) to change this aspect. And also it would be a deviation from the Satoshi whitepaper, which is sacrilege in itself according to many.
After 22 years no more Bitcoin will be found, correct. So miners no longer receive blockrewards. However, miners also earn an income through the Bitcoin transaction fees. These fees are expected/intended to be big enough by that time to incentivize miners to keep validating blocks. Right now the miner fees have been pretty high already, because of the fact people are paying a lot of fees to get their transactions through. With more usage, fees are expected to be high as well.
Nobody knows for sure how this will pan out and if this plan will work in the future! It's all still experimental so we will have to wait and see..