There is an argument that bitcoin tail emissions could be inflationary. Suppose the hard cap of 21 million bitcoins continues to stay in effect. In that case, one could argue that there will not be enough of a reward for bitcoin miners to continue to generate bitcoin without the price of a transaction increasing substantially. The alternative to creating bitcoin tail emissions is that the 21 million bitcoin cap is eventually removed, allowing a continued trail of bitcoin rewards for mining new bitcoin. The concept of tail emissions would enable the blockchain system for bitcoin to remain in effect to avoid generating a scenario where the mining of bitcoin becomes unprofitable and therefore creates an environment where there is no robust bitcoin verification process.
What are Tail Emissions?
A tail emission is a program introduced by Monero. The algorithm’s goal within the network is to prevent the block rewards received from mining from becoming zero. In the Monero system, the block rewards are at a fixed rate. The fixed rate for tail emissions for Monerois 0.6 Monero. The goal of the Monero tail emissions is to prevent the rewards from mining a block from moving to zero.
The importance of crypto trading can be examined by looking at bitcoin. Bitcoin has a hard cap on how many bitcoin can be created. This scenario took place when the algorithm was initially coded. Of the 21 million bitcoin allowed to be generated throughout the life of bitcoin, nearly 19 million have already been coined. The reward that miners receive is an additional bitcoin. Once a new transaction is verified on the blockchain network, a miner gets some bitcoin. As the number of new potential bitcoins becomes fewer, the less profitable the mining process becomes. The theory is that once the bitcoins are mined, the reward will become zero. Suppose there is no reward for the verification process. In that case, it’s unlikely that a miner will spend time and money on the process of bitcoin verification which could destabilize the entire mining system. The tail emissions system put into place by Monero was the first attempt to create a viable long-term solution to the issue.
The Monero tail emissions’ ultimate goal is to provide miners incentives and keep the system in place indefinitely. Some also believe that a move to tail emissions would erode the desire to hold bitcoin as a store of value. Remember, one of the critical benefits of bitcoin is that there is a hard cap. There are only 21 million bitcoins created.
If you hold a bitcoin and the process continues at some point, the price will need to rise to reflect the limited number of bitcoins that can be created because it is no longer profitable to create a bitcoin. As the price of bitcoin increases, it will generate profitability for even the slightest verification. Some might argue that the “store of value” could be mitigated if there are tail emissions for bitcoin.
How Did This Occur?
Monero decided to create a hard fork, where they would pivot from a “proof of work” blockchain model and move to a tail emissions model. Some see this process as less private.
A Transactions Fees Enough to Support Bitcoin?
The short answer is that transaction fee are sometimes insufficient to support bitcoin. The issue is that it would be hard to cap the amount that a miner receives for verifying a bitcoin transaction. The economics of tail emission only make sense to the miner when the mining process costs too little to generate a profit. At the same time, the gains are substantial. It’s hard to convince a miner that they need to have a fixed value. If mining fees started to dwindle, there might be a solution related to transaction fees that support the verification process, but layering these fees into the environment is a work in progress.
The Bottom Line
The upshot is that the life of a blockchain system needs to have a way to generate a verification process that will work indefinitely and continuously. A hard cap on the number of bitcoins that can be created could eventually create a scenario where it becomes harder to incent a miner to verify a bitcoin transaction as there will be no bitcoins left to provide. The hard cap on bitcoin production is 21 million, and slightly more than 19.1 million are now in existence. That leaves slightly less than 2 million bitcoin left to mine. With more than 91% of the bitcoins issued, each new block on the chain adds approximately 6.25 bitcoins. This scenario is still profitable for a bitcoin miner. It will be hard at this junction to discuss the need to change the process and make bitcoin production a different work process.
Unfortunately, as the curve continues to rise and the number of bitcoins received from the verification process fall, the incentive to create a bitcoin from the verification process will decline.
At some point, the volume of bitcoins available will dwindle to zero. At that point, no one will want to mine bitcoin, and the blockchain process will cease to exist. One way to avoid this scenario is to use tail emissions. A tail emission is a fixed rate that can change how the proof of concept works when creating a bitcoin. The tail emissions process is ingrained in Monero. To change the process, they needed a hard fork. Bitcoin will need to make some tough decisions. While the need to create a sustainable mining system is essential, some problems could occur. One of the benefits is that there are a limited number of bitcoins; therefore, it attracts investors who want a store of value because of the limitation. Tail emissions might reduce that scenario.