Cryptocurrency is nowadays a very popular word. Almost every day, media outlets talk about various topics around cryptocurrency. One of the most popular topics in cryptocurrency is how volatile the price is. The volatility becomes a problem when a cryptocurrency is deemed as a real currency, where people can buy stuff or receive payments in cryptocurrency. When the users are not really sure about its future price, they hesitate to use the cryptocurrency as a payment method, hence they might just keep hoarding the coins without ever using them.
A new research in this area explains how the price can be stabilised. The study investigates the correlation between the market price and the supply of Bitcoin. In order to respond to the market price, one of the ways to control Bitcoin supply is to control the mining reward received by the miners. Reducing the mining reward might cut market supply; hence it is expected to increase the market price of the respected cryptocurrency. When the market price is too high, then the mining reward can be increased such that the market supply will be increased, hence it reduces the market price.
Another interesting insight from the same study describes that the mining rewards need to be given to miner endlessly. This result is contrast to the “controlled supply” in Bitcoin, where Satoshi Nakamoto has set the transaction supply to be constantly reduced; by 2140 there will be no more mining reward received by the miners. When this happens, the miners can only be benefitted from transaction fees received by cryptocurrency users when they submit their transactions to the network.
Another research has shown that removing mining reward might jeopardize the security of the blockchain system, where the miners will switch from one chain branch to other branches in order to maximize their profits. It is also expected that when miners stop mining, the security of the blockchain will be dramatically reduced, as it might be cheaper for the attackers to conduct 51% attack, take over the blockchain and furthermore, conduct a double spending by reorganizing the blocks.
These studies show that mining reward scheme is important, not only to ensure the sustainability of the blockchain system, but also to control the market price, where extreme price volatility happens all the time. Price volatility may or may not benefit the users, depending on how the users treat the cryptocurrency they own.
Although ensuring that mining reward needs to be constantly provided to the miners to motivate them to keep mining, controlling the amount of mining reward to control market price still needs a further study. As we might have realized, cryptocurrency market price is determined by not only market supply, but also other issues such as government regulations, laws, the economic condition of the countries in the world, and even the number of users of the related cryptocurrency. Furthermore, controlling mining reward might not be sufficient to make a necessary impact on the market supply, where the mining reward might be just a tiny fraction of the available supply in the market. When the price is good, there is no way to stop users to offload their crypto-asset to the market and gain profits.
Image source: bitcoinist.com