Blockchain is a decentralized consensus. It must contain all information relevant to determining consensus in itself, so every node can have all the data necessary to determine which chain is the main chain. That's why any incentive to maintain the chain must be produced by the chain itself. You can't peg the reward to a USD bank account, or a Facebook stock, or some Folding@Home tasks. They exist outside of the chain and thus can't be trusted/verified by every peer.
So you need to create some incentive in form of a valuable reward that is purely informational, can be verified independently by anyone, contains all necessary information in the blockchain and does not consume enormous amount of bandwidth/time/energy in order to be verified. This could only be a fungible cryptographic token and this token must be rare. This does not guarantee that it will be valuable, but fungibility and scarcity are necessary to start with.
This token must be created in a way that can't be counterfeited and can be independently verified using only the blockchain data (because one can only trust what's in the blockchain). So far it was proof-of-work that provided scarcity. I don't think there is a drastically different way to solve this problem.
so higher miner fees would not be a viable incentive? thanks for the information, very helpful in understanding blockchains better.
given your analysis, how will miners be compensated once we hit 21M bitcoins? others have asserted higher miner fees. if they are right, this seems to negate one of bitcoin's supposed benefits -- negligible transaction fees -- precluding certain applications like microtransactions.
not attacking bitcoin, just trying to understand its true applications.
> so higher miner fees would not be a viable incentive?
Miner fees are irrelevant if one does not have the coins to begin with. The chain will be maintained by competing miners only if they are incentivized with initial distribution of a limited supply of units. If all units belong to just one guy, then why anyone should mine anything? If you need coins, you can just buy them from him. But why would they have any value then?
> how will miners be compensated once we hit 21M bitcoins?
We will never "hit" 21M bitcoins. We will slowly approach lower and lower inflation until it becomes zero. But we will notice how miners receive bigger and bigger portion of income from the fees. There will be more demand for on-chain transactions which will increase competition among users and fees will go up. To increase income, miners will be eager to increase the block size limit thus allowing more throughput and as a side effect making fees stabilize at some level. The process will be slow that no one will be shocked by the adjustment of the reward. At the same time, all known events of the future are already priced in. Miners already know that in 3 years they will have 2x smaller reward.
Think of the process this way: miners want to maximize their revenue, users want to minimize their costs. If on-blockchain transactions become too expensive, users will use some clearing houses thus depriving miners from extra fees. Therefore miners will be eager to process more transactions at the current or slightly lower prices to collect those fees. But by allowing more transactions, they reduce competition between users thus preventing the fees from growing further. The system will stabilize at an intersection of 1) affordable bandwidth for miners (so they do not lose too much money on side blocks), 2) optimal fees for users to pay and miners to earn. If bandwidth/CPU is infinite, miners would collect trillions of transactions costing a 0.0001 of a penny and users would enjoy microtransactions right on the blockchain. But we have some real-world limitations that shift equilibrium somewhere to lower throughput and higher fees.
So you need to create some incentive in form of a valuable reward that is purely informational, can be verified independently by anyone, contains all necessary information in the blockchain and does not consume enormous amount of bandwidth/time/energy in order to be verified. This could only be a fungible cryptographic token and this token must be rare. This does not guarantee that it will be valuable, but fungibility and scarcity are necessary to start with.
This token must be created in a way that can't be counterfeited and can be independently verified using only the blockchain data (because one can only trust what's in the blockchain). So far it was proof-of-work that provided scarcity. I don't think there is a drastically different way to solve this problem.