1 month ago
Bitcoin is a mineable cryptocurrency in which coins are mined by solving complex computational problems. The mining is rewarded. Bitcoin halving reduces this reward by half.
Bitcoin transactions are validated via consensus among the participants in the network, the consensus mechanism. The first participant, or miner, to solve the computations becomes the first validator of the transaction and, following the proof of work (PoW), is rewarded for the effort. Bitcoin halving reduces this reward by 50%, with various effects on the overall system.
Every blockchain has a set of protocols engraved in its codes that define the rules for the decision-makers. One of the rules in this set, which is predefined in the blockchain, is whether all the cryptocurrency to be circulated will be pre-mined or will be mined subsequently after the new block is generated.
What is Bitcoin halving?
Bitcoin halving or Bitcoin halvening is an event in a Bitcoin’s blockchain that cuts the rewards received by the miners to half. This also means the number of bitcoins generated after the creation of a block will also be halved. This event occurs after every 210,000 blocks (approx. four years). The last Bitcoin halving occurred on July 9, 2016, after 420,000th block. The block reward reduced from 25 bitcoins to 12.5 bitcoins. The next event is expected to occur around May 14, 2020, after the generation of 630,000th block. The rewards per block generation will reduce to 6.25 bitcoins.
The primary reason why Bitcoin halving is done is to keep inflation in check. One of the major “defects” of fiat currency is the fact that central banks have the power to print as much money as they want. Bitcoin, on the other hand, is intended to simulate a commodity like gold. Similar to gold, the effort to extract more Bitcoins is going to increase with time as the number of blocks to validate the current state of the blockchain is going to increase. More power consumption and time will be required to mine each block.
Satoshi Nakamoto writes in his whitepaper: “The steady addition of a constant amount of new coins is analogous to gold miners expending resources to add gold to circulation. In our case, it is CPU time and electricity that is expended. Once a predetermined number of coins have entered circulation, the incentive can transition entirely to transaction fees and be completely inflation-free.”
Effects on the network
- Bitcoin halving extends the applicability of rewards. The total number of bitcoins mined in the blockchain is limited to 21 million. If the network were still rewarding 50 bitcoins to the miner, this limited supply cap would be reached quickly. Slowing the reward rate to half means the same number of bitcoins that took four years will now take eight years to generate.
- The limited supply of bitcoins causes the price to increase as the scarcity of total bitcoins also increases proportionally.
- Bitcoin halving reduces the return miners are getting to half. As network difficulty is increasing over time and reward rate is reducing, the actual cost of mining a bitcoin is increasing. Miners expect the network to increase the price of each bitcoin to balance the losses.
Bitcoin has of course seen extreme volatility in recent years. Many industry experts expect the next halving to not only boost the value of the cryptocurrency, but also shore up its stability. Exactly how this will play out remains to be seen – we will all know more after May 2020.
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