The Effect of Bitcoin Halving on the Blockchain Ecosystem
The emergence of Bitcoin ten years ago has tremendously changed how we view money. The creation and continued existence of Bitcoin have proved that the digital and without a middleman the transfer of money is possible. For Bitcoin to truly serve as a transfer of value, certain features have been fused into the Bitcoin protocol to facilitate value transfer. For instance, the entire concept of proof-of-work is a feature that is intended as a solution to the double-spend problem. Bitcoin also has an interesting encoded feature that allows for what has now become known as Bitcoin halving events. You might be thinking what is Bitcoin Halving? What does it mean? When does it happen? How it affects the Blockchain ecosystem? In this post, we will answer these questions.
What is Bitcoin Halving?
In order to understand what Bitcoin Halving is, you need to first understand the basics of Bitcoin and how it works. Bitcoin is a cryptocurrency conducted on a public ledger known as the blockchain. It can be digitally transferred from one person to the other as it exists only online. As gold, it can have monetary value while also being a commodity, but it’s still its own currency. It is also decentralized and not managed by a single person, but rather a group of people who process transactions, known as miners. This means one does not have to follow government regulations when traded or spent, and you don’t need a bank to use it. New Bitcoins come into the world as a reward for miners whenever they mine bitcoin block on the blockchain.
Satoshi Nakamoto set up the rules for Bitcoin protocol stating that there are two important things: First, the supply of Bitcoin is finite and limited to 21 Million. Second, the number of bitcoins generated per block i.e. the reward decreases by 50% every 210,000 blocks.
Since there are 6 blocks found on an average within an hour and halving happens once every 210,000 blocks, then every four years there will be a halving event. Once 21 million coins are generated, the network stops producing more. This is also one of the main reasons Bitcoin is often referred to as digital gold. Just like the yellow metal, there is only a limited amount and someday all of it will have been extracted.
According to the protocol, after every 210,000 blocks, blockchain performs bitcoin halving and with this, producing new coins becomes even more difficult and miners receive 50% fewer BTC for verifying transactions, similar to gold mining where finding new deposits becomes more challenging over time.
Timeline of Bitcoin Halving
The next bitcoin halving is likely to occur in May 2020 and it represents the third halving in the history of Bitcoin. With this, the mining rewards will be reduced to 6.25 bitcoins from the current 12.5.
The first bitcoin halving occurred on 28 November 2012 which saw the rewards coming down from 50 to 25 bitcoins. The second halving happened on 9 July 2016, witnessing a further fall from 25 to 12.5 bitcoins.
The Effect of Bitcoin Halving on Blockchain Ecosystem
When we talk about the blockchain ecosystem, we are talking about the parts that make the whole system, how they interact with each other, and with the outside world. It boils down to four parts, the user sending and receiving payments, the miners generating cryptocurrency, investors buying it, and the developers that monitor and maintain the whole thing.
Impact on Mining Fees
Miners get incentives for mining the blocks in two forms, block rewards and mining fees. Block rewards are directly driven by the bitcoin halving event, but the mining fee is not. It is independent of the block reward and is based on the demand for using the network. With that said, the transaction fee has recently been on the rise and is expected to provide some relief to the miners from the third halving event to take place in May 2020.
Impact on Hash Rate
As some miners drop off the network due to lack of profitability, the hash rate sometimes tends to fall. Rises in the hash rate can be associated with the increased interest of people in mining Bitcoins before the third halving event. It is expected that the prices could recover by a large margin based on the history of the previous halving events as well as the current recovery of the overall cryptocurrency market.
Impact on Cost of Mining
The dynamic of Bitcoin halving indicates lesser rewards after each succeeding event as it has high-cost implications. It also requires more amount of time, effort, and greater energy consumption to solve complex algorithms for verifying a block. In the long run, it is expected that the cost of mining will continue to rise with the rewards falling and algorithms becoming more complex.
This is all about bitcoin halving and how it affects the blockchain ecosystem.