What is Bitcoin Halving and What are the Rewards
Within the Bitcoin code there is a mechanism that establishes a reduction in the reward that is delivered for each block generated, a process called Bitcoin halving . This process is essential to control the price increase within an emission limited (by code) to 21 million BTC.
What is the Bitcoin halving
It is an event integrated into the Bitcoin source code, forming part of the design and operation of this cryptocurrency. The Bitcoin halving causes a downward variation of the reward received by the miners of the network for generating the blocks.
The idea of the Bitcoin halving and a finite issue of coins is that it can be differentiated from fiat money. Any central bank in the world can issue money in an uncontrolled way, making fiat money worth less and less. In addition, Bitcoin adds an emission adjustment to prevent the price from rising uncontrollably.
Satoshi Nakamoto stated in the code that every 210,000 blocks the reward for each new block will be halved . Through this process, it is established that the emission of the practically 21 million BTC that will never be available will take place in 2140. Thus, every 4 years the reward received by miners is reduced and a controlled and predictable emission is established.
Initially 50BTC/block were added to circulation. In 2012 the first halving took place, moving to a reward of 25BTC/block. Four years later, in 2016, we moved to a block reward of 12.5BTC/block. The last halving was in 2020, when the reward was reduced to 6.25BTC/block.
What is the Bitcoin halving for?
What is interesting about this process is that it does not have just one reason for being, but rather it has three reasons for existing. These are:
We must go back to 2008, when the world suffered a major financial crisis due to uncontrolled loans offered by banks for people to buy homes. When the system began to slow down and the loans could no longer be repaid, it caused the collapse. A house of cards that collapsed with the fall of Lehman Brothers.
That event showed that money managers were only concerned with saving their friends . They dropped families to save the banking system, printing as much money as they will request.
Nakamoto had been working on decentralized money that would eliminate “trusted third parties” for some time. Although he published the Bitcoin whitepaper in 2008, he himself acknowledged in one of the first emails he sent that he had been working on the code for more than a year and a half.
His proposal is based on a currency with a fixed and immovable emission limit. This aspect, which may seem unimportant, establishes that the price of Bitcoin can only go up. Leaving behind the inflationary model that only makes money lose value and the purchasing power of people, fall.
To avoid continuing with one of the endemic evils of the financial system, I devise a gradual issuance mechanism. An incentive is provided to add systems for block generation and transaction validation. Furthermore, it adds an element to Bitcoin that allows it to evolve and mature.
Satoshi to control the price of Bitcoin established an early “massive” emission that was reduced. The idea is that it would be easily accessible in its initial phase and then it would be more difficult to access it, generating scarcity. The combination of these elements culminates in the halving process.
Currently more than 18.8 million BTC have been issued, which represents over 90% of the total. What the halving mechanism does is that in a short time most of the BTC is issued and then the emission is reduced. What this mechanism establishes is a shortage that will begin to be noticed in the near future, causing a sharp rise in price.
Through this process, a relatively controlled rise in the price of Bitcoin is achieved. The lower the reward per block and the higher usability and scarcity, the higher the price escalation.
The aggregation of new Bitcoin to the circulation is based on the generation of the blocks. These blocks are based on a proof-of-work consensus mechanism, which requires the expenditure of hardware, time and electrical energy for their generation.
For miners to continue operating, there must be a profitability to operate as network validators. If the reward is halved every 210,000 blocks, but the price does not change, the time would come when mining would no longer be profitable. So the usual thing is that after each halving there is a rise in the price of Bitcoin.
We must add to this the great competition to be the block generator among all the miners. Not all miners can generate blocks, that depends on their power and luck. Finding the valid hash requires a lot of computing power, and the less power you have and the less weight you have on the network, the more difficult it is for you to generate the block.
How many Bitcoin halvings have there been?
There have been three halving processes at the time of writing this article. Let’s see the dates and try to summarize a little the impact they have had on the price of Bitcoin and other cryptocurrencies.
- January 3, 2009: The genesis block of Bitcoin is created and it is established that for each block 50 BTC will be added to the network.
- November 28, 2012: The first Bitcoin halving occurs after the first 210,000 blocks. The block reward becomes 25 BTC at this point. On the day of the halving, the price of 1 BTC is around 11.5 dollars, for four and a half months after marking 270 dollars.
- July 9, 2016: Date on which the second Bitcoin halving occurs after reaching block 420,000. The block reward becomes 12.5 BTC. The price of 1 BTC on the halving date was around $660. After just over 500 days, the price of 1 BTC managed to exceed $20,000.
- May 11, 2020: During the global COVID-19 pandemic, the third Bitcoin halving reduced the block reward to 6.25 BTC . The price of 1 BTC on the same day of the halving was about 8,800 dollars, going to value 1 BTC more than 63,500 dollars almost 400 days later
What would have happened if the Bitcoin halving did not exist
The issuance of Bitcoin is set so that the price does not suddenly grow in a very short time. A mechanism is established so that the process is much more gradual over time. This means that until approximately 2140 the entire amount of Bitcoin is not in circulation.
If this mechanism did not exist, at a rate of 50 BTC/block, in just 420,000 blocks the total 21 million bitcoins would have been issued. This supposes a period of only 8 years from the generation of the genesis block.
This would not be a problem, since from that moment the validating miners and block generators would receive the commissions as a reward . But this in turn would be a problem, as it could affect the price of Bitcoin and its adoption.
The first scenario would be a very high price (possibly in the millions of dollars) that would make the average user unable to use it. Something that would reduce the usability of this cryptocurrency and break with the principle of its creation, which is accessibility to everyone.
But at the same time we could have the opposite scenario, a low price due to lack of interest. As miners are only rewarded with transaction fees, they would have no interest in operating on the network. This would also make users doubt its value.
It is really difficult to establish what the scenario would have been if it had been broadcast in a short period of time. In between, there could have been many other scenarios.
Other cryptocurrencies with halving processes
Naturally, other cryptocurrencies have adopted this mechanism to adjust the issuance of their coins. There are different variations on this point, since some follow the same pattern as Bitcoin, as is the case with Litecoin.
Dogecoin, for example, is a particular case, since the adjustment of the reward per block has been at the discretion of the developers . Also, the block reward is fixed, it is pseudo-random .
Ethereum is another particular case. The block reward is set by the developers based on different criteria. Specifically, it maintained the block reward, but the transaction validation reward for miners was removed.
Cardano (ADA) is another quite particular case in terms of the halving process. It doesn’t really have anything like that as the block reward is based on an algorithm. Your reward varies based on the volume of network usage.
Then we have stablecoins, tokens, and initial issue cryptocurrencies. All of these coins are fully issued from the start and no new tokens or coins are added for each block. Some cryptocurrencies, such as XRP, establish the burning of commissions to reduce the currency.
Final Words on the Bitcoin Halving
It is a process added in the code that modifies the issuance of new coins for each block. Each Bitcoin halving process, in the average period of 12-15 months, represents an increase in the price of this cryptocurrency. Logically, if Bitcoin increases in price, the rest will follow as they are linked.
This process controls that the price of bitcoin is not inflationary or suffers an uncontrolled rise. It also serves to predict how many new bitcoins are added to the network for each block, for each hour, for each day, for each month and for each year.
Each cryptocurrency, as we have mentioned, adjusts the halving process in a different way. The developers of each project have different visions of how the issuance of the tokens should be. Dogecoin and Ethereum have no fixed limit and the addition of new cryptocurrencies to their respective blockchains is different. ADA has an algorithmic mechanism based on network usage.
What do you think of the Bitcoin halving mechanism and that of other cryptocurrencies?