The bitcoin network 3rd halving is coming, what will it affect is a key issue for the bitcoin ecosystem. The halving may affect the revenues for bitcoin miners, it will affect the hash rate of the network and price of BTC.
One important element for a public blockchain ecosystem is “mining”. Transaction data will be packaged into blocks, each block connects into a database called the blockchain. To reword nodes who help to package and store data, the blockchain network will give coins to reword the nodes. This is how most blockchain mined.
Each public blockchain have their consensus mechanism to manage the network and different way to mine their coins. For the Bitcoin, the consensus mechanism is called “proof of work” and there’s a mechanism called halving for bitcoin mining.
Proof of Work (PoW)
In the PoW consensus mechanism, every node needs to “compete” with each other to package blocks. The way is to solve puzzles for every block, the first one who solves the puzzle for a block will win the authority to package the block and reword.
The puzzle is to find x to fit the equation
SHA256(SHA256(version, prev_hash, merkle_root, ntime, difficulty, x )) < TARGET
x is from 0 to 2^32, to solve the puzzle is actually to try x in the range. The puzzle is designed to be solved in 10 mins. If there are more nodes join the process, the hash rate on the network will become larger, the puzzle may be solved quickly. However, the difficulty will become more difficult if the previous puzzle solved too quickly and vice versa.
For more detail how it works, you can read the book “Mastering Bitcoin“
For nodes who win reword we mentioned, the reword includes transaction fees and coin mining. And for mining, the network have designed a mechanism called “halving”.
In the beginning, every block will mine 50 BTC. However, for every 210,000 blocks, the network will make the mining coins halve. From 50 BTC to 25 BTC to 12.5 BTC …
We note that it’s a proportional series
S = 210,000 x (50 + 25 + …) = 210,000 x 50 x [1+(1/2)+(1/2)^2+(1/2)^3+…] (A)
2S = 210,000 x 50 x [2+(1)+(1/2)^1+(1/2)^2+…] (B)
(B) – (A) = 2S – S = S = 210,000 x 50 x 2 = 210,000 x 50 x [1/(1-1/2)] = 21,000,000
It means the having process will make the total numbers of bitcoins less than 21millions. However, since there’s a minimum unit called satoshi, 1 satoshi = 0.000,000,01 BTC. The total number of satoshi will be mined is 2,099,999,997,690,000 satoshis = 20,999,999.976,9 BTC
The halving make the BTC rare.
So, when will the halving happen? We mentioned the bitcoin puzzle is designed to be solved in averaged 10 mins, it means 1 block will be produced in 10 mins. 210,000 will be produced in 2,100,000 mins ~ 4 years.
In history there are already 2 halving happens, one is in 2012 November 28th, another is in 2016 July 9th. The third halving will happen in 2020 May.
All bitcoin will be mined in around 2140 AD, after that, no further bitcoins will be mined. The nodes on the bitcoin network will get rewards in only transaction fees.
What will happen and what’s new for 3rd halving?
The TokenInsight issued a report about the 3rd halving. There are some observations in their analysis.
- Network hash rate will decline since some mining machines may not able to cover their cost to mine bitcoin.
- The % of node revenues from the transaction fee will become temporarily double.
- The short-term transaction fee for each node may arise because of the hash rate decline. However, long-tern transaction fee depends on the dynamic of network activity and hash rate.
Network hash rate will decline since some mining machines may not able to cover their cost to mine bitcoin.
In the 2nd halving that occurred in 2016, the network didn’t experience a meaningful hash rate due to the margin is OK after halving. In the picture below, the most efficient miner S9 in 2016 earning ~$20 daily pre-halving and ~$8 daily post halving.
However, things changed in 2020, the most efficient miner S9 in 2020 earning less than $5 daily pre-halving.
You can see another picture, the cost for ASICs like S9 is ~ $6K in early 2020. The costs will be double to ~$12K immediately after halving.
Unless BTC price rebounds to $12K quickly, the S9 miners(the least efficient miners in 2020) may shut off because of no economic benefit.
The % of node revenues from the transaction fee will become temporarily double.
% node revenue has a ~2x increase in the short-term in 2016. You can see it’s still relatively small compared to BTC mining.
The % of revenue from transaction fee is
(transaction fee)/[(BTCs mining)+(transaction fee)]
= [(transaction fee)/(BTCs mining)]/[1+(transaction fee)/(BTCs mining)]
Since the (transaction fee)/(BTCs mining) is related small to 1, the % ~ (transaction fee)/(BTCs mining), if the transaction network is stable temporarily, the % of transaction fee will become 2x since the (BTCs mining) becomes 1/2 for each block.
The long-term revenue % from the transaction fee depends on the network activity.
The short-term transaction fee for each node may arise because of the hash rate decline. However, long-tern transaction fee depends on the dynamic of network activity and hash rate.
Besides the % of revenue from the transaction fee, the transaction fee may also increase because of 2 reasons.
- Increased network activities.
- Hash rate decreases.
We can see figures in the past 4 years, there are some activities that made transaction increase.
- March 2020: Reason 1
- May – June 2019: Reason 2
- November 2018: Reason 2
- December 2017: Reason 1
- November 2017: Reason 2
- August 2017: Reason 2
- June 2017: Reason 1
For the 3rd post halving, the transaction fee may be increased because of reason 2. node may arise because of the hash rate decline. However, long-tern transaction fee depends on the dynamic of network activity and hash rate.
For more detail how mining work, you can read the book “Mastering Bitcoin”
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Status of Bitcoin and Derivatives Exchanges in March 2020
A Closer Look to Bitcoin On-Chain Health Post-Halving from TokenInsight