Block Reward
A block reward is a fixed amount of crypto that is given to a miner for successfully mining a coin and adding a new block to the blockchain. For example, when Bitcoin was first created, the block reward was 50 Bitcoins. So, every time a block on the Bitcoin network was verified by a miner, that miner would be rewarded with 50 Bitcoins. Because halving is built into Bitcoin’s code, that reward was cut in half on November 28, 2012. At that time, approximately 10.5 million Bitcoins had been mined (though there were actually around 12.5 million Bitcoins in existence, though not in circulation. At this time, 210,000 blocks had been mined.
Built into Bitcoin’s code is a halving that will occur every time 210,000 blocks are mined. Initially, one block mined rewarded the miner with 50 Bitcoins. After the first halving, one block mined earned the miner 25 Bitcoins — thus, “halving.”
The second halving occurred on July 9, 2016, when 420,000 blocks had been mined. At this time, the block reward was reduced from 25 to 12.5. The third halving occurred on May 11, 2020, when 630,000 blocks had been mined. This reduced the block reward from 12.5 to 6.25. The fourth halving is expected to occur in 2024, sometime around late April or early May, though it’s impossible to predict exactly when it will happen. At this time, the block reward will be reduced to 3.125. There are several factors that can affect when the next halving will occur, such as mining difficulty and hashing power.
A total of 64 halving will occur on the Blockchain network, reducing the block reward from 50 down to 0.00000001 — that’s 8 decimal places! This is expected to occur around the year 2140, though again, many factors can alter this date.
Proof of Work vs. Proof of Stake
While many cryptocurrencies have a halving mechanism built into their protocol, it’s notable that Ethereum, the second most popular cryptocurrency after Bitcoin, does not. Ethereum uses a mechanism called Proof of Stake (formerly Proof of Work), which is an entirely different mechanism to halving, though its aim of controlling the rate of coin production and to secure the network is the same as Bitcoin.
Bitcoin’s mechanism of halving is also known as Proof of Work. There are varying opinions as to whether PoW is better than PoS, even though both aim to achieve the same goal. In reality, both have different use cases and each mechanism carries both advantages and disadvantages. PoW is, generally speaking, more energy intensive but also more secure. Moreover, PoS does not reduce the reward for validators over time, and is thus less effective at controlling the cryptocurrency’s inflation.
Block Time
When mining, there is also the feature of block time. Block time is something built into the cryptocurrency’s protocol, though it can be slightly altered due to varying factors. Block time is the average time it takes to validate a new block on the blockchain. Block time is a critical metric that affects the speed of transactions as well as the overall performance of the network. Put simply, a shorter block time means it takes less time for transactions to be confirmed and added to the blockchain. Bitcoin has a block time of approximately 10 minutes, and this number is generally not affected by halving.
While more miners on a network make it more difficult for any given miner to mine a coin, it also reduces the block time on the network’s protocol. This is because the greater the number of miners, the greater the hash power, also known as hash rate. Hash power is the measure of computational power of a blockchain network, measured in hashes per second (H/s).
Having more miners on the network is also beneficial as a protection against what is known as a 51% attack. A 51% attack is a type of attack on a blockchain network where a single miner (or a group of miners) control more than 50% of the network’s hashing power. This allows the miner(s) to carry out malicious attacks like double spending, block withholding, and reverse transactions. They can also prevent other miners from adding new blocks to the network.
While Bitcoin is the most popular cryptocurrency, and has the largest global blockchain network, and while the second most widely used cryptocurrency Ethereum does not undergo halving, there are other notable cryptocurrencies that halve at regular intervals:
- Litecoin (LTC) – Litecoin has a block time of 2.5 minutes and a halving mechanism that reduces the block reward every 840,000 blocks, or roughly every four years. The first halving occurred in 2015, reducing the block reward from 50 LTC to 25 LTC. The second halving occurred in 2019, reducing the block reward to 12.5 LTC. The next halving is expected to occur in 2023.
- Bitcoin Cash (BCH) – Bitcoin Cash has a block time of 10 minutes and a halving mechanism that reduces the block reward every 210000 blocks, or roughly every four years. The first halving occurred in 2020, reducing the block reward from 12.5 BCH to 6.25 BCH.
- Dash (DASH) – Dash has a block time of 2.5 minutes and a halving mechanism that reduces the block reward every 2,016,000 blocks, or approximately every four years. The first halving occurred in 2020, reducing the block reward from 3.6 DASH to 1.8 DASH.
- Bitcoin SV (BSV) – Bitcoin SV has a block time of 10 minutes and a halving mechanism that reduces the block reward every 210,000 blocks, or roughly every four years. The first halving occurred in 2020, reducing the block reward from 12.5 BSV to 6.25 BSV.
There are other consensus algorithms besides halving (Proof of Work) and Proof of Stake, though PoW and PoS are by far the two most common mechanisms to control the rate of coin production.
Coin Caps
While halving is an important way to curb inflation, Bitcoin, and many other cryptocurrencies, have maximum limits to how many coins can be mined. Bitcoin has a hard cap at 21 million, built into its protocol from the beginning. Ethereum, on the other hand, does not have a limit, but uses PoS to limit the production of coins over time.
Litecoin has a cap of 84 million coins, and Bitcoin Cash is capped at 21 million, like Bitcoin.
There is a complex relationship between halving and energy consumption. Halving can either increase or decrease the energy required to mine, depending on several factors. If, upon a halving, a large number of miners choose to shut down their operations, then mining will become easier for the miners who continue their operations, thus allowing them to mine using less electricity. However, halving can also lead to an increase in electricity consumption if the mining difficulty is adjusted to compensate for the lower rewards, or if the price of cryptocurrency increases as a result of the cryptocurrency being halved.
