It is the process of periodically halving the mining rewards in cryptocurrency projects. These intervals were determined by Satoshi Nakamoto and Bitcoin developers to be every 4 years. The purpose of block rewards is to secure the network by keeping records of transactions and incentivize miners who confirm transactions and process them on the blockchain. The goal of the halving is to encourage miners to work longer on cryptocurrency projects. If block rewards continue at the same pace without halving, the only payoff that will encourage miners to stay on the network will be transaction fees as the limited supply of these cryptocurrencies will be in circulation much sooner than usual. And this would cause many miners to leave the network and greatly reduce the processing power on the network. Thus, these concepts are interconnected and affect each other. Let's look at the concept of halving and the concept of miner revenue that encourages miners to join a network.
Miner Revenue
Bitcoin miner revenue consists of block rewards for each block created and transaction fees for each transaction executed.
Block Rewards
The most important income of Bitcoin miners is block rewards. Blockchains consist of blocks with many transactions in them. Miners receive certain block rewards for each successful block they create on the blockchain network. These block rewards will be distributed until the total supply of Bitcoin runs out. The total supply of Bitcoin is expected to end in 2140 under current conditions. Miners will not be able to benefit from block rewards for transactions performed after this date.
The block rewards earned by miners continue to be halved in every 210,000 blocks, or approximately every 4 years. With each halving, the number of Bitcoins in circulation will decrease.
Bitcoin Halving Dates
From 2009, the year Bitcoin emerged, to the first halving, the block reward was 50 Bitcoins per block. Subsequently, the reward was reduced to 25 Bitcoins on November 28, 2012, to 12.5 Bitcoins on July 9, 2016, and to 6.25 Bitcoins on May 11, 2020.
Miners will be rewarded with 6.25 Bitcoins per block until the next halving in 2024. After that, the reward will be reduced to 3.125 Bitcoins. The block reward is given to the first miner on the network who solves the math problems offered to the miners in the fastest and most accurate way.
This process is repeated approximately every 10 minutes for each mining device on the Bitcoin network. Network Difficulty is adjusted to allow a mining device to solve math problems in an average of 10 minutes.
Network Difficulty, calculated by the processing power (hash rate) contributed to the Bitcoin network, is a measure of how difficult it is to generate a Bitcoin block. The higher the hash rate, the more competition there is to create a block on the network. This increases the Network Difficulty. Higher difficulty requires a higher hash rate to mine the same number of blocks. Therefore, there are more miners, which makes the network more secure against attacks.
The graph above shows the Network Difficulty from the emergence of Bitcoin to the present. We see that the Network Difficulty is constantly increasing over time. The graph also gives us a clue about the number of miners who have joined the Bitcoin network. For the Network Difficulty to increase, the hash rate in the network must increase, and for the hash rate to increase, the number of miners in the network must increase. Therefore, we can say that the Bitcoin network has become more powerful, and it may become even more powerful and more secure in the future with the participation of new miners.
Transaction Fees
The second part of miner income consists of transaction fees. All transactions in the blockchain network are processed into the blockchain after miner approval. When a transfer is made in Bitcoin, it is first added to a Mempool, which consists of transactions on the network awaiting completion. Miners can choose between these transactions and pull a transaction forward to add to the next block. So, miners can prioritize transactions with higher transaction fees. If you pay a higher transaction fee, your transaction may be processed faster.
The graph above shows the average of transaction fees on the Bitcoin network over the past year. The average transaction fee rose to $63 in April 2021. As of June, it fell to $7.
What Will Happen When the Halving Ends?
The graph below shows the change in Bitcoin’s price movements in the medium term after the 2nd and 3rd halvings. So, when will the halving end and what awaits Bitcoin when it ends?
It is estimated that the total supply of Bitcoin will be in circulation in 2140 (under current conditions). From this date, block rewards will end, and miners will only have to benefit from transaction fees. Thus, it can be considered as a factor that can adversely affect the addition of new miners to the network or the retention of existing miners in the network. However, there is a possibility that the Bitcoin network protocol will change by 2140. The Bitcoin network is subject to improvements and updates by the community and developers. Besides, the fact that the halving will continue for a long time is the most important indicator that Bitcoin miners will be actively involved in the network for many years.
