Will Bitcoin’s Block Rewards Halving?


As the block mining reward halving event approaches, many people in the bitcoin space are excited because of the potential for an increase in the digital currency’s price.

One miner, though, has expressed serious concern that, when the drop in the block subsidy occurs, it could trigger a chain of events that could lead to an inevitable hard fork.

Chandler Guo is the founder of Bitbank, a China-based digital currency company that runs one of the largest mining operations in the world, BW. On average, BW.com accounts for approximately 10% of the total hashrate, an impressive feat considering it launched only two years ago.

Guo said he fears that if the price of bitcoin does not appreciate significantly before or immediately after halving, too much hashrate will drop off the network due to unprofitable mining, making transaction verification virtually impossible.

He said:

“If the price doesn’t go up very quickly, up two times, it means a lot of the older machines will be shut down. They must shut down.”

Bitcoin halving is a roughly once-every-four-year event whereby the consistent supply of bitcoin released is cut in half. When pseudonymous creator Satoshi Nakamoto released bitcoin in January 2009, each block generated a reward of 50 BTC. On 28th November, 2012, nearly four years after the bitcoin blockchain was first launched, the reward subsidy fell by half to 25 BTC.

Satoshi added halving so that the code could continue to provide fresh bitcoins as the network scaled, but would also phase out the production of new bitcoin as it approached the maximum cap of 21 million. However, that sudden drop can shock miners that operate with low profit margins.

Guo believes that miners using less efficient hardware will be forced to drop off the network when the subsidy falls.

“There will be 300 petahash of older machines that shut down immediately. They don’t need to work anymore; they just shut down,” he said.

He went on to explain:

“When halving come[s], for the Avalon A3, Bitminer S3, the cost of the electricity is the same, so it must shut down. For example, the S3 is working 24 hours, they cost $1, for example, and they can mine $1. So if mining equipment can only mine the electricity payment, they don’t need to work.”

Hardfork for difficulty

Miners make money by generating more income than they spend on electricity and the associated costs of running a network of machines that are always churning away. Maximizing profit in bitcoin mining is all about how much hardware someone can throw at trying to solve the next block.

The more hashing power, the more likely a miner is going to succeed on a regular basis.

To solve this problem, Nakamoto included a difficulty equation in the code so that every 2,016 blocks, the code analyzes how much hashing power is on the network and increases – or decreases – the difficulty. Over the past year, the difficulty has increased significantly as more hardware was added to the network.

The reason Guo is so concerned is because of the hard coded time by which difficulty is calculated. If more hashing power was added to the network tomorrow, blocks might be found sooner, increasing profitability for miners and speeding up the time at which difficulty is recalculated. However, if hashing power were to be removed, the opposite occurs.

Guo explained that if a large number of miners are taken offline, it will reduce a significant amount of the total hashing power which, in turn, will slow down when the next difficulty event occurs.

He told CoinDesk:

“When the difficulty doesn’t change, but the hashing power shuts down immediately, there will be no next block. If, after the halving, the price does not go up, but the prices goes down, [there] will be heartache. It means no next block, no blockchain, all of the blockchain will be shut down immediately.”

In other words, because the difficulty won’t change for 2,016 blocks, if 300 petahash were to drop off the network, that would slow down the time between each block.

That slowdown could translate into slower transaction times, creating major headaches for people looking to broadcast transactions. In one worst-case scenario, this situation would lead to a crisis of confidence in the digital currency, potentially resulting in a sell-off. Lower bitcoin prices could result in even more miners shutting down their hardware, sparking a vicious cycle.

To get around this, Guo believes that there will need to be a hard fork to essentially reset the difficulty.

“Some mining pool, together, will change to another chain, to change the difficulty to another chain. [A] hard fork is coming, it’s bad news and the price will crash down again,” he said.

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