Rob Behnke
April 19th, 2024
In April 2023, the Bitcoin network experienced an event called the “Bitcoin halving” or “the halvening”. The Bictoin halving is when the block rewards paid to Bitcoin miners are cut in half and the event occurs roughly every four years. The halving process is baked into the Bitcoin protocol and codebase and is designed to make Bitcoin a deflationary currency and ensure that it sticks to its intended cap of 21 million Bitcoin.
In general, the halving event is highly anticipated since it historically has a positive impact on Bitcoin’s price. Each Bitcoin halving in the past has caused a jump in price, both in the run-up to it and afterward.
However, the Bitcoin halving isn’t necessarily good for everyone. The miners who rely on block rewards to make their operations profitable can be hit hard by the halving, which may have significant impacts on Bitcoin security.
The Bitcoin blockchain uses the Proof of Work (PoW) consensus algorithm to ensure the security of its digital ledger. With PoW, the hash of each block on the blockchain is required to fall below a particular threshold.
Since hash functions are unpredictable, the only way to find valid blocks is through a brute force search of the possibilities. Bitcoin block headers contain a nonce value that is under miners’ control and can be used to manipulate the block hash to meet the threshold requirement.
However, this process takes a lot of computational power to complete, making it expensive. To compensate miners for their efforts, Bitcoin and other blockchains include a block reward, which is a set minimum amount of crypto that they can award themselves for finding a valid block. In addition to these block rewards, the Bitcoin miners also receive the transaction fees associated with the transactions included in their block.
Over time, the Bitcoin network is designed to operate almost exclusively on transaction fees, with the block rewards decreasing to near zero. This is implemented by cutting the block reward in half every 210,000 blocks, which comes out to about four years with Bitcoin’s ten-minute average block interval.
The Bitcoin Halving is the point where this decrease in the block reward occurs. The next halving is expected to occur on or around April 20, 2024.
Rewarding miners for their efforts is a core component of Bitcoin’s decentralized model. However, maintaining the 21 million target cap for the Bitcoin supply means that Bitcoin can’t infinitely continue to be created out of thin air as block rewards. The Bitcoin halving process creates a slow decay in block rewards that eventually ends with a total supply of 21 million around 2140.
However, while the halvening is good for Bitcoin’s supply — and the price of Bitcoin in general — it does have potential security implications. Most of these center around block rewards’ role in covering Bitcoin miners’ expenses.
Many Bitcoin miners only do so if it is profitable. If the costs of mining — infrastructure, power, network connectivity, etc. — are outweighed by the value of the block rewards that they earn, then they mine. If costs exceed rewards, then they stop mining. This is one factor behind the constant variations in the Bitcoin hashrate. As some miners stop mining, the hashrate changes, which makes earning rewards easier and attracts new miners.
For any particular Bitcoin miner, the cost of mining at a particular hashrate is constant (infrastructure, power, network connectivity, etc.). However, the Bitcoin halving means that the potential block rewards that they can earn from mining are suddenly cut in half, which can have a significant impact on their profitability calculations and whether they can afford to keep mining.
In general, halving events are great for Bitcoin holders. After a halving event, the price of Bitcoin tends to increase, making everyone’s holdings more profitable.
While this can offset Bitcoin miners’ decrease in block rewards, it isn’t always enough. Bitcoin halvings have the potential to drive some miners out of business.
Some of the potential security implications of this include:
Decreased Hashrate: If all miners are working at full capacity, then each miner leaving the network decreases the overall hashrate. This makes it easier for an attacker to collect the mining power required to perform a 51% attack and gain the ability to rewrite the history of the Bitcoin blockchain.
Increased Centralization: Bitcoin’s security relies on the fact that no individual or group controls a majority of the network’s hashpower. If mining becomes less profitable due to a decreased block reward, it’s likely that smaller miners will be driven out of business and only larger organizations will have the scale and efficient hardware needed to be profitable. This increases the centralization of the Bitcoin mining network and increases the risk of 51% attacks.
Reliance on Transaction Fees: Bitcoin’s reward model is designed so that miners become more reliant on transaction fees over time, which is based on the belief that usage and transaction fees will increase to fill the gap left by decreasing block rewards. However, if this isn’t the case, miners driven out of business could increase the impacts on hashrate and centralization.
Market Volatility: The anticipated increase in Bitcoin’s value post-halving can result in increased speculation in the cryptocurrency. As a result, prices may become more volatile, further impacting miners’ price and profitability calculations.
The Bitcoin halving is a pre planned event in which the block reward paid to miners is cut in half at regular intervals. While this is good for the Bitcoin supply — and often for Bitcoin holders — it can have negative security implications, causing decreases in hashrate and increased centralization of mining power.
In general, the security implications of Bitcoin halving depend on the cost of mining and the price increases driven by the halving. If mining is still profitable for smaller miners after the halving, then everything is fine. On the other hand, if these smaller players are driven out of business, then Bitcoin’s security may suffer somewhat as a result.
However, the sheer scale of the current Bitcoin mining network means that this decrease is unlikely to have any major impacts. Also, the system is self-correcting since miners leaving the pool increase other miners’ chances of earning block rewards, making mining more profitable again.