In today’s article we explain why the much anticipated Bitcoin halving will likely lead to an unprecedented demand for scaling of the Bitcoin network. 

bitcoin halving

Why the Bitcoin Halving Necessitates Scaling

Bitcoin’s 3rd reward halving event, often referred to as a “halvening,” came and went on Tuesday, May 12th without much fanfare. The bitcoin miner reward was split in half (from 12.5 to 6.25 BTC awarded per block) in block number 630,000. There was a slight dip in price a half an hour or so before the halving, almost acting like a bearish “fake out” type event, but it was soon corrected, and the price of BTC remained relatively stable through, and after, the process.

Several different halvening celebrations were live streamed through much of the world, with several crypto communities meeting up via popular communications platforms like Slack, Telegram, Facebook and YouTube. Onlookers watched in anticipation for the incoming block after block 629,999, relieved to confirm everything was still going as expected when the next block was mined. Even though the event was not preceded or followed by a magnificent increase in price, it was still a celebration of bitcoin’s technical accomplishments.

The halving event on May 12th did not go without a couple minor hiccups:

  • There was a 41 minute gap between blocks 630,000 and 630,001 (the first two blocks with a reduced miner reward of 6.25 BTC), likely due to some miners removing themselves from operation as there were no more 12.5 BTC blocks to be mined. Less than 12 hours later, however, things were relatively back to normal, with a whopping 13 blocks being found in a single hour (one block found an average of every 4.61 minutes rather than the normal average of 10 minutes).
  • The Bitcoin network hash rate reached an all-time high of 149.72 exahash per second (by some estimates) the day of the halving. This number fell some 21% immediately after the halving, briefly causing concern that the network may be entering a sort of “death spiral,” which would mean that if the hash rate dropped too fast before the network difficulty had the chance to adjust, no new blocks would be found and transactions would cease to confirm (this of course did not happen).

What Exactly is a Bitcoin “Halving”?

The halving of the BTC miner reward was programmed in to the Bitcoin software upon its initial launch in January 2009. This feature was developed to mathematically enforce a hard limit on the number of bitcoins that could ever be minted, with the cap famously being 21,000,000 BTC. It also serves to give BTC a deflationary quality, meaning that the number of bitcoins available to spend will eventually be on the decrease as they are lost or otherwise removed from circulation. When developing the idea of a digital currency, Satoshi Nakamoto saw this feature as beneficial to maintaining (or increasing) bitcoin’s value as a currency, in stark contrast to the inflationary nature of fiat currency.

Halving events are set to occur every 210,000 blocks (roughly 4 years). The first halving event (reducing the block reward to 25 BTC) took place in November 2012 and the second event (reducing the reward to 12.5 BTC) in July 2016. This time around – sure enough, and right on schedule – the reward was reduced to 6.25 BTC per block mined. The Bitcoin software is programmed to continue halving the reward in this fashion all the way until the last bitcoin is mined, which is projected to be sometime in May, 2140, at which point there will be almost 21 million total coins ever mined (due to the nature of rounding, the exact number is just slightly smaller, by a few satoshis).

bitcoin halving

A logarithmic graph of bitcoin miner rewards from blocks 0 through 6,930,000.

Of course, the amount mined during the latter half of coin production will be trivial compared to what it was during the first 16 years of Bitcoin’s existence, which means that miners will have to compensate their loss in reward with collecting more in fees. With bigger block rewards (such as 50, 25 and even 12.5 BTC mined in a block), the reward was enough to cover the costs of the average mining operation. For the first 3-4 years of Bitcoin’s existence, it was even possible to send transactions with no fee at all. These days are now long gone, however, and the average transaction fee currently sits at about $4.82 per transaction. In order to assure that a new transaction will be added to the next 1 or 2 blocks, the fee is currently around 192 satoshis per byte, which comes out to about 43,000 satoshis, or $4.18.

Why Bitcoin Scaling is a Necessity

During the great bull run of the latter half of 2017, BTC’s transaction fees saw a great run-up as well, with the median transaction fee peaking at a whopping $34 in late December. The mempool became overburdened with transactions, the processing of deposits and withdrawals on exchanges was stalled, and it seemed like the network was on the verge of being frozen. As the price quickly tumbled in January 2018, so did transaction fees along with it, and transacting returned to normalcy. However, the perception of Bitcoin from those who regularly used it was definitely transformed. No longer was BTC seen as a totally viable currency, and it became apparent that the network’s transaction capacity would need to be increased if it were continued to be used as a peer-to-peer form of electronic cash.

Although the space-saving SegWit had been introduced to Bitcoin in August 2017, not a whole lot of people had caught on to it by the end of the year. By September 2019, however, over half of all transactions utilized SegWit, and as of today this number is now well above 60%. Bitcoin blocks remain near full, meaning there isn’t a whole lot of space available for an increase in transaction volume. This means that as the price of BTC ascends, it can be assured that transaction fees will along with it — that is, unless the system is changed somehow to fit more transactions inside Bitcoin’s 1 MB blocks. Indeed, there are a couple ways to do this that have been in the pipeline for quite some time which we have covered extensively in previous articles:

  • Lightning Network. Despite remaining out of the limelight and long a work in progress, the Lightning Network has the potential to be a game-changer in terms of making Bitcoin massively more scalable. Basically, it allows transactions to be accomplished off-chain by locking  BTC in smart contracts on chain. Some of the changes made in the SegWit release of Bitcoin Core in August 2017 helped pave the way for the future of LN-based transactions. Yes, the LN is very complicated and requires its participants to run their own Bitcoin node if they do not want to rely on a 3rd party to process their transactions for them. However, strides in usability and commercial adoption are being made on a monthly basis, and it is likely only a matter of time before making LN transactions will be on par with making regular BTC transactions.
  • Taproot/Schnorr. This refers to a combination of features that are planned to be soft forked into Bitcoin before the end of the year. Specifically, the implementation of Schnorr algorithms will allow for new Bitcoin private and public key pairs to be generated in a manner that renders them smaller in size. This means that less data will need to be included in each BTC transaction, thereby reducing the size of each transaction. Smaller transactions mean that more transactions can be squeezed in each block, thus improving Bitcoin’s scalability. An additional advantage of using Schnorr is that it allows for the saving of transaction data size for those performing multisignature transactions, which can be quite large.

With this latest uptick in fees (going from an average of less than a dollar to four dollars in the span of a week), we being are reminded that scaling is essential to Bitcoin’s long-term success in fulfilling its goal of acting as a digital currency. Without a significant boost in the price of BTC, miners will depend on transaction fees more than ever, thus increasing their chances of ignoring transactions with small fees in favor of those with large fees. This will in turn increase the average fee needed to confirm a transaction in the next upcoming block while simultaneously clogging the mempool with unconfirmed transactions.

Hopefully, the price of BTC will continue to rise, as is the expectation based on what happened after the last two halving events. However, much of BTC’s intrinsic value relies on its ability to act as a currency, as Satoshi Nakamoto intended. In order for Bitcoin to be successful in this regard, it will have to remain a competitive alternative to normal modes of wealth transfer, regardless of how much they are subject to inflation and devaluation in the future.