Andreas Antonopoulos

Bitcoin Halving Q&A | Andreas M. Antonopoulos

Got questions on the Bitcoin halving? We have compiled all the answers from our favorite Bitcoin educator, Andreas Antonopoulos

Watch the Halving Q&A on YouTube

Intro

Bitcoin’s Supply is Limited and Slowing

  • Bitcoin’s supply follows a geometrically declining supply curve – This is how currency is introduced into the Bitcoin economy:
    • A new block is added to the Bitcoin blockchain every 10 minutes on average
    • In the beginning, 50 new bitcoins were created with every block (Block Subsidy)
    • This subsidy is cut in half every 210,000 blocks (~4 years) till the year 2141 when no more bitcoins will be issued
  • The halving was introduced by Satoshi Nakamoto from the very inception of Bitcoin; the network is about to witness its third halving

Bitcoin’s Monetary Policy

  • The key idea: Bitcoin is a hard asset that represents sound money
    • Thus, Bitcoin’s monetary policy is purposely deflationary and resembles the mining of precious metals (it gets harder and more expensive to mine as time passes)
    • That said, other cryptocurrencies reflect other monetary policies
  • Bitcoin’s monetary policy is publicly known since inception, “We know what the monetary policy will be in 2140”
    • Contrast that with not knowing what the Federal Reserve will decide next Friday
    • Hint: the decision will probably always involve “More stimulus & more printing money […] because that hasn’t worked a 100 times but the 101st it probably will” – Andreas Antonopoulos

Mechanisms to Control Bitcoin Supply

  • Full nodes check every block to ensure the subsidy doesn’t exceed the current limit, else the block is rejected
    • 21 million is an emergent number from the code, it’s not explicitly defined
    • Every participating member in the Bitcoin network enforces the consensus rules
  • Bitcoin code is open source, but if a node runs a modified code and goes out of consensus, it gets kicked off the network
    • If a sizeable number of nodes adopt a change, they fork off the network and create a new coin with its own monetary policies
      • Tens of forked coins exist, most are irrelevant and don’t have value
  • “Developers can write code, but nobody has to adopt it” – Andreas Antonopoulos

The Economy can Function with a Finite Number of Bitcoins

  • Bitcoin is a dynamic economy; more bitcoins circulate as demand rises, creating velocity in the economy
  • For measuring value, the number itself is arbitrary. What matters from a sound money perspective is that the number is ultimately capped
    • That is, no matter what the price is, you cannot increase the issuance
    • In the physical world, this doesn’t hold even for gold
      • A significant rise in the price of gold would make it profitable to mine in more expensive places, including asteroid mining
      • “The amount of gold in the universe is absolutely not capped, but the amount of bitcoin is” – Andreas Antonopoulos
  • Bitcoin can be further subdivided, allowing for more granularity
    • Not to confuse this with inflation, adding more decimal places doesn’t change the total amount that is available 

Why There Will Be Less than 21 Million Bitcoins

  • “[The total numbers of coins available] will be less than 21, and perhaps even significantly less” – here is why:
    • It is estimated already over a million bitcoins have been lost through loss of private keys or sent to a burn address
      • A burn address doesn’t have a private key, hence bitcoins sent to it are lost
    • Additionally, rules check that subsidy doesn’t exceed the allowed limit, but taking less than the full subsidy is allowed – those “unmined” coins are gone forever
  • The phrase “There will only be 21 million bitcoins” is better said as “there will always be less than 21 million bitcoins”

Bitcoin’s Distribution: Unequal but Fair

  • Bitcoin has a nasty Gini coefficient, i.e. it’s unequally distributed
    • Maybe early holders will be the new 1%, they could also lose it all
    • This is fair because no one will bail investors out if Bitcoin fails
  • “The fundamental difference of course is that the reason you will be the new 1% is because you took an enormous risk on an untested technology based on a vision you had”
    • Rather than “Because your grandfather killed more people than my grandfather, which is how most of the 1% have their money today”

What was the Initial Price of Bitcoin?

  • May 22, 2010, saw the first commercial Bitcoin transaction:

Price Prediction: Post-Halving

  • “I predict the price will go up… and down… and then it will probably go up and down again” – Andreas Antonopoulos
    • What you should do: “Take a deep breath, relax, don’t try to play the casino unless you are an experienced stock gambler”

Why the 10 minutes Block Time in Bitcoin Mining?

  • Miners in different parts of the world may discover blocks simultaneously, which are then transmitted to the network at different speeds, arriving at different times for different nodes
    • The question is, which block is considered valid?
  • This causes a normal temporary fork in the network, it happens weekly on average
    • It is resolved depending on the next block building on the longest chain considered valid
    • The orphan block gets recycled and its transactions are included in subsequent blocks
  • Shortening the target time for the blocks will cause orphan blocks to occur more often
    • In order to avoid re-transmissions and increase efficiency, Bitcoin’s algorithm is tuned to reduce orphan blocks

Maintaining a 10 minutes Block Interval

  • This is the responsibility of the “Difficulty retargeting” function in Bitcoin’s algorithm – Its job?
    • Every 2016 blocks (~2 weeks), it adjusts the mining difficulty, always targeting 10 minutes average time for finding new blocks
      • For instance, more miners joining the network will lead to blocks being found more frequently
      • Result: Difficulty increases in the next 2 week period and adjusts for new miners, and vice versa
  • “10 minutes is the fixed heartbeat time of the bitcoin network, and what’s variable is the difficulty of hashing”
    • The 10 minute period is hard-coded into the software

Worth Noting: Bitcoin is a Clock

  • “Bitcoin doesn’t have a clock, bitcoin is a clock. It contains time stamping and time-keeping mechanism which is the blockchain” – Andreas Antonopoulos
    • The halving is measured in blocks, not minutes or hours or years

Why Bitcoin Uses Halving Rather than a Gradual Reduction?

  • Simply, because Satoshi built it that way, and Bitcoin’s fundamental functions are resistant to change
  • Miners’ compensation suddenly dropping by 50% may be an inconvenience
    • On the other hand,  it gives an advantage to early miners because they collect more coins
  • Crucially, the halvings are publicly known in advance all the way till 2140
    • Thus, miners build their operation models to account for it
    • The network is ready when it actually happens, and not much changes
  • Contrast this with a sudden, unexpected, change in the fiat currency interest rate to which the market has to adjust
    • Fiat currencies have probabilities of interest rate changes, but Bitcoin has monetary supply stability

Impact of the Halving on Miners

  • Miners invest capital and often prepay for electricity; halving guides their decision making
  • Bitcoin’s mining hardware rapidly advanced till it hit the limits of Moore’s law
    • To adapt, the network hashing power now sees 2x increases every 18 months
    • The implication is more miners get the latest hardware, mining becomes less centralized, and hardware doesn’t have to be switched every few months
  • We will go into the halving with “Haves and Have-nots”: efficient miners with the latest hardware will survive, the rest will not
  • However, Bitcoin will continue to be secure despite the drop in miners.
    • Bitcoin’s hash power has been increasing exponentially and will remain secure even with a reduction of miners

Miner Competition

  • Miners don’t split the available transactions to mine, they all mine from the same pool of unconfirmed transactions – called the Mempool
  • The other competition is between transaction senders
    • Transactions compete for the limited block space, putting higher fees on your transaction will ensure it gets mined faster

Bitcoin Mining Post-2140

  • In the year 2140, the network will reach block 6,930,000, and the block subsidy will go to 0 satoshi per block; bitcoin issuance stops
  • Every day, miners decide which equipment to keep running based on their costs and revenues, block subsidy is only one of the factors
    • “Nothing magical happens at block 6,930,000 that wasn’t the same decision that happened a block earlier”
    • This is one of the perks of using a deterministic hard currency
  • Keep in mind: there is always an incentive for miners to stay in the game
    • Difficulty increases as the least efficient miners turn off, the remaining miners get a bigger share of mining rewards

How Will Transaction Fees Change After 2140?

  • A possible scenario: reliance on seigniorage drops in favor of relying on activity
    • A 2019 block has 12.5 bitcoins subsidy and .1 bitcoin in fees; a ratio of 120:1
    • In 2041, a block will have 1 satoshi subsidy and 10K satoshis in fees; a 1:10,000 ratio
    • There will be a cross over point long before 2141 with a subsidy to fee ratio of 1:1; miners will know to start focusing on fees
  • Mining revenue relying on fees is not necessarily because fees are becoming more expensive, but because there are more transactions and bitcoin is more valuable
    • Will the fees be as bad as VISA or MasterCard? “If they are, then we badly failed”

Locating Halving in the Code

Crypto : , , , , ,
Notes By Mostafa Khaled

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