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The rationale behind reduction of block rewards for miners

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One of the main events that is part of  the bitcoin community is the HALVING. It takes place every 4 years whereby the block rewards for miners reduced by half (50%). The first halving took place in 2012, followed by 2016 and the next is expected in 2020. In all those events, miner rewards reduced from 50 to 25 BTC in 2012 and then to 12.5 BTC in 2016 and is expected to reduce to 6.25 BTC in 2020.

Ethereum is also undertaking its own type of upgrade this month. The first took place in 2017, called Byzantium hard fork that reduced the block rewards to miners from 5ETH to 3 ETH. On January 16 2019, there is another called The CONSTANTINOPLE HARD FORK that entails among other things reducing the block rewards for miners from 3 ETH to 2 ETH (THIRDENING).

Related: Terminologies used in blockchain world.

ETH block rewards
ETH block rewards

source: consensys.

The upcoming Ethereum upgrade is also to improve the following aspects:

  • enabling state channels
  • lowering the amount of computing power needed to verify smart contracts
  • lowering the amount of gas needed to send transactions.

Reducing of block rewards is intended to control inflation in the coin ecosystem. when rewards are reduced, the supply of a specific coin created automatically reduces.

Bitcoin block rewards

When Bitcoin introduced the concept of peer-to-peer decentralized cash, one of the problems it was trying to solve was the current monetary system that  is prone to runaway levels of inflation. In most cases, central banks can institute mechanisms meant to increase the money supply in the economy. However, if not monitored as we have seen in many countries now, it can lead to high levels of inflation. For most part, many governments are able to control their levels of inflation, but some have not. High levels of inflation have a direct negative impact on the economy as we have seen in some countries.

However, if the amount of money introduced in the economy is predetermined in stable and predictable way, it could help control the level of inflation. Therefore Satoshi set that in 2009, 50 bitcoins would be produced every 10 minutes which then reduced to 25 in 2012 and 12.5 in 2016 and will further reduce to 6.5 BTC in 2020. Currently, about 17 million of all bitcoins have been mined representing about 80% of all bitcoins with the overall bitcoin supply set at 21 million. You can read more about controlled supply nature of bitcoin and its implications. 

Even if the block rewards reduces, it is expected that market forces would readjust and push up demand therefore ensuring miners still make profits. Furthermore, cost of electricity, price of a coin, hashrate are among other factors affecting economics of mining in that influence ability  to run a profitable operation.

Therefore whenever halving takes place, the amount of bitcoins in supply reduces. With this trend, it is predicted that by 2140 all bitcoins will have been mined and block rewards for miners will no longer be available.Miners will only earn transaction fees which they also earn now. When the bitcoin model succeeds,  mass adoption will have happened and therefore the income earned through transactions fees will be enough to sustain the miners.

 

 

 

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