Bitcoin’s next halving event is set to happen in less than a week, at which point, the Bitcoin block reward is set to be cut in half from 12.5 coins per block to 6.25 coins per block. But why is this happening?
Bitcoin’s coin issuance dictates that miners be rewarded a certain amount of bitcoins whenever a block is produced. Bitcoin’s proof-of-work algorithm results in blocks being produced approximately every ten minutes. When the Bitcoin network first began, the reward for miners was 50 Bitcoin per block. Satoshi designed the network so that the block reward gets split in half every 210,000 blocks that are mined, which ends up being about every four years.
We have already had two halving events, and, eventually, the block reward per block will become 0. This is set to happen around 2140, so over a century from now. After this date, new blocks will be produced, but miners will receive no reward for producing blocks. They will only be able to collect transaction fees.
Logic of Bitcoin Halving Block Rewards
The block reward is a crucial element of the Bitcoin protocol as it is what incentivizes miners to participate in the security of the network. Without block rewards, the network would be in chaos. With enough computing power, miners can attack the network but are strongly incentivized not to because they would risk losing block rewards then they would risk losing their block rewards.
As more computing power is directed by miners towards producing blocks on the Bitcoin blockchain, the harder the network is to attack because the attacker would need to gain control of a majority portion of the total processing power to conduct a successful attack. But the more money miners can earn through block rewards, the more mining power goes to Bitcoin, and thus the more protected the network is.
But eventually, when there is no block reward, transaction fees may have to skyrocket to keep the network as secure. Bitcoin, as it is currently constituted, does not have the capacity to scale the throughput of its on-chain transactions, so sky high transaction fees may be an inevitability.
But why would the creator of Bitcoin, the pseudonymous Satoshi Nakamoto, choose to potentially reduce the security of the network in the long term or make it so that transaction fees for those who want to use Bitcoin become extremely high?
Since Satoshi disappeared after unleashing Bitcoin upon the world, no one has been able to find out his reasoning for the strict formula for coin issuance. But based on Satoshi’s note on the first Bitcoin block that he minted, which read “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”, it can be inferred that he created Bitcoin as a response to governments and central banks. These institutions exert extraordinary influence on global economies by inflating currencies at their will, and it seems like Bitcoin’s strict issuance schedule is a very intentional departure.
Since there will only ever be 21 million Bitcoins minted, and the issuance rate is reasonably predictable, Bitcoin’s supply more closely resembles that of precious metals like gold than traditional fiat currencies. Bitcoin’s supply schedule is written in code, and no central force can force the protocol to deviate.
While we may never understand the choice to cut the block reward exactly in half, the deflationary supply schedule can be explained by Bitcoin’s raison d’être—specifically, its opposition to centralized modern monetary policy. The end result of the continually halving block rewards may not play out for decades, but until then, we have to trust that Satoshi’s issuance policy will work out.