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A Look at Block Payout Halving

Almost all crypto currencies have something in common: they are set up with a finite amount of coins that will be minted. In order to sustain this and help ease people in to it, they do what is called “block halving,” where the rewards of solving a block are halved every certain period of time. With Bitcoin, for example, this is once every four years (on average). The idea behind this is that it will slowly decrease the rewards for miners, which should get the price stabilized to a point where it is still worth mining; otherwise the coin would undoubtedly die off, meaning its value would completely crash as well (because if nobody is mining the coins, there is no way to transfer them, which means they can not be traded and therefore have no use anymore). While we are still not sure whether or not the payment fees are going to help keep the network going, we are hoping for the best. As part of this, there is something we can usually assume: that the price of Bitcoins (or other coins) will keep going up in value as the halving continues, and even after it is finished.

Keeping the Value Up

When we look at the value of a coin and what it is going to be over time, it is usually safe to assume that if the coin is going to be successful, the value of it will continue to climb. This is pretty much a necessity to keep the system going. Take, for example, Bitcoin:

  • If we have 100 transactions in a block and each one paid the minimum, 0.0001 BTC, in fees, that would be just 0.01 BTC for that block
  • If we went with the current value of Bitcoin, this would equal about $8 USD

Now, consider the amount of power people are burning to go for that block, and how many people are competing in the hopes of getting a piece of that pie. When the Bitcoin halving rate hits the point where this is pretty much all that is going to be paid out, there are two things that can happen:

  • The network will be cut down so much that only a few people will be mining. This will mostly include those with free electricity that just do not care how much they earn (although they usually end up neglecting to take in to consideration the cost of the hardware they are wearing out as well). This will lead to the ability to exploit, and will, for all intents and purposes, end the coin
  • The value of the coins will be going up enough to compensate for it. So now, instead of $8, we are looking at a hundred times the value, or $800. This is still significantly less than people are earning for solving a block right now, but it is much more appealing to miners than getting almost nothing

In essence, what you are doing when you mine or buy and hold a coin is you are betting that the coin will be successful. If it is, you are pretty much guaranteed to win. If it is not, you lost. People that are holding long term often do not consider the risks they are really taking. They are hoping that as more people jump on board, it should go up. In all actuality, this is not always going to be true. We are going to see after the next halving what happens, and I think that should be at least somewhat indicative of what is happening in the future (ie. if we lose a ton of miners and the network hash rate goes down, we know that the coins are flawed and are likely not going to make it too much further, and if the price goes up then we can tell that the market itself is what is keeping the coins floating, and will hopefully continue this in to the future).

Is Halving Good Or Bad?

Being that what we are seeing is payments get smaller over time, it is a pretty good question to ask whether the payment halving is a good thing or a bad one. And, the answer is that it really depends. It hits on both good and bad sides, as we will now see.

The Good

A good part about payment halving is that it helps preserve the value of the coins by combating inflation. If we look at our status with fiat, you will notice that every year there is a number released (in a percentage format) called the “cost of living adjustment (COLA).” This is designed to figure out how much more it costs to live this year versus the previous year, so that pay rates can help compensate for this. While they do not straight up call it this, it is really just inflation. More money is being created each and every year, which means there is more money being spread among the people. As people get more money, their value relative to items and services goes down, meaning that the cost of everything goes up.

With Bitcoin and other coins, the creation of this currency is limited, and decreasing over time. Instead of constantly giving people more and more money to spend, it is actually lowering it. This has the opposite effect of what the fiat system does, by lowering the prices of goods and services (in relation to Bitcoin itself, not fiat).

It is also important to note that Bitcoins (and other crypto currencies) are being lost daily. Sometimes people lose their wallets. Sometimes people send funds to the wrong address. Or maybe even lose the password that a wallet was encrypted with. In all of these cases, those funds can be lost for good, never to be seen again. And while the protocols are there for the minting of a certain number of coins, it can not take in to consideration how many are lost. As such, while a coin may only be minting 100, it is safe to assume that each day that number is actually decreasing. This adds on to the deflationary aspect of the coins.

The Bad

The bad part is also the same thing that makes it so awesome: the deflationary aspect. Bitcoins and other crypto currencies are designed in such a way that they actually promote hoarding. The less coins there are out on the market, the more each one of them is presumably worth. If you buy a coin and hold it, for example, you can assume that its value will go up, at least by a little bit. While the percentage may not be high, it is still better than interest rates from banks at the moment, making it an awesome thing to invest in (although with a bit of risk, of course).

It is hard to come up with a solution for this, too, being that it is one of the ways the protocols were designed. Turning them from a deflationary to an inflationary currency would go against the entire concept of how the coins work, and would be problematic. As an example of this, we can look at Infinitecoin and other coins that are made in pretty much infinite supply. If you give them some value by throwing money in to the crypto system, but coins are being constantly minted, it goes to assume that the coins will consistently lose their value. At some point they have to become worthless, otherwise even a small amount of value could be worth massive amounts of money (for example, if coins are worth a cent each but there are 100 of them, that is a dollar. If there are 100 billion, that would be a billion dollars), which is just not sustainable.

Conclusion

The block halving of crypto currencies can be seen as a “necessary evil.” While it is flawed in that it creates the wrong image for how currencies should be handled, it does solve the problem of infinite inflation (which would at some point devalue the coins to the point where they are worthless). While both of these cause problems, I do not think that there is a middle ground (which is why countries experience an inflation on a yearly basis). Keeping things in check in the crypto world, especially without knowing how many coins are actually accessible by people, is pretty much impossible. Not only are we not able to see how many coins there are total that people can send (due to losses and such), we do not even know who all holds how many. Anyone and everyone can create new accounts in seconds, all anonymously. Because of this, the wealth distribution is completely unknown. People can make guesses if they want, but at the end of the day we do not know for sure!

E-Currency


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