One of these solutions is halving, an algorithm that slows the release of cryptocurrencies. This process lowers the rate at which new tokens are created, thereby reducing the rewards received by miners for mining new blocks. It is called halving because the reward is halved each time it occurs.
Halving is a tool for controlling inflation. It makes it possible to limit the supply of a given cryptocurrency on the market and protect it from depreciation. The concept of halving was developed by Satoshi Nakamoto and was first implemented on the Bitcoin blockchain.
Today, the halving mechanism is used on many blockchains that use the proof-of-work (PoW) consensus mechanism, such as Bitcoin, Litecoin and Monero. The concept of halving doesn’t work on other kinds of networks, where issuance control is achieved through smart contracts or implementing hard forks.
Why halving is necessary
As mentioned above, halving keeps a lid on cryptocurrency inflation by reducing the issuance of new tokens. Issuance is intrinsically limited by the algorithms of cryptocurrencies like Bitcoin, which has a finite, pre-programmed maximum token supply. Halving allows the supply of cryptocurrencies to grow gradually, and this growth is significantly outweighed by increasing demand.
Even before the first Bitcoin halving, Vitalik Buterin explained the importance of the mechanism by comparing BTC with gold, which has been a globally recognized medium of exchange and store of wealth for more than 6,000 years thanks to its limited reserves and increasingly difficult mining.
How halving works on the Bitcoin network
Mining is the only way to create new bitcoins. They are issued to miners as a reward for mining new blocks in the network. The continuous issuance of BTC occurs at a pre-programmed, predictable rate, and the size of the reward given to miners for the work they do is also set in advance.
On the Bitcoin network, a halving event occurs every 210,000 blocks (it takes roughly 10 minutes to create a new block), or around once per 4 years.
Bitcoin’s total token supply is set at 21 million BTC. Halving ensures that new coins are issued at a predetermined rate and, when all 21 million bitcoins have been issued, the process will stop.
There have already been three halving events on the Bitcoin blockchain:
- 28 November 2012;
- 9 July 2016;
- 11 May 2020.
The reward for mining new blocks has decreased from an initial 50 BTC to 6.25 BTC during this period. The next halving is expected to take place on 21 April 2024, when the block reward will halve once again, to 3.125 BTC. The last halving event should occur in 2136, with the final bitcoin mined in 2014.
The effect of halving on crypto prices
Halving usually pushes the prices of cryptocurrencies up. Demand for the token in question outpaces supply in the run up to and after a halving event, causing values to creep up. This is usually then followed by a drop off in prices. Many cryptocurrency market participants buy up coins before a halving in the hopes of receiving a good return, which also contributes to the price increase.
For example, after the first bitcoin halving in 2012, its price jumped from $12 to $1,000 by the end of 2013. After the second halving, which took place in 2016, the BTC price rose from $670 to $20,000 in the space of just a few months. Finally, at the time of the third bitcoin halving in May 2020, it cost $8,700, before rising to $63,500 by April 2021.
Looking at the three BTC halvings that have already occurred, we can say that its price tends to increase around six months before the halving, reaching its peak value within a year to a year and a half, before dropping off in price.
Conclusion
According to experts, Bitcoin is the blockchain most heavily impacted by halving. For other networks, the process has a much lower impact on crypto values.
The next halving events set to take place in 2023 are as follows: Litecoin (LTC) – 4 August; MonaCoin (MONA) – 11 September; Einsteinium (EMC2) – 12 November; Nervos Network (CKB) – 19 November.