Before we get to halving, it is important to understand the concept of Block Reward. As part of the Bitcoin Blockchain’s coin issuance policy, miners are rewarded with a certain amount of Bitcoins as a reward for mining a block. This fixed amount of coins given to the miners is known as the Block Reward.
What is Bitcoin Halving
The amount of coins the miner is rewarded with is fixed only for a certain period of time. After every 210000 new blocks mined/added to the chain, the block reward is halved to its current value. It takes approximately four years for 21000 new blocks to be mined (at a rate of 10 minutes per block). So, after approximately every four years, the block reward is reduced to half of its current value.
History of Bitcoin Halving
When the Bitcoin blockchain initiated in 2009, the block reward was 50 Bitcoins at block 0. On reaching block 210000 on November 28, 2012, the first halving took place. The block reward was halved to 25 Bitcoins. The second halving on July 9, 2016 resulted in the block reward reducing to 12.5 Bitcoins. The current block reward is 12.5 Bitcoins. On May 12, 2020, after the third halving, the block reward will reduce to 6.25 Bitcoins. Halving will continue until the block reward reduces to zero, which is expected to happen in the year 2140.
Why halving though?
Unlike the US dollar or any other currency, Bitcoin is designed to be a deflationary currency. Donald Trump recently announced a $3 trillion stimulus package to help revive the US economy. While that sounds great for now, it will only cause problems in the long run. The introduction of $3 trillion worth of new currency only means that the value of the dollar in the pockets of Americans has gone down.
Bitcoin challenges this problem with a fixed supply of 21 million. This nature of minting only a specific number of Bitcoins over time helps retain the purchasing power of Bitcoin against the US dollar. As Bitcoins become scarcer, its purchasing power will only increase over time.
“If block reward keeps on decreasing and less profitable for miners, why do miners keep mining?”
Block reward is not the only way miners earn financial incentive. For every successful block mined, the transaction fees of all the transactions in the block are also given to the miner. As more and more people start using Bitcoin, people will start paying more in transaction fees in order to get their transactions picked by the miners (miners decide which transaction to add to the block). So, even though the block reward decreases, miners will continue to profit off of the increasing transaction fees.
If you still have any questions related to the Bitcoin halving taking place on May 12, 2020, drop them in the comments below and we will try to answer them.