but what does this even mean, what is getting halved means?
is it talking about the number of bitcoins being cut in half or what?
Well not Exactly, rather it’s a topic that is focused around how new bitcoins are created.
In order for us to see the whole picture we will have to take a journey into the bitcoin protocol and break it down piece by piece.
First, imagine the bitcoin protocol as a planet in outer space, let’s be super creative and call it “planet bitcoin”.
On this planet there are a limited number of resources available and they are just 21 million of them.
Secondly imagine us a “space explorers” on a mission to extract the resources A.K.A. the bitcoin miners,
after landing safely on planet bitcoin, we Step off the spaceship and head inside to one of the many bitcoin factories.
Every factory on this planet is connected to the Internet and is constantly communicating with each other and what happens next is a crucial step to the mining process, pay attention because one day you too may own a bitcoin factory.
Now imagine that every 10 minutes a new puzzle is presented to all of the factories,
it’s a race between the factories to see who can solve the puzzle first after solving It is publicly shown for all the other factory to see,
at this time they will take a look at your puzzle to make sure you didn’t cheat after reviewing your work they can vote either yes or no and this process of voting is also known as Consensus.
If everyone vote yes on your puzzle then you are the winner, these puzzles are known as blocks and you may now claim your prize which is called the block reward and what do you think the reward is?
You guessed it right “bitcoins” new bitcoins are created in every blocks and reward goes to each winner respectively.
When the bitcoin protocol began in 2009 the reward was 50 points per block however,
there’s a problem with this steady rate of bitcoin creation,
If 50 bitcoins are made every 10 minutes then we would hit the limit of 21 million quickly and all the resources would be exhausted within eight years.
Without longevity planet bitcoin would not be sustainable. Introducing the bitcoin halving,
Satoshi Nakamoto proposed a way to make the bitcoin supply stay around longer so he decided the block reward should be reduced by half every four years,
same amount of work and effort but half the payout, but why would anyone want to do this?
why would anyone want to work the same amount and get paid only half the amount?
Well let’s take a quick look at some simple economics starting with inflation.
According to the federal reserve bank of St. Louis, the amount of currency in circulation has been ever increasing.
The total amount of money was under $200 billion up until 1986,
in 2020 we currently stand at $1.8 trillion that’s an increase of nine times the original amount in the past 34 years and that’s not good.
Imagine that planet Bitcoin has a limited supply of 25 Tamagotchis,
it is the year 1970 and it cost one dollar to buy one of these precious digital pets as time progresses there’s more demand for Tamagotchis however, due to the lack of resources they can only be 25 Tamagotchis at a time.
Because the demand rises while the supply remains the same the cost for Tamagotchi also rises.
By the time 2020 rolls around the price for Tamagotchi has increased to 5 dollars.
The increased price of goods and services in an economy over a long period of time is also known as inflation.
This also means that the price of our buying power of our currency has decreased because more money has to be put into the economy to keep up with growing demand and rising prices.
Satoshi knew this and wanted to make the buying power of bitcoin increase over time,
with the halving the amount of bitcoin going into circulation every four years is cut in half increasing the purchase Power of the coin.
According to the bitcoin source code provided by a forum moderator “murch”
it states that the subsidy of bitcoin is cut in half every 210,000 blocks which will occur approximately every four years.
For example,
The block reward for each block in 2009 was 50 bitcoins and two halving have occurred since then and the third halving is scheduled to take place this coming May 2020, cutting the current block reward of 12.5 to 6.25.
There will be a total of 64 halvings that will take place before the block reward reaches 0.
This means that the last bitcoin will be mined around the year 2140 and we won’t be around anymore until then I hope you enjoyed my breakdown of the bitcoin halving, if you did feel free to comment your thoughts below in the comment section.
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