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The halving process reduces the rate of new coin issuance by periodically reducing the block subsidy provided to miners. This helps maintain a consistent rate of coin issuance and ensures that the maximum supply of a cryptocurrency is reached in a controlled manner.
Halving in crypto refers to the process of reducing the reward for mining or verifying transactions on a blockchain network by half. This is a deliberate design feature of many cryptocurrencies, including the most well-known one, Bitcoin.
In the case of Bitcoin, the reward for mining new blocks is currently 6.25 bitcoins, but it will be halved to 3.125 bitcoins after the next halving event, which is estimated to occur in May 2024. The halving process is scheduled to occur roughly every 210,000 blocks, or every four years.
The purpose of halving is to control the supply of the cryptocurrency and maintain its scarcity. By reducing the reward for mining, the rate of new coins entering circulation is slowed, which helps to preserve the value of the existing coins. This is because, in theory, the reduced supply will drive up demand and, therefore, the price.
It is also important to note that halving can have an impact on the mining industry. Since the reward for mining is reduced, it may become less profitable for miners to continue operating, potentially leading to a consolidation of the mining industry as less efficient miners exit the market.
The U.S. dollar is a currency that loses its value over time as more dollars are printed, which is a characteristic of inflation. However, Bitcoin is a finite currency with a capped production limit of 21 million, making it a hedge against inflation as its value is expected to remain stable over time. This stability is further strengthened by the periodic halving process, which makes Bitcoin a deflationary currency with increasing value.
Similarly, Ethereum has become a deflationary currency due to the Triple Halving. The Triple Halving consists of three different processes that work together to achieve deflation:
1. Reduced Issuance - Before the Ethereum Merge, miners were rewarded for verifying transactions and adding blocks to the blockchain, similar to Bitcoin. However, post-Merge, the role of verification has been taken over by stakers, and the first step in the Triple Halving will dramatically reduce their rewards. According to a tweet by blockchain engineer Montana Wong, “the annual issuance of ETH will drop from 4.3% pre-Merge to an estimated 0.4% post-Merge.”
This tenfold reduction in ETH issuance will increase deflationary pressure by reducing supply, which is made possible by the significant reduction in energy consumption achieved through the Merge.
2. Burning - The second deflationary measure is a process called burning, which involves sending tokens to a wallet without an access key, causing them to be lost permanently. In March 2022, leading up to the Merge, the Ethereum network burned nearly $6 billion worth of tokens. This burn mechanism split miner rewards (which were still being earned in March) into base fees and tips, with the base fees being intentionally destroyed through burning and the tips kept by the miners.
3. Staked Withdrawals - The final deflationary mechanism is related to the post-Merge validation process through staking. ETH (Ether) owners can secure a portion of their currency in the network by working with validators, who are responsible for verifying the next block in the chain. Stakers are rewarded for their contributions, but the network does not currently allow them to withdraw their holdings for six to 12 months after the Merge. After this time, withdrawals will only be allowed in a queue to prevent a large influx of locked-up holdings into the market.
In conclusion, halving is a fundamental aspect of many cryptocurrencies and plays a crucial role in controlling the supply and maintaining the value of the currency. As more and more halvings occur, the reward for mining will continue to decrease, which will have both positive and negative effects on the crypto industry. Understanding the halving process is important for anyone interested in investing or participating in the cryptocurrency market.
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