Halfing Bitcoin Block Reward

Written by  on July 6, 2016

BitcoinThree days are left till the reward for mining Bitcoin[1] blocks goes down in half, to 12.5 coins per block, from 25. It is the second time that this happens, as in November of 2012 the reward went down to 25 from 50. Next (and final) halfing will take place in another four years. The mechanism is integral to the core Bitcoin design and has been implemented in the node code since day one. To the people in the field this is so important, that they track it by the hour.

Mining  blocks is seriously expensive, and the Bitcoin crowd thinks that it’s a good thing. Cause that prevents the ‘bad guys’ from doctoring several blocks in a row and stealing a bunch of coins via “double spending”. [Will cover the details at some future date, as there is no big urgency with this.]

The largest cost in Bitcoin mining is electric power, both to run the data centers full of specialized computers, and to cool them. Most mining is done in China, using subsidized power. But the ‘carbon footprint’ of the Bitcoin industry is nothing short of atrocious. Some compute farms are in Iceland, using geothermal power, while saving on the AC bill.

Bitcoin miners get paid in two ways – a reward’ of so many coins per block and a fee for recording transactions in the block. So far the reward has been by far the predominant part of miners’ income. Bitcoin price has been rather volatile recently, but at $600 the reward of 25 coins is worth $15,000. By comparison, the miner recording fees, in the best case at current rates, could add up to around 0.5 BTC ($300) for the maximum size 1 Mb block.

The fee is usually quoted in Satoshi / byte, where a Satoshi unit is 1/100,000,000 BTC. Today, a fee that gets your transaction recorded without delay is around 50 Satoshi. For the shortest 250 byte Bitcoin transaction, it works out to around 7.5 cents. Not all transactions are this short – the ones with many ‘inputs’ and ‘outputs’ can be several kilobytes long.

The Bitcoin marketplace has been running recently at around 200,000 transactions per day. By design, a Bitcoin block is mined about every ten minutes, for 144 per day. So, less than 1400 transactions are recorded per block, on average, not 4000. Partly this is due to larger transactions, but also  because many miners do not fill their blocks fully, out of fear of duplicating a transaction that another miner already put in a block of their own, and having the entire block ‘orphaned’ and not getting paid at all. Smaller miners may fill as little as 1/4 of a 1 MB block.

MinerAll this is important because if the miners have to compensate for the loss of 12.5 BTC per block by increasing transaction fees, they would have to raise them twenty-fold. Is the Bitcoin community prepared for a $2 transaction fee?

[1] Learn more about Bitcoin and the details of mining and rewards.