The bitcoin network underwent a significant change on Monday as the number of new bitcoins produced in each block fell by half. This is according to a schedule established by bitcoin founder Satoshi Nakamoto almost 12 years ago.
Previously, each block in the blockchain came with 12.5 new bitcoins worth roughly $110,000. Now each block includes only 6.25 new bitcoins worth around $55,000.
That's a challenge for the bitcoin mining industry, which derives the lion's share of its income from these block rewards. But it has a happy side effect for everyone else: the bitcoin network's energy consumption is likely to fall in the coming months as lower profits from bitcoin mining force miners to tighten their belts.
Lower miner revenues will mean lower energy consumption
To construct a block, miners make a list of all transactions that have been submitted since the previous block was created. They then race against one another, performing millions of trillions of SHA-256 hash computations every second, looking for a block that produces a hash below an arbitrarily low value.
The winner gets the block reward (previously 12.5 bitcoins, now 6.25 bitcoins) as well as any transaction fees that are included in individual transactions. Right now, transaction fees are worth much less than the value of the block reward—around 0.6 bitcions, or $5,000, per block. So the halving of the block reward means that miners' income fell almost in half overnight.
That sudden decline in the rewards for mining means that the mining is suddenly a lot less profitable. Barring a big increase in bitcoin's price, we can expect bitcoin miners to temporarily stop investing in new mining hardware for the next few months. If bitcoin mining becomes unprofitable enough, some miners might even switch off less efficient mining hardware because it's not generating enough bitcoins to cover operating costs.
In the short term, fewer resources spent on mining should lead to a slower rate of bitcoin creation. However, the network has an automatic process to ensure that bitcoins get generated at a more or less constant rate. Every two weeks, the network changes the difficulty of the hashing problem in order to keep the network producing about six blocks per hour. If the network is producing blocks too slowly, the network lowers the difficulty of the hashing problem by increasing the range of hash values that are considered "winners." If the network is producing more than six blocks per hour, the network does the opposite: making the hashing problem more difficult to slow down the rate of block creation.
The upshot is that in the long run, the bitcoin network always produces one block every 10 minutes, no matter how much hashing power the network has.
Miners, of course, want to make a profit, and competition among miners keeps profit margins fairly steady over the long run. So if the revenues from bitcoin mining fall by half, that will ultimately translate to miners spending about half as much to produce those bitcoins. Electricity is one of the biggest costs of bitcoin mining, so the halving of block rewards should ultimately reduce the amount of electricity consumed by bitcoin mining by a similar proportion.
And this is significant because the bitcoin network is stupendously wasteful. The exact figures are known only to miners themselves, but the website Digiconomist estimates that the network has consumed between 50 and 70 TWh per year—roughly as much energy as the 8 million people in Switzerland. We shouldn't expect that figure to fall by half immediately, but if bitcoin's price stays around the same level, we should expect to see it falling in the coming months.
The halving will push up bitcoin's price—but not very much
Of course, higher bitcoin prices could offset this effect. HRead More – Source
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