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Every 4 years, the Bitcoin protocol undergoes a “halving” that reduces the emissions of Bitcoin by half. The halving is both an important milestone marking Bitcoin’s longevity (a reminder that Bitcoin has made it this far) and a forcing function to drive more adoption (which in turn drives higher transaction fees) to compensate for the reduction in mining subsidies.
How Does the Halving Impact Bitcoin?
Over the past 4 years, Bitcoin miners were rewarded with 6.25 BTC per mined block. After today’s halving, miners will receive just 3.125 BTC per block. This halving process is part of the Bitcoin protocol and will continue every 4 years until 2140, when the hard cap of 21M tokens is met. However, as you hear in the news anytime the halving comes around, shrinking mining rewards brings up questions of miner sustainability and profitability.
In fact, miner profitability has gone down over time. This is an expected trend from any competitive market, but it is concerning when the dominant revenue source is scheduled to shrink every 4 years.
As mining rewards go down, innovation goes up.
Miners earn fees from the transactions they include in mined blocks too, but the new token emissions are a fundamental part of their profitability. Today, these emissions count for anywhere from 80-95% of miner revenue, with the rest being from fees themselves.
In 2024, it cost between $40,000-$55,000 to mine a Bitcoin block. That’s a lot of money, and as token emissions go down, transaction fees must increase in order for Bitcoin’s security budget to stay constant and for miners to stay in business.
The good news is that as mining rewards go down, innovation goes up.
Each Halving Period Brings New Innovation
With each halving cycle, we’ve seen new innovations that push the Bitcoin ecosystem further.
The First Halving (2012)
In the first 3 years of Bitcoin’s existence from the mining of its first block to the first halving, Bitcoin was still getting its sea legs. The innovations in this era were more informal. For example, how to ratify BIPs and how to plan the direction and continued development of a decentralized protocol were still being hashed out.
The innovation in this time period set the stage for future innovation and identified the standards by which Bitcoin development could continue and how innovation can occur.
The Second Halving (2016)
By the time of the second halving, we saw the first major improvements to Bitcoin. The SegWit upgrade was put in motion following the contentious Blocksize Wars (though it ultimately didn’t go live until 2017). This innovation allowed more transactions per block and paved the way for the Lightning Network.
During this 4-year period, we also saw the rise of the first major Bitcoin exchanges and the rapid expansion of the Bitcoin network, with the total number of Bitcoin addresses going from 8M to 164M.
The Third Halving (2020)
By the third halving, the stage was set for the biggest upgrade to the Bitcoin network to date, Taproot which went live in 2021. This upgrade increased the privacy and the efficiency of the Bitcoin network.
We also saw the creation of the first Bitcoin layers. Lightning, Rootstock (called RSK back at launch), and Liquid all launched in 2018. Stacks (then called Blockstack) became the first ever token offering qualified by the SEC for a Regulation A raise.
These projects all aimed to expand the capabilities of Bitcoin beyond the Bitcoin blockchain itself, whether by offering cheaper payments, an EVM-compatible smart contract environment, the issuance of new assets, and more. This 4 year cycle marked the beginning of serious experimentation and innovation around Bitcoin.
The Fourth Halving (2024): Bitcoin Season 2
Many Bitcoiners have described the past year in Bitcoin as “Bitcoin Season 2”, and there’s a lot of truth to that. It very much feels like we’ve seen more innovation on Bitcoin in the past 4 years than we have in the first 11 years of Bitcoin’s life.
40% of Bitcoin developers are building on Bitcoin layers.
Today, there are dozens of projects building on Bitcoin, a sharp increase compared to the number of projects in 2020. Those projects include the mainnet launch of Stacks, new programming languages, new layers and sidechains, protocols for arbitrary challenge-response games, zk proofs, and so much more.
40% of Bitcoin developers are building on Bitcoin layers, and 4 years ago that concept would have been totally outlandish.
There are now even new ways of representing assets on the Bitcoin blockchain itself, including Taproot Assets and Bitcoin Ordinals, which enable fungible and non-fungible tokens to be created on Bitcoin. These approaches themselves are innovations on older models like colored coins and Counterparty, ideas which were first proposed in 2012 and 2014.
Ordinals in particular caught fire in the last year, and over 66M ordinals inscriptions have been created to date. These aren’t meaningless numbers in a vacuum either. These innovations are driving real transactions and in turn driving up transaction fees. Ordinals alone have generated $258M in transaction fees since they launched.
The truth is that Bitcoin needs innovation in order to survive, and the last cycle has shown us that innovation is happening, and now developers are flocking to the Bitcoin network.
Looking Into the Crystal Ball
As we enter a new cycle with 3.125 BTC rewards per block, it’s more important than ever that devs continue to build and innovate on the oldest and most secure blockchain in production. In a competitive market, innovation is critical to survival, and while Bitcoin has remained dominant for 14 years, in order to stay that way, devs must keep building.
The good news is that there’s no shortage of innovations on the horizon for Bitcoin. Research in Bitcoin rollups is heating up. Bitcoin Runes, a new protocol for memecoins, drops today. sBTC, a new trust-minimized Bitcoin peg is coming to Stacks later in 2024. Then you have other innovations that could come to Bitcoin in the coming years, such as Bitcoin covenants, Drivechains, EVM-bridges, and more.
While it isn’t certain where the network fees will come from, we’re confident that devs will build new things, and some combination of those things will drive network fees to support Bitcoin’s security. When there’s an opportunity as big as the $1T of latent capital in Bitcoin, devs simply can’t walk away from it.
Someone with the inspiration and with the drive will build something new and transform the Bitcoin ecosystem as we know it. Will it be you, anon?
