Vital Crypto Definitions You Must Clarify: Halving and Difficulty
On average, every four years (after each 210,000 blocks in the Bitcoin’s blockchain), the production of new Bitcoins abruptly halves, or more precisely, the reward given to miners for adding a block to the blockchain decreases by 50%. Halving was put into the network code by Satoshi Nakamoto, the anonymous creator of Bitcoin, aiming to controlling Bitcoin inflation.
Since the Halving event actually decreases the supply rate of new Bitcoins by 1/2, the experts believe that this event will have a significant impact on the price of Bitcoins and can increase the value of Bitcoins over time.
What does Bitcoin Halving Mean?
To understand the concept of Bitcoin Halwing, you must first become familiar with the basic concepts of Bitcoin mining. In short, volunteers, called miners, provide the network with the ability to process their hardware in a process called mining, which requires power consumption and solving equations, to validate and secure Bitcoin transactions. The network generates some Bitcoins as a reward and gives them to miners. Halving halves the miners’ bonuses every four years.
When Satoshi Nakamoto was setting the rules for the Bitcoin protocol, he emphasized two rules the most:
- Bitcoin inventory is finite and limited to 21 million units.
- Reduce the number of Bitcoins produced per block by 50% after every 210,000 blocks.
How often does Bitcoin Halving occur?
Considering that an average of 6 blocks are found per hour and the Halving event occurs after every 210,000 blocks, it can be said that Halving occurs approximately every 4 years.
At the beginning of Bitcoin era, 50 units of Bitcoins were generated every ten minutes, or more precisely, the first miner to reach the answer to the block equation received 50 Bitcoins. In 2012, after the first Halving, the extraction bonus reached 25 and in 2016, after the second Halving, the extraction bonus reached 12.5 units. Today, as you read this article from Coinmarketsig.com, about 12.5 Bitcoins are generated every ten minutes. This figure reduced to 6.25 Bitcoins after the next Halving, which took place in May 2020.
What is the philosophy of the Halving event?
You may be wondering why it was necessary to design this change in the Miners’ Rewards and why the reward rates for the Miners should not be kept constant. Will this event not end to the detriment of the miners? The answer to this question lies in the law of supply and demand.
If new Bitcoins are generated quickly, or the number of Bitcoins that can be produced is infinite, the high number of Bitcoins in circulation will gradually devalue them.
Ethereum creator Vitalik Buterin, in a personal note to the Bitcoinmagazine website, explains the need to slow down the distribution of Bitcoins through the Halving event:
“The main reason for doing this is to control inflation. One of the biggest mistakes of traditional Fiat currencies, which are controlled by central banks, is that they can print as much money as they want, and if they print too much, the value of the government currency will fall rapidly under the law of supply and demand.
Unlike conventional currencies, Bitcoin is designed to act like a valuable commodity, like gold. The amount of gold in the world is limited and with the extraction of each gram of it, the extraction of the remaining gold becomes more difficult than before.
Because of this limited supply that gold has been able to establish itself as a medium of exchange and value storage over the past 6,000 years.”
Vitalik Buterin the creator of Ethereum
How does Halving affect the price of Bitcoin?
The most important question people ask about Halving is whether it will affect the price of Bitcoin, and the answer is that no one knows. In fact, on paper and in theory, assuming demand is stable, if supply halves, the price should be twice as high to meet demand, but it cannot necessarily be said that demand will remain stable and not decrease.
In 2016, a week after the Halving incident, there was not much change in the price of Bitcoin. At that time, Bitcoin was priced at around $ 650, and a week later it reached $ 675, which was not a significant change. But more than a year later in 2017, the price of Bitcoin reached its highest point in history, $ 20,000.
The first Bitcoin Halwing happened on November 28, 2012, after the extraction of the 210,000th block. Bitcoin was priced at $ 13.42 at the time, and Halving did not seem to have much of an impact on the price. It is true that the price of Bitcoin soon reached $ 230, but many attribute the increase to the financial crisis in Cyprus.
However, there are still arguments to suggest that either the price will increase or there will be no change.
Many also believe that the Halving event is known only to members of the Bitcoin community and therefore cannot surprise anyone or cause a significant change in the price of Bitcoin.
No one in the meantime believes that Halving can reduce the price of Bitcoin in any way.
What is Mining Difficulty?
Difficulty is the variable that aims to keep the average creation time of a block in the network constant. In digital currencies that can be extracted, or their so-called PoW mechanism, it is necessary to have a flexible capability to increase or decrease the number of miners. In this article, we will explain the difficulty of the network and its details.
Before we get into the subject of network complexity and its explanation, we need to briefly look at the basic concepts of extractable digital currencies.
One of the capabilities of digital currencies that has made them popular is the use of public blockchain. These types of blockchains are transparent and anyone can work in or out of these networks without the need for permission from the center or institution. For example, you do not need permission from any person or group to enter the Bitcoin, Ethereum and LightCoin network. All you have to do is download the entire blockchain of these networks and run a full node.
Folders are devices that store the entire history of network transactions in their memory and are directly responsible for the validation of transactions.
Extraction or mining operations can be done freely by any person or group in the network. The basis of digital currencies that use the extraction mechanism is to solve a complex problem called “hash” in each block to find the answer and thus confirm the transactions in which the block is located. Miners in the process of finding the hash of each block, do so by guessing and error.
The hash, or complex mathematical problem that is an integral part of all digital currencies, is the product of a function called the hash function. This one-way function in digital currencies receives data or inputs, which are the transactions of different people, and the output is a string of expressions of constant length and volume. One of the most interesting features of hash functions is that it makes it almost impossible to access primary data by having output.
What is mining difficulty?
The general basis of the concepts of network complexity is the same in all digital currencies. To explain the complexity of the network, consider one of the extractable digital currencies such as Bitcoin.
Bitcoin mining difficulty
The hardness of the Bitcoin network changes every two weeks so that the time it takes to find each block is an average of 10 minutes. If there is no network difficulty, as more miners enter the network, the guesses about the hash of each block will also increase. As the number of guesses made increases, the probability of finding each block in less than 10 minutes increases.
With this account, there will be no controlling factor in the network to prevent the miners from creating a block every minute, second or even less than a second and force them to create a block in about 10 minutes.
It has been said that the difficulty of the Bitcoin network changes every two weeks (in other words, after the creation of each 2016 block). Considering the time of 10 minutes to solve each block, the time required to solve this number of blocks will be 20,160 minutes.
But if the number of miners increases during this two-week period and this number of blocks is resolved earlier or later (for example in 18,000 minutes), then the difficulty of the network must match the number of miners.
If we divide the total 2016 settling time of the block by the ideal value of 10 minutes per block, with a simple proportion we can see that the hardness of the network should be, say, 1860/2016 or 1.12 times the previous state.
If the ratio is greater than 1, the miners have solved the blocks faster than usual, and if the number is less than one, the power of the miners has decreased compared to before.
Bitcoin Network Hardness Chart is available at Blockchain.com. The concept of the difficulty chart and the numbers used in it show the ratio of how much more difficult it has become to extract Bitcoins, for instance, than in the previous week or, for example, the early days of Bitcoin start-ups.
Imagine a hair on which the numbers 1 to 100 are placed and a device is supposed to select a random number every minute in this interval. We consider the number 50 as a target that we consider less random numbers. In this case, on average, we have to wait 2 minutes to get any number below 50. If our goal is numbers below 20, this time will increase to 5 minutes.
Of course, luck may be with us and the first number that the device randomly selects is below 20, but in the long run, the time required to find a number below 20 will be the same as 5 minutes.
So by changing the number that we know as the target, the time it takes to get it also changes.
The same goes for network stiffness or default. Miners try to achieve random hashes less than the target hash by generating random numbers. As extraction becomes more difficult, the target hash becomes smaller and smaller. Of course, this is done by adding more zeros to the beginning of the target hash. That’s why the hashes of newer blocks on the Bitcoin network have more zeros than blocks a few years ago.
But if you look at the example of graphs 1 to 100, the numbers that will be on the Bitcoin graph are very large. For this reason, computers also deal with these numbers in hexadecimal or base 16 format.
In what year is the last Bitcoin mined?
According to estimates from the Halving event, the final number of Bitcoins in 2140 will reach about 21 million (20,999,999,9769) units.
Will there be an end to Bitcoin mining?
No, as long as Bitcoin exists, its extraction will necessarily continue. When the block reward is reduced so much that it does not cover the extraction costs, the miners’ reward will be covered by the transaction fee.
How many Bitcoins are mined each day?
An average of 144 blocks are mined each day, which means that (24 hours a day * 60 minutes per hour / 10 minutes per block) the average number of Bitcoins mined before May 2020 (Halving) is 1,800 units per day.