Enemy of the Network: A Critique of Bitcoin Halving

Enemy of the Network: A Critique of Bitcoin Halving

The Bitcoin network is Halving the block rewards every four years to set the supply limit at 21 million. This procedure is known as Halving and runs until 2140. The majority believes that demand will be stimulated by the Halving Protocol due to declining supply and rising prices. Looking at the table below in recent years, however, the indicators say almost the same.

% of Change to the previous UAU Max No of Unique Addressed Used (UAU) in each period % of Change to the previous Halving BTC Price During Halving in $ Rewards in 10 min Date of Halving Halving
- Aug 16, 2012

47,500
- 0.07 50 Genesis Block (Jan. 03, 2009) 0
+927% Feb 02, 2016

488,000
+17757% 12.5 25 Nov 28, 2012 1
+120%  Dec 14, 2017

1,073,000
+5300% 675 12.5 July 9, 2016 2
-59%  April 13, 2020

437,000
+918% 6873 (April 13, 2020) 6.25 May 13, 2020 3

Extracted from blockchain.com unique addresses and market prices

Over the years, we witnessed a dramatic increase in prices compared to each previous period, whenever supply has declined. Yet there are pieces of evidence that the third halving process will not follow the same path!

What was the mission of halving?

On January 3, 2009, Satoshi Nakamoto placed an important note into the genesis block as the biggest news of the day from the cover page of London Times entitled “Chancellor on Brink of Second Bailout for Banks” specifying that Alister Darling as Chancellor of the Exchequer is taking supportive financial steps to save the banks from the financial crisis. To execute financial supportive policies, the governments need to print more amounts of money that ultimately cause hyperinflation in some cases and raise the number of citizens living in poverty. Satoshi as the first protester against central banks’ monopolization of printing currency offers a practical solution. The note embedded into the genesis block itself shows what is going on in Satoshi's mind. It reveals that he was seriously concerned about monetary policies.

While such an issue becomes a major concern for one (or more) scientists, he has decided to specify 21 million coins in its new monetary network and committed itself to follow the specified coins. He formulates the bitcoin network for 131 years, controlling the inflationary effects of bitcoin. 

To prove that the number of bitcoins is constant, he must create a transparent network with public participation and monitoring. He understands that crowdsourcing is the key, and in order to create network effects and get everyone involved in some way, he sets a significant reward for the miners at the beginning of the work.

Early miners, like Satoshi and very few other computer geeks, received 50 bitcoins every ten minutes as the block reward. In addition to processing costs, the block reward will provide network management costs to justify cost-effective blockchain maintenance.

How come the price shows significant growth after the previous Halvings?

Well, the first reason is that bitcoin holding and mining was a complete niche market, like not yet saturated and there were not many players in it. The early pioneers of this market, which were not numerous, tried to develop Bitcoin technology among themselves and encourage others to use it as well. The Bitcoin network is growing like a successful startup that was able to bootstrap with the help of these developers.

The second reason is that, as I said, no significant technology was needed to mine bitcoin for the pioneers. Mining could be a low-cost hobby with no real-world applications. That's why one of the same famous miners, Laszlo Hanyecz, finally exchanged 10,000 bitcoins with only two $25 pizzas. He says “it was worth it”.

The third reason for the Bitcoin surge was the arrival of new people who were not programmers and computer enthusiasts. Bitcoin's early pioneers knew well that Bitcoin had to have network effects to add value to its network. This means that the more users likely to spend Bitcoin and the more people want to receive Bitcoin in exchange for goods or services, the higher the value of the network. As a result, from that moment the network could no longer be monopolized by programmers and miners. Somewhere between November 2012 and July 2016, early adopters entered into the game who were not just programmers but were very interested in technology. These people are the ones who are queuing up when Apple's new technologies such as the new IPhone are introduced to be the first to use the technology, and to this day, the same kind of people remain in the industry. These people are developing and maintaining the mining industry to date and they have experienced unprecedented growth in bitcoin. On the other hand, looking at the table above shows that the number of active Bitcoin users (Unified Addressed Used on the blockchain) has decreased from the first to the third Halving. 

I would like to call the Unified Addressed Used Chart a "Bitcoin Popularity Chart"; that is, the higher the transaction rate, the more usable Bitcoin is. More usability means higher ease of use rate and fewer barriers to employing bitcoin in routine day-to-day transactions, resulting in increased network effects and ultimately a more consistent approach to the compatibility of bitcoin use in heterogeneous collaboration networks. The table above shows the number of active addresses in the quasi-gradually decreasing which rings the alarm bell!

Besides, a large portion of traditional taste investors and the early majority still do not have a middle ground with this technology. Evidence of this claim is the Black Thursday crisis on March 11, 2020, which showed that traditional investors have no remote interest in using Bitcoin to escape the crisis and preserve the value of money. Bitcoin, like all financial markets, reacts to economic problems. Although trillions of dollars were spent by governments to maintain the economy, Bitcoin's performance without such a parachute was astonishing.

As a result, at the same time with the advent of Halving, more people have been adopting Bitcoin over the years mostly because of its cutting edge offers, but this increase has gone unnoticed, and everyone hoorays for the Halving.

What happens after the third Halving?

The third Halving may have catastrophic consequences on the Bitcoin network. While the expense of network maintenance is not lowered, the rewards are significantly reduced. Looking at the chart of Bitcoin Miners Revenue (see link below) shows a significant reduction in miners’ gain, almost 53 percent immediately the day after Halvening.  

Miners revenue (USD)

Click here to see more.

As the third Halving increases network costs, many enthusiasts and investors in the industry are likely to feel frustrated and switch to the alternative more feasible. If the third Halving raises the expense of the network, many technology pioneers and developers would definitely become disappointed and retreat from the Bitcoin network. Of course, a portion of miners were also willing to maintain the network at a loss, but this period could not be long. If the slope of rising costs becomes faster than the network's revenue by 64th bitcoins Halving in 2140, then at best only governments with free energy resources will be able to control the bitcoin network. This is contrary to what Satoshi wished for.

On the other hand, the exit of miners reduces the usability, attack and laxity of the network and creates fear among large investors. Fear among investors and whales suddenly reduces the value of Bitcoin and tends to zero. Although such a scenario is pessimistic, it is not unlikely.

Why aren't Halving alone effective?

Bitcoin enthusiasts point out that the scarcity of bitcoin in the honing effect is causing a price jump. This claim alone is not an accurate claim and seems to have been exaggerated. Scarcity alone cannot make the price jump. Some experts cite the scarcity of gold to explain the importance of Halving, saying that bitcoin is as scarce as gold in the world, so it becomes valuable. This claim is not accurate. Many resources in the world are scarce but not necessarily valuable. Although gold mineral rock is scarce, it is not valuable to the general public until it becomes a usable commodity. Ordinary people don't buy gold just for rarity. Gold is not valuable if it is not used for industrial, jewelry, medical or reserve assets purposes.

Let’s put it in this way: Those resources that are useful in the present and the future and are scarce are more likely to become valuable. In other words, they are valuable resources for which we are fighting or will fight! We once fought for spices, gold, and salt, and maybe in the future, we will fight for water. Bitcoin must provide a present and a future value that we fight for!

So, the Bitcoin price spike scenario is simply ruled out by Halving. Any price increase requires new adopters and acceptors, and new people with fresh money must accept it and invest to improve the network. So, in the case of Bitcoin, any price jump will not last until it is accompanied by an increase in acceptors.

 How do grandmas use bitcoin?

Bitcoin has to increase network effects or increase bitcoin acceptors. Bitcoin must be able to get out of fantasy applications and present itself to the general public. Although some websites that offer bitcoin payment gateways are currently in services, demand has not been sufficiently stimulated.

On the sidelines of a conference in August 2019, Alex Fazel, Swissborg's head communications, asked Antonopoulos “how he would explain to his grandmother Susie that he was not afraid of Bitcoin and would use it” (see video/link below). “Everyone really needs to know! […] Not everyone needs this technology. Leave Susie to enjoy her retirement,” Antonopoulos said in response. Antonopoulos is right from the point of view of a computer programmer. But from a macro point of view, this is a clear mistake in the bitcoin development strategy. Leaving aside bitcoin fluctuations as a barrier to acceptance, the wallet, and the Bitcoin transaction process should be designed to be simple enough for any grandmas to understand. If grandmothers learn to use bitcoin, it means we have access to the most acceptable and simplest technologies available ever!

See the video to find out more.

 Why is the third halving the enemy of Bitcoin?

According to what I explained, Bitcoin always needs to add new people to its network. Bitcoin is keen to promote any possible noisy advertising to increase its network engagement. Increasing participation means increasing usability, more participants in the network, improving technology, and ultimately increasing price. Although the surge in price leads to an increase in awareness, it has nothing to do with sustainable growth and Bitcoin development. The third halving is about to take place when the Z generation, which was born in the midst of information technology, is not yet among the majority of its adopters. But they can help improve network stability in the coming years. The new generation needs programmable money, but it may take another Halving for them to join the current Bitcoin network. On the other side, Bitcoin competitors do not sit idle. By creating all kinds of tokens and a variety of smart contracts until the next Halving, they are going to improve their cryptocurrencies to attract the attention of the new generation by referring to Bitcoin as expensive and outdated technology.

Future of bitcoin

As a pioneering technology, Bitcoin has taught us how to solve our problem by employing crowdsourcing and collective intelligence methods. Bitcoin made blockchain useful. Bitcoin has taught us how even trust as the rarest element in the world can be formulated by blockchain.

Bitcoin has no choice but to innovate to survive. If Bitcoin fails to expand its applications or persuade a significant portion of traditional investors to participate, it will be replaced with the new competitors with better performances. Otherwise, like the Nokia 3310 model made by Nokia, which was once considered as a pioneer of the technology respected by all, it has become inapplicable and should be sought in the museum.

 

Author Bio

Mehdi Daryaee is an MBA graduate from Carleton University in Canada and PHD candidate in technology Management. His research focus is on Blockchain, Bitcoin, Startups, and Collective Intelligence. He is also the co-founder and executive producer of the annual Information and Communication Security Conference in the oil industry in the fields of industrial automation; Information and Communications Technology; Passive Defence; Physical Security; and senior management action plan. The conference, which became one of the largest and most specialized security conferences in the Middle East, was used to hold in the North of Iran (MahmoudAbad City) from 2011 to 2017 to discuss how to prevent damage to the country's vital infrastructure. The IS conference has hosted senior executives and thinkers from Iran, Russia, Iraq, and France.

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Publication date: 
05/21/2020 - 20:15
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