The fourth bitcoin halving is almost here, and this one has the potential to bring some very interesting surprises. This halving marks the reduction of bitcoin's supply subsidy from 6.25 btc per block to 3.125 btc per block. These supply reductions occur every 210,000 blocks, or approximately every four years, as part of bitcoin's gradual, disinflationary approach toward its final limited supply in circulation.
The finite supply of 21 million coins is, if not he, fundamental characteristic of bitcoin. This predictability of supply and inflation rate has been at the center of what has driven demand and belief in bitcoin as a superior form of money. The regular halving of supply is the mechanism by which that finite supply is ultimately enacted.
Halvings over time are the driving force behind one of the most fundamental changes to bitcoin's long-term incentives: the move for miners to be funded with newly issued coins from the Coinbase subsidy (the block reward ) to be predominantly funded by transaction fee revenues. of users moving bitcoins on the chain.
As Satoshi said in Section 6 (Incentives) of the white paper:
“The incentive can also be financed with transaction fees. If the output value of a transaction is less than its input value, the difference is a transaction fee that is added to the incentive value of the block containing the transaction. “Once a predetermined amount of coins have entered circulation, the incentive can shift entirely to transaction fees and be completely inflation-free.”
Historically, the halving has correlated with massive bitcoin price appreciation, offsetting the impact of the miner subsidy halving. Miners' bills are paid in fiat currency, meaning that if the price of bitcoin appreciates, resulting in higher income in dollar terms for the lower amount of bitcoin earned per block, the negative impact on the operation mining is dampened.
In light of the last market cycle, without even a 4x appreciation from the previous all-time high, the degree to which price appreciation will protect miners from the effects of the halving is an assumption that might not be true. always be true. In the next halving, bitcoin's inflation rate will fall below 1% for the first time. If the next market cycle plays out similarly to the last, with much less of an upward movement than seen historically, this halving could have a materially negative impact on existing miners.
This makes the fee income that miners can collect from transactions more important than ever, and will continue to be more central to their sustainability from a business perspective as block height increases and successive halvings occur. Either tariff revenue has to increase or the price must appreciate at least 2 times each time it is halved to compensate for the decrease in subsidy revenue. As optimistic as most Bitcoiners may be, the notion that the price is guaranteed to double every four years, in perpetuity, is a dubious assumption at best.
Love them or hate them, BRC-20 tokens and inscriptions have changed the entire dynamics of the mempool, raising fees from somewhere in the ballpark of 0.1-0.2 btc per block before its existence, to the somewhat volatile average of 1-2 btc. lately, regularly increasing much more than that.
The new factor this time
Ordinals present a very new incentive dynamic for the halving that was not present in any previous halving in bitcoin history. Rare sats. At the heart of the Theory of Ordinals is that the satoshis of specific blocks can be tracked and “owned” based on their arbitrary interpretation of the blockchain's transaction history, based on assuming specific amounts sent to specific outputs “send that sat” there. The other aspect of the theory is to assign rarity values to specific sats. Each block has a coin base, which produces an ordinal. But each block has a different importance for the scheme. Each normal block produces a “rare” sat, the first block of each difficulty setting produces a “rare” sat, and the first block of each halving cycle produces an “epic” sat.
This halving will be the first since the widespread adoption of Ordinal Theory by a subset of bitcoin users. No “epic” film has ever been produced while there was material market demand from a large, developed ecosystem. Market demand for that specific sat could end up being valued at absurd multiples of what the coinbase reward is valued in terms of simply fungible satoshis.
The fact that a large market segment in the bitcoin space values that single coinbase drastically more than any other creates an incentive for miners to fight over it by reorganizing the blockchain immediately after the halving. The only time something like this happened in history was during the first halving, when the block reward decreased from 50 btc to 25 btc. Some miners continued trying to mine blocks rewarding 50 btc in the coinbase after the supply outage, and gave up shortly after when the rest of the network ignored their efforts. This time, the incentive to reorganize is not based on ignoring the consensus rules and hoping that people will take your side, but on fighting over who can mine a completely valid block because of the value that collectors will attribute to that single base of coins.
There are no guarantees that such a reorganization will actually occur, but there is a very large financial incentive for miners to do so. If this happens, how long it will last will ultimately depend on how much that “epic” sat could be worth in the market to pay for the loss of revenue from fighting for a single block instead of advancing the chain.
Every halving in bitcoin history has been a pivotal event that people watch, but this attempt has the potential to be much more interesting than previous halvings.
How an Epic Satellite Battle Could Play Out
In my opinion, there are a few ways this could happen. The first and most obvious way is for nothing to happen. For some reason, miners don't judge the potential market value of the first “epic” satellite mined since Ordinals adoption began to be worth the opportunity cost of wasting energy reorganizing the blockchain and giving up the money they could make by simply mining. the next block. . If miners don't believe that the extra premium that ordinal can get is worth the cost of giving up moving on to the next block, they simply won't do it.
The next possibility is the result of nuanced economic scales. Imagine that a larger scale mining operation can afford to risk having more “lost blocks” involved in a reorganization fight for the “epic” sat. That larger miner with more capital to put on the table can afford to take on greater risk. In this scenario, we could see some strange attempts at reorganization by larger miners with smaller operations not even trying and essentially minimal disruption. This would happen if miners think there is some premium they can acquire for the ordinal, but not a massive premium worth a serious network outage.
The last scenario would be if a market develops bids for the “epic” sat in advance, and miners can get a clear idea that the ordinal is valued massively above the market value of the fungible sat itself. In this case, miners can fight over that block for an extended period. The logic behind not reorganizing the blockchain is that you are losing money, not only are you giving up the reward of simply mining the next block, but you are also continuing to incur the cost of running your mining operations. In a situation where the market is publicly indicating how much the “epic” sat is worth, miners have a very good idea of how much time they can give up moving to the next block and still end up with a net profit by reaching the reduction to the half. coinbase reward with ordinal. In this scenario, the network could suffer substantial disruption until miners start approaching the point of incurring a guaranteed loss, even if they end up successfully mining this block without it being reorganized.
Regardless of how things play out, this will be a factor in every halving going forward, unless the demand and market for ordinals disappears.
