Written by “Shinobi” via BitcoinMagazine.com,
The fourth Bitcoin halving is just around the corner and it holds the potential for some very interesting surprises. This halving marks the reduction of Bitcoin supply subsidy from 6.25 BTC per block to 3.125 BTC per block. These supply reductions occur every 210,000 blocks, roughly every four years, as part of Bitcoin's gradual, disinflationary approach to its final limited circulating supply.
The finite supply of 21 million coins is an if not The, fundamental feature of Bitcoin. This predictability of supply and inflation rate was at the core of what drove demand and belief in Bitcoin as a superior form of money. The regular supply halving is the mechanism through which this limited supply is ultimately implemented.
Halvings over time are driving one of the most fundamental shifts in Bitcoin incentives in the long term: Transitioning from funding miners through newly issued coins from the Coinbase subsidy – the block reward – to funding them primarily through transaction fee revenue from users moving Bitcoin on-chain.
As Satoshi said in Section 6 (Incentives) of the white paper:
“The incentive can also be funded 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 number of coins have entered circulation, the incentive can switch entirely to transaction fees and be completely inflation-free.”
In the past, the halving was associated with a massive increase in the price of Bitcoin, which offset the impact of the halving on miner subsidies. Miners' bills are paid in fiat, meaning that if the Bitcoin price increases, the negative impact on mining operations is cushioned, resulting in higher dollar income for the lower amount of Bitcoin per block.
Given the last market cycle, which did not see even a 4x appreciation from the previous all-time high, the extent to which the price increase will insulate miners from the impact of the halving is an assumption that may not always hold true. At the upcoming halving, Bitcoin's inflation rate will fall below 1% for the first time. If the next market cycle is similar to the previous one, with much less upside than in the past, this halving could have a significant negative impact on existing miners.
This makes the fee income that miners can earn from transactions more important than ever and will become increasingly important to their sustainability from a business perspective as block height increases and successive halvings occur. Either fee revenue must increase or the price must increase at least 2x with each halving to compensate for the decline in subsidy revenue. As optimistic as most Bitcoiners may be, the idea that a price doubling is guaranteed to occur every four years and in perpetuity is a dubious assumption at best.
Love them or hate them, BRC-20 tokens and inscriptions have changed the entire dynamic of the mempool, taking fees from somewhere in the region of 0.1-0.2 BTC per block before their existence to the somewhat volatile average of 1 -2 BTC has been increasing lately – regularly peaking well above that.
THIS TIME THE NEW FACTOR
Ordinal numbers represent a whole new incentive dynamic for this round's halving that has not been seen in any previous halving in Bitcoin's history. Rare Sats. The essence of the ordinal theory is that satoshis from specific blocks can be tracked and “owned” based on their arbitrary interpretation of the blocks’ transaction history Blockchain, based on the assumption that certain amounts are sent to certain exits “that were sitting there”. The other aspect of the theory is to assign rarity values to specific sats. Each block has a coin base, creating an atomic number. But each block has a different meaning to the schema. Each normal block creates an “uncommon” sat, the first block of each difficulty adjustment creates a “rare” sat, and the first block of each halving cycle creates an “epic” sat.
This halving will be the first since the widespread adoption of ordinal theory by a portion of Bitcoin users. There has never been the production of an “epic” sat, despite there being significant market demand for it from a large and developed ecosystem. Market demand for that particular sat could end up being valued at an absurd multiple of what the Coinbase reward itself is worth in the form of single fungible satoshis.
The fact that a large market segment in the Bitcoin space would value this single coinbase significantly higher than any other creates an incentive for miners to compete for it by reorganizing the blockchain immediately after the halving. The only time in history this has happened was during the very first halving when the block reward dropped from 50 BTC to 25 BTC. Some miners continued to attempt to mine blocks equivalent to 50 BTC on Coinbase after the supply cut, only to give up shortly afterward when the rest of the network ignored their efforts. This time, the incentive to reorganize is not to ignore consensus rules and hope people are on your side, but to argue about who gets to mine a fully valid block because collectors assign value to that single coin base .
There is no guarantee that such a restructuring will actually happen, but there is a very strong financial incentive for miners to do so. If it does happen, how long it will continue will ultimately depend on how much this “epic” sat might be worth in the market to make up for lost revenue from fighting over a single block rather than from advancing the chain cover up.
Every halving in Bitcoin's history has been a pivotal event that people watch, but this detour has the potential to be much more interesting than past halvings.
HOW AN EPIC SAT BATTLE COULD TAKE PLACE
In my opinion there are several ways this could play out.
- The first and most obvious way is this nothing happens. For some reason, miners don't consider that the potential market value of the first “Epic” mined since Ordinals began launching is worth the opportunity cost of wasting energy reorganizing the blockchain and forgoing it the money they could earn by simply mining the next block. Unless miners believe that the additional premium that the ordinal can bring is not worth the cost of forgoing moving on to the next block, they simply won't do it.
- The next option is a Result of differentiated economic scales. Imagine if a larger mining operation could afford to risk more “lost blocks” and engage in a reorg battle for the “epic” sat. The larger miner, who can put more capital on the table, can afford to take more risk. In this scenario, there may be some strange attempts at reorganization by larger miners, while smaller operations don't even try, and the disruption is essentially minimal. This would come into play if miners assume that they can get some reward for the ordinal, but not a massive reward that would be worth serious disruption to the network.
- The last scenario would be if A market develops bids for the “epic” that is ahead of its time, and miners can get a clear picture that the value of the ordinal is significantly higher than the market value of the fungible sat itself. In this case, miners may fight over this block for a longer period of time. The logic behind not reorganizing the blockchain is that you will lose money and not only will you miss out on the reward of just mining the next block, but you will also continue to incur the costs of running your mining operation. In a situation where the market is publicly signaling how much the “epic” sat is worth, miners have a very clear idea of how long they can forgo moving to the next block and still end up making a net profit by they reach the halving Coinbase reward with the atomic number. In this scenario, there could be significant disruption in the network until miners approach the point where they suffer a guaranteed loss even if they successfully mine that block without reorganizing it.
Regardless of how things actually turn out, This will be a factor over which any further halving should be considered unless the demand and market for ordinals wanes.
From Zerohedge.com
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