• Wed. Feb 28th, 2024

Understanding Ethereum’s “Triple Halving”

Key Takeaways:

  • The “triple halving” of Ethereum refers to the reduction in ETH issuance by over 80%, which is  similar to halving the Bitcoin system three times.

  • This reduction in supply was instituted alongside the switch to the Proof-of-Stake consensus algorithm through the Ethereum Merge and came into full function as The Merge was completed.

  • Ethereum’s “triple halving” slows Ether’s supply rate via reduction in issuance, staking and coin burning. This keeps already-circulating coins in check and makes Ether deflationary, improving Ether’s value through systematic scarcity.

News and events surrounding Ethereum’s famous switch to the Proof-of-Stake (PoS) consensus algorithm might have overshadowed an (almost) equally important development in Ethereum’s technology and economy. The “triple halving” and its impact on the circulating supply of ETH became fully functional on the Ethereum blockchain when it turned its back on the pioneer Proof-of-Work (PoW) algorithm and transformed into a Proof-of-Stake (PoS) blockchain as part of the Ethereum upgrades.

Since The Merge, new ETH issuance has decreased by ~88%. At the same time, the base fee for transactions is burned, removing it from circulation. 

Source: Ultrasound.money

As seen in the above image, these measures have caused a significant drop in the issuance of ETH, especially when compared against the simulated PoW issuance. 

But first, what is halving and what is Ethereum’s “triple halving”?

What is Halving?

Halving in cryptocurrency is, in the plainest terms, a reduction in rewards allocated to miners, validators, or anyone who benefits from the issuance of new tokens or coins. Halving is popularly associated with native crypto assets like bitcoin, BitcoinCash, and Bitcoin SV, but this system can be applied to just about any system where tokenization and scheduled supply are practiced. Cryptocurrency projects adopt the halving culture as a tokenomics approach.

Halving works according to the general supply and demand mechanics. It seeks to tame supply as a way of improving an asset’s value against a stable or changing demand. With fewer new tokens or coins coming into circulation at a time, halving is believed to create scarcity. This practice has been shown to be effective, especially for projects who are able to maintain the demand levels for their associated crypto assets, and works even better for projects that continue to grow in utility and adoption.

Depending on the technological systems available to a cryptocurrency project, the halving system can be automated or integrated through human-augmented automation systems. Human-augmented (semi-automated) halving systems are used mostly by smart contract projects to modify rewards distributed to participants of incentivized programs like liquidity mining. APRs and APYs can be modified by project teams according to presiding factors. Automated halving systems work a bit differently. The major difference is the rigidity and self-functioning set-up used in automated halving systems. A good example is bitcoin’s halving structure.

Bitcoin Halving

From the genesis block in January 2009 to about four years later, the Bitcoin blockchain rewards each miner with 50 bitcoins for successfully validating a block. In November 2012 at the block height of 210,000, this was reduced to 25 bitcoin per block. Bitcoin’s creator included pieces of code in the Bitcoin codebase that splits miners’ rewards after a certain number of blocks are added to the chain. The halving interval coincides with four years, but this is prone to deviations. The block height is a more accurate measure.

CoinGecko lets you follow bitcoin halving dates through a live countdown. Click here to learn more about Bitcoin’s halving and follow the countdown.

Halving is embedded into Bitcoin’s codebase; other forks of Bitcoin also inherit the halving mechanics. The two most popular Bitcoin forks – Bitcoin SV and Bitcoin cash – also slash miners’ rewards automatically. The first Bitcoin cash Halving occurred in April 2020 at a block height of 630,000, shortly after Bitcoin halved.  

Other early day blockchains like Litecoin also reduce block reward by half the initial value after four years. Just like bitcoin, Litecoin’s initial miners’ rewards of 50 LTC will be reduced to 6.24 LTC after its third halving event estimated to occur in 2023. Newer blockchains like Ravencoin also reduce miners’ rewards in a similar fashion. In the case of Ravencoin, the block reward is halved after every 2.1 million blocks are validated

The Merge’s Impact on ETH Supply

On September 6 2022, the Ethereum Merge was completed. In the popular event, Ethereum’s main network was fused with the Beacon Chain, marking the migration of the Ethereum blockchain from the Proof-of-Work to Proof-of-Stake consensus algorithm.

The Merge means a lot for the Ethereum network and the different parties interested in it. For global environmental advocates, one of the largest PoW networks switching to the greener PoS means a more sustainable computing system. For investors and users of the network, the move to Proof-of-Stake is expected to bring agility and scalability to the network and improve utility, especially once the final stage of Ethereum upgrades, sharding, is implemented.

However, mining node runners on the Ethereum Proof-of-Work network have to move to alternative PoW networks, as the switch to PoS means that Ethereum’s consensus system will be powered by a different technology that replaces miners with validators. The Merge also resulted in a couple of Ethereum Proof-of-Work forks: EthereumPoW (ETHW) and EthereumFair (ETHF/ETF).

During the Proof-of-Work era, Ethereum’s tokenomics includes an unlimited asset supply system in which the coins in supply grow by a certain percentage per year through rewards issued to miners. The reward per block mined is modified according to community agreements and new supply systems installed through mining software upgrades. The EIP-1234 passed and implemented in 2019 reduced the miners’ reward per block to 2 ETH and set the annual increase in supply at 4.3%, with an average of 15,000 ETH issued per day. Following the Merge, this system has seen significant changes.

Like other halving systems mentioned earlier, Ethereum’s “triple halving” seeks to modify the demand and supply structure of the Ethereum network by curtailing the availability of Ether. The positive effect this is expected to have will stem from the reduced sell pressure and the ‘lack’ that will emerge against increased demand. Beyond just halving the reward, Ethereum’s facilities also support two more supply management channels. 

How Does Ethereum’s “Triple Halving” Work?

With the switch to Proof-of-Stake, the issuance of ETH will drop by more than 80% – the effect of more than three bitcoin halving events. This is accomplished through three separate approaches:

Reduction in the Number of Coins Issued Daily

Setting up a mine and running the daily cost of a PoW blockchain node requires a significant level of financial commitment. Miners consume a tangible percentage of the global electricity supply and pay extra costs for the facilities that power the mines. Miners expect their mining rewards to be able to, at least, offset this cost and return some profits. Miners’ reward on the Ethereum PoW consensus system was set to a level profitable for miners.

Following the switch, validators will have to spend very much less to run a node and keep the network alive. Thanks to the reduced cost, achieving profitability for validators is easier. In light of this, the reward for validators on the Proof-of-Stake Ethereum blockchain was reduced. The reduction in the number of coins issued to validators will see the annual percentage increase in circulating tokens go from 4% to about 0.5%. The amount of Ethereum issued daily will decrease to an average of 1,700 ETH; a significant decrease from the previous 13,000 ETH issued daily on PoW.

Ethereum Staking

The Proof-of-Work system requires network participants to set up a mine using software and high-power mining devices. The network finds its strength in the quality and quantity of computing powers committed to protecting the network at any time. The PoW system favors higher computing power, so to stand a better chance of winning the right to validate a block, a miner will need to set up a mine within or above the average power of computers on the network.

Switching to PoS, the Ethereum network will embrace a system that depends more on the assets committed to the network rather than a validator’s computing power. Validators with more assets staked to their nodes stand a higher chance of being chosen to validate a block.

Assets staked to the modes are removed from active circulation for the period they stay staked on the network. 

The Beacon Chain is the staking chain of the Ethereum blockchain. With The Merge, the Beacon Chain is merged into the Ethereum mainnet. 

Validators on the Ethereum network will be required to stake their Ether on the network. Validators also serve as a portal for other holders to stake their assets on the network and benefit from the supply swell.

To run a validator node on the network, a minimum of 32 ETH must be staked. A validator’s chances will depend on not only their own asset staked but that of other holders staking on their portal.

With 32 ETH staked by hundreds of thousands of validators and even more staked by other investors, a significant number of the total Ether in supply will be locked away. 

Ethereum’s Coin Burning Mechanism

EIP-1559, an improvement proposal that burns a fraction of every ETH transaction fee paid on the network, was implemented as part of the London hard fork implemented in August 2019. Within 3 years of implementation, the EIP-1559 had already overseen the burning of over 2 million Ether coins. The burning mechanism sends the ETH to a wallet that cannot be accessed by anyone, thus taking them out of circulation forever.

The EIP-1559 modifies the fee system on the Ethereum blockchain and makes Ether deflationary. The fee paid by a user for a transaction is split into a base fee and a priority fee (tip). The base fee is the minimum amount (in ETH) paid by the initiator of a transaction to run his command through the blockchain. The priority fee is an additional fee paid by users as an incentive to validators to speed up the validation process. The variation in fees paid on the network is due to differences in the amount paid in tips to validators.

Bitcoin is dubbed a ‘sound’ money, an accolade it earned due to the fixed token supply system. Ether supply isn’t fixed, but the burning makes it a deflationary asset. If fixed-supply assets are sound money, deflationary assets are “ultrasound money,” and subsequently accords Ether the “Ultrasound” tag.

Impact of the “Triple Halving” on Ethereum

Decrease in ETH issuance

Data from Ultrasound.money shows the “triple halving” taking effect in real-time. At the time of this writing, the net supply change of ETH is between 1,100-1,300. That is, the difference between the daily supply and the Ethereum put away from active circulation has stayed below 1,500 ETH since the merge was completed in September 2022. A sketch of the supply pattern shows an overall decrease in the supply rate. A negative swell was even recorded between November 9th, 2022, and December 1st, 2022 with net supply going as low as -0.005 on November 12, 2022. A negative swell means that more coins were removed from circulation than newly issued coins. One contributor to this was XEN, a cryptocurrency which could be minted by users utilizing Ethereum-based wallets simply by paying the applicable Ethereum gas fees.

Reduction in ETH supply growth

Continuing with the data from the platform, it is estimated that an average of 600,000 ETH will be burnt per year while 620,000 ETH will be supplied within this period, putting the supply growth percentage at 0.007%.

However, the effect of this significant change in supply has so far been overshadowed by the crypto winter, and the real influence of Ethereum’s “triple halving” on price development will most likely be more effective in favorable market conditions. 

Final thoughts

Like Bitcoin’s halving system, Ethereum’s “triple halving”  aims to complement Ethereum’s utility with improved tokenomics. As Ethereum’s unlimited supply remains a challenging part of its tokenomics, the drastic reduction in issuance and circulating supply will help manage the supply of ETH and its price. 

As the network continues to grow and offer more utility, the “triple halving” will likely boost the effect of increased demand on price development. But bear in mind that cryptocurrency markets are volatile and other external factors will likely play a role as well. 

Finally, remember to do your own research before investing in any cryptocurrencies. Also, please note that this content is purely educational and no part was meant to be financial advice.