02/26/2024 0 Comments

1. What happens during the bitcoin halving?

The next bitcoin halving is just around the corner. This event will halve the rewards miners receive for each new block added to the network’s blockchain. But what exactly does all of this mean? Blockworks breaks down the technical details around what happens during the halving.

The basics of bitcoin

The bitcoin network operates on a decentralized ledger known as a blockchain, which is run by a network of computer nodes. These nodes are designed in a way that records and verifies the validity of each transaction on the network.

More computer nodes often means that the stability and security of the network are higher. According to Bitnode, there are currently 18,454 nodes running on bitcoin today.

Running a node requires the operator to have enough computer storage to download a full record of the network’s blockchain. This record includes every transaction processed since Bitcoin’s creation in January 2009. As the blockchain grows, so does the need for storage. At the time of publication, the bitcoin blockchain size was over 551 gigabytes.

Transactions on the Bitcoin network are grouped into “blocks.”

Miners, who use powerful computers to solve cryptographic challenges, compete to find a specific 64-digit hexadecimal number, or “hash.” Successfully discovering this hash allows a miner to add a new block to the blockchain, for which they are rewarded with newly minted bitcoins. This process not only secures the network by verifying transactions but also introduces new bitcoins into circulation, adhering to a predefined issuance rate.

What does this have to do with bitcoin halving?

There have been three previous halving events. The first occurred on Nov. 28, 2012, when bitcoin rewards went from 50 bitcoins to 25 bitcoins. The second happened in July 2016, when rewards went from 25 bitcoins to 12.5 bitcoins. The most recent bitcoin halving event occurred in May 2020, when 12.5 bitcoin rewards were reduced to 6.25.

These events are significant because bitcoin has a hard limited supply of 21 million distributable coins, and there is already an estimated circulating supply of over 19 million.

A new halving occurs each time the network mines 210,000 blocks. By design, these events are meant to occur roughly every four years. In practice, however, this has not always been the case.

Bitcoin’s protocol aims for a new block to be mined every 10 minutes. The network adjusts the mining difficulty every 2,016 blocks in an attempt to maintain this pace. Increases in miner computing power can lead to faster block discovery, while decreases can slow it down.

Over the years, these shifts in capacity have led to deviations from the anticipated four-year interval between each halving. This upcoming halving, however, appears to be aligning closely with its scheduled timeline.

According to a Flipside Crypto report, the next bitcoin halving event will most likely occur on April 20, 2024.

What does this mean for bitcoin miners?

Some argue that the fewer the rewards, the fewer incentives there may be for bitcoin miners to continue their operations.

“The current hash rate, the current mining difficulty, a miner’s electricity cost and the current bitcoin price — play a tremendous role in determining if bitcoin miners are profitable and can keep operating older ASICs,” Matthew Niemerg, co-founder of layer-1 network Aleph Zero told Blockworks.

Sanjay Gupta, the strategy lead at Auradine, a blockchain web infrastructure solutions company, shares this sentiment.

“With bitcoin halving, the need for energy-efficient bitcoin, demand response with the grid becomes even more critical. Older, lower efficient miners without rapid energy response will become obsolete,” Gupta said.

Even so, Sukhveer Sanghera, Earth Wallet’s founder and CEO, highlights DeFi solutions on bitcoin’s layer-2 networks as a beacon for new revenue streams and incentives for miners, including MEV.

“Bitcoin’s hardcoded monetary policy ensures continued trust and stability, while layer-2 innovations like social network layer-2 can provide the incentives to complement base layer immutability,” Sanghera said.

The potential for an increase in bitcoin’s value post-halving could also offset these reduced rewards, maintaining mining’s appeal despite the challenges.

2. Bitcoin halving ‘blood bath’ could push US miners offshore

Potential sluggishness in the price of Bitcoin after the Bitcoin halving could tank the share prices of high-cost public miners in the United States, forcing some to even move offshore.

“We might see a mining stock blood bath as investors realize these companies are barely making money,” says Jaran Mellerud, founder and chief mining strategist of Hashlabs Mining, referring to what could happen if the Bitcoin price doesn’t rise substantially after the halving.

Mellerud is now eyeing the three to four-month window after the halving to see the extent to which miner profitability is pressured by the slashing of block rewards.

The next Bitcoin halving is expected to occur on April 24, according to CoinMarketCap. It will reduce Bitcoin miner rewards from 6.25 BTC ($321,000) to 3.125 BTC ($160,500), though it has historically been followed by a surge in the price of Bitcoin.

In the last halving event on May 11, 2020, Bitcoin was priced at $8,750 and surged over 430% five months later in October from $11,500 to $61,300 by mid-March 2021.

But if Bitcoin fails to make a major run before that three to four-month interval, “a significant part of the network might have to turn off their machines, particularly those paying hosting rates of $0.07 per kWh or more,” Mellerud said, adding that a large concentration of these inefficient miners are located in the United States.

As a result, Mellerud expects some of Bitcoin’s hash rate to shift from the U.S. to countries with cheaper electricity rates, particularly in Africa and Latin America.

Profitability concerns resurfaced in late January when Cantor Fitzgerald reported that 11 publicly-listed Bitcoin miners wouldn’t mine profitability post-halving if Bitcoin’s price remained around $40,000 (the price of Bitcoin at the time).

Cantor Fitzgerald’s “all in per coin” metric refers to the total costs a Bitcoin miner would incur in producing a single Bitcoin, including electricity costs, hosting fees and other cash expenses.

But with Bitcoin’s price now sitting at $51,000, only four of the 13 mining firms now fall under the profitability threshold.

However, head analyst at Bitcoin mining firm Blockware Solutions, Mitchell Askew, told Cointelegraph that most U.S. public miners would operate at low enough electricity rates to remain profitable, especially the firms that bought more efficient machines throughout the bear market.

Askew countered Mellerud’s argument that most inefficient miners are based in the U.S., saying they only comprise a minor share of Bitcoin’s total hash rate. As a result, any hash rate lost in the U.S. would be negligible.

However, even in the event of unprofitability, Askew says a few reasons will prevent U.S. miners from moving offshore.

“[Many of them] are locked into a fixed hosting contract in which they must continue to mine regardless of profitability,” while others mine for the sole purpose of stacking non-Know Your Customer Bitcoin and are less concerned with profitability, Askew said.

Mellerud touted Ethiopia, Nigeria and Kenya as the best-positioned African countries to capture a larger share of the hash rate should a mining migration event unfold.

Ethiopia, in particular, has a “massive hydropower surplus” and has several Chinese miners moving there to mine, said Mellerud, who expects the African country to pick up 5–10% of Bitcoin’s total hash rate over the next couple of years.

Meanwhile, Mellerud said Argentina and Paraguay are the most promising mining countries in South America.

3. Will Stacks L2 Unlock Bitcoin’s Multi-billion Dollar DeFi Economy?

Stacks (STX), a leading Layer 2 network on Bitcoin (BTC), is garnering investor interest ahead of a key network upgrade dubbed “Nakamoto” that could become a catalyst event in unlocking the multi-billion dollar DeFi potential of Bitcoin.

April 2024 will be a defining month for Stacks, with the network slated to implement the Nakamoto upgrade in the same month as the highly-anticipated Bitcoin halving event.

Why is the upcoming Stacks upgrade important? Will the STX crypto add to its 70% year-to-date gain?

What is Stacks (STX)?

To fully grasp the importance of the upcoming Nakamoto upgrade, we first need to learn how it functions.

Stacks is a blockchain layer that brings smart contract functionalities and decentralized applications (dApps) to Bitcoin. It uses the Bitcoin blockchain as a settlement layer and enables the use of BTC beyond peer-to-peer payments and store-of-value.

All Stacks blocks are recorded on Bitcoin, enabling transactions to be publicly visible on the Bitcoin blockchain. Concurrently, smart contracts on Stacks can read the Bitcoin state and can be triggered by Bitcoin transactions.

Stacks uses a consensus mechanism called proof-of-transfer where miners submit bids in BTC on the Bitcoin blockchain to win the chance to create the next block. The block creator earns block rewards in STX.

The BTC committed by miners for block building is distributed to a network of STX stakers (called Stackers) for participating in consensus. Stackers are responsible for keeping a check on miners.

They are responsible for approving and validating newly proposed blocks. The responsibility and BTC rewards of Stackers are expected to increase following the introduction of a token called sBTC (More on that later).

Stacks features customizable execution layers called subsets that support smart contracts and virtual machines. Decentralized applications can customize their subnets to their needs and can make tradeoffs between decentralization and performance.

Why is the Stacks Nakamoto Upgrade Significant?

The Nakamoto upgrade is seen as a key upgrade not only for the L2 network but also for the growth of DeFi activity on Bitcoin. Here is why the upcoming Nakamoto upgrade is a key moment for Stacks and the Bitcoin ecosystem:

1. Growth of Bitcoin DeFi

Bitcoin’s lack of programmability has restricted BTC from being used as a store-of-value cryptocurrency. To unlock the value of the world’s most valuable blockchain, L2 networks can bring smart contract programmability to the rigid Bitcoin network, enabling decentralized exchanges, crypto lending, and other DeFi activity.

Although Stacks is the leading L2 on Bitcoin, the network is still nascent and faces issues such as slow transactions, security vulnerabilities, and maximal extractable value (MEV) issues. The Nakamoto upgrade will address these problems creating better end-user and developer experience, which will ultimately accelerate the growth of DeFi on Bitcoin.

2. Precursor to sBTC

Nakamoto upgrade will prepare Stacks for a highly-anticipated feature called sBTC, which the project said will solve a “holy grail” problem for a decentralized BTC pegged token that does not exist in the market today.

sBTC is a decentralized pegged BTC token on the chain that is operated by a fully permissionless, decentralized, dynamic set of crypto-incentivized Stackers.

An equivalent amount of sBTC tokens will be minted when users send BTC to a peg wallet on the Bitcoin chain. The sBTC token is similar to wrapped Bitcoin (wBTC) on Ethereum, but without centralized actors enabling and managing the peg between the base and mirror tokens.

Applications and end-users will be able to use sBTC for decentralized Bitcoin lending, Bitcoin-backed stablecoins, and other DeFi activity without compromising the security and decentralization promises of Bitcoin.

3. Faster Transactions on Stacks

At the time of writing, the block times of Stacks are as slow as the block times on Bitcoin. A single block is created every ten minutes due to the protocol only allowing one block proposer per Bitcoin block.

Following the Nakamoto upgrade, a miner will be able to produce many Stacks blocks per Bitcoin block instead of one. According to the Nakamoto upgrade draft, the time taken for a Stacks transaction to be mined within a block will reduce from ten minutes to seconds.

4. Increased Security by Anchoring to Bitcoin

Nakamoto upgrade will bring the Stacks L2 and Bitcoin L1 ever closer. The upgrade will require miners to add the indexed block hash of the latest block to their bidding transactions submitted on the Bitcoin blockchain (as explained earlier, Stacks miners bid in BTC to win a chance to create the next block).

This process will anchor Stacks’s chain history to Bitcoin, ensuring that Stacks blocks and transactions are protected by 100% of Bitcoin’s mining power. According to the Nakamoto upgrade draft, altering a transaction will be as hard as reversing a Bitcoin transaction following the upgrade.

5. Bitcoin Miner MEV Resistance

Bitcoin miners mine Stacks to increase their mining profits. The Stacks mining process is rather seamless for Bitcoin miners as bids to win the chance to mine blocks are submitted on the Bitcoin blockchain in BTC.

It was discovered that whenever F2Pool – one of the biggest Bitcoin mining pools in the world – created Bitcoin blocks, F2Pool would censor rival Stacks block-building bids and only include their bid in their Bitcoin block.

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Harvey CHEN