Understanding the Bitcoin Halving
The fourth Bitcoin halving is approaching, and this event may bring some fascinating surprises. This halving marks a reduction in the mining reward from 6.25 BTC per block to 3.125 BTC. These supply reductions occur every 210,000 blocks, or approximately every four years, as part of Bitcoin's gradual, deflationary path toward its ultimate circulating supply limit.
Bitcoin's limited supply of 21 million coins is a fundamental feature. The predictability of this supply and its inflation rate has been a core driver of demand and supply dynamics for Bitcoin as a superior form of money. The periodic halving events are the mechanism that will eventually achieve this finite supply.
Over time, Bitcoin halvings are responsible for driving one of the most basic shifts in the network's incentive structure. The security model transitions from being funded primarily by the block reward (the coinbase subsidy) to being funded, in the long term, mostly by transaction fees paid by users to move bitcoin on-chain.
As Satoshi Nakamoto stated in Section 6 (Incentive) of the white paper:
"This incentive can… 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 transition entirely to transaction fees and be completely inflation-free."
The Historical Price Impact
Historically, halvings have correlated with significant appreciation in Bitcoin's price, which offset the impact of the halved miner subsidy. Miners pay their bills in fiat currency. This means that if the Bitcoin price appreciates sufficiently, the reduction in the number of bitcoin earned per block can be buffered by an increase in U.S. dollar-denominated revenue.
However, the assumption that price appreciation will always buffer miners is not guaranteed. In the last market cycle, the price did not even quadruple from its previous all-time high. The upcoming halving will see Bitcoin's inflation rate drop below 1% for the first time. If the next market cycle performs similarly to the last one, with gains far below historical averages, the halving could have a significantly negative impact on existing mining operations.
This makes fee revenue from transactions more critical for miners than ever before. From a business sustainability perspective, it will remain central as block height increases and successive halvings occur. Either fee income must increase, or the price needs to at least double with each halving to compensate for the reduction in subsidy income. While most Bitcoin proponents are optimistic, the idea that the price is guaranteed to double every four years forever is a questionable assumption at best.
The Role of Ordinals and BRC-20 Tokens
Whether you love them or hate them, BRC-20 tokens and inscriptions have fundamentally changed the dynamics of the mempool. They have pushed average fees from a rough baseline of 0.1-0.2 BTC per block before their existence to a fluctuating average of 1-2 BTC recently—often spiking far beyond these figures.
New Factors Influencing This Halving
The Emergence of Rare "Satoshis"
Ordinals introduce a completely new incentive dynamic for this halving cycle, one that was absent in any previous Bitcoin halving. This dynamic revolves around rare "satoshis" (the smallest unit of a bitcoin). The core idea of Ordinals theory is that specific satoshis from particular blocks can be tracked and "owned" based on an arbitrary interpretation of the blockchain's transaction history. This relies on assumptions about which specific coins were sent to which outputs.
The other aspect of the theory is assigning scarcity value to specific sats. Every block has a coinbase transaction, which creates an Ordinal. However, each block has a different level of importance within this scheme:
- Every normal block produces an "uncommon" sat.
- The first block of each difficulty adjustment period produces a "rare" sat.
- The first block of each halving epoch produces an "epic" sat.
This upcoming halving will be the first since a substantial segment of the Bitcoin user base widely adopted Ordinals theory. In previous halvings, an "epic" sat was never generated in the presence of substantial market demand from a large and developed ecosystem. The market demand for this specific sat could ultimately be valued at a ridiculous multiple compared to fungible satoshis.
The Potential for Chain Reorganization
Within the Bitcoin space, a large market segment's acceptance of this concept creates a powerful incentive. The fact that this single coinbase transaction could be valued orders of magnitude higher than any other encourages miners to potentially reorganize the blockchain immediately after the halving to compete for it.
Historically, a similar situation occurred only once, during the first halving when the block reward dropped from 50 BTC to 25 BTC. Some miners continued trying to mine blocks with a 50 BTC reward after the supply reduction but soon abandoned their efforts after the rest of the network ignored them.
This time, the motivation for a reorganization isn't based on ignoring consensus rules and hoping others join you. Instead, it's based on competing to mine a completely valid block that collectors will赋予 (assign) immense value to due to its "epic" sat.
There is no guarantee such a reorganization will actually happen. However, miners have a strong economic incentive to attempt it. If it does occur, its duration would ultimately depend on the market value of the "epic" sat and whether it can compensate for the revenue lost by fighting over a single block instead of progressing the chain.
Every halving in Bitcoin's history has been a key event that captures attention. However, the circumstances surrounding this one have the potential to make it more dramatic than any before.
How an Epic Battle Could Unfold
In my view, there are several potential ways this could develop.
Scenario 1: Nothing Happens
The first and most straightforward outcome is that nothing unusual occurs. For some reason, miners might decide that the potential market value of the first "epic" sat mined since the widespread adoption of Ordinals theory is not worth the opportunity cost of wasting energy on a reorganization. They may deem it not worth forfeiting the money they could earn by simply mining the next block. If miners believe the extra premium from the Ordinal isn't sufficient to justify abandoning the next block's rewards, they won't engage in a fight.
Scenario 2: Minor Skirmishes Due to Scale
Another possibility involves the nuances of economic scale. Imagine a much larger mining operation can afford to take on more risk from "lost blocks" by participating in a reorganization battle for the "epic" sat. The larger miner, with more capital deployed, can shoulder greater risk. In this case, we might see a few of the largest miners attempt an odd reorganization, while smaller miners don't even try, resulting in minimal actual disruption to the network. This could happen if miners believe they can capture some premium for the Ordinal, but not a massive one that justifies significant network disruption.
Scenario 3: A Major Battle for the Epic Sat
The final scenario is that the market bids up the value of the "epic" sat well in advance. Miners can then clearly see its value far exceeds the market value of the fungible sats within the block. In this case, miners might compete for that specific block for an extended period.
The logic behind not reorganizing the chain is that you are losing money—you're forgoing the reward for mining the next block while still incurring the costs of running your mining operation. However, if the market publicly signals an extremely high value for the "epic" sat, miners can calculate exactly how long they can afford to fight for it. They will know how much time they can spend attempting to reorganize the chain and still achieve a net profit by winning the Ordinal-enhanced coinbase reward. In this scenario, the network could experience considerable disruption until miners approach the point where even successfully mining this block without a reorganization would guarantee a loss.
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Frequently Asked Questions
What is the Bitcoin halving?
The Bitcoin halving is a pre-programmed event that occurs every 210,000 blocks (roughly four years). It cuts the reward miners receive for validating new blocks in half. This controls the issuance of new bitcoin and ensures its total supply will never exceed 21 million coins.
Why is this halving considered different?
This halving is unique due to the emergence of Ordinals and BRC-20 tokens. These have created a secondary market for rare satoshis, specifically the "epic" sat expected to be generated in the first block of the new halving epoch. This introduces a new economic incentive that could lead to unusual miner behavior, such as chain reorganizations.
What is an "epic" sat?
An "epic" sat is a theoretical classification within the Ordinals protocol. It is the first satoshi mined in the first block of a new halving epoch. Due to its extreme rarity and specific timing, collectors within the Ordinals ecosystem assign it a potentially very high value compared to a regular satoshi.
What is a chain reorganization?
A chain reorganization occurs when a miner (or pool) finds a block that diverges from the current main chain. If this new chain becomes longer, the network will abandon the previous blocks and adopt the new chain. This is a normal part of Bitcoin's consensus mechanism but can be exploited if miners have a strong incentive to rebuild history for a specific block.
Could a reorganization disrupt the Bitcoin network?
While a short reorganization is normal, a prolonged and deep reorganization could potentially slow down transaction confirmations and create temporary uncertainty. However, the Bitcoin network is designed to be resilient, and the economic incentives usually ensure that the longest valid chain is accepted quickly.
How do transaction fees play a role post-halving?
After the halving, the block subsidy is cut in half. This makes the transaction fees included in each block a more significant portion of a miner's total revenue. For the mining ecosystem to remain profitable without perpetual massive price increases, fee revenue from transactions needs to become increasingly important over time.