What happens when the block reward halves to 25?

[fivemileshigh]

Sometime later this year, the block reward will halve to 25. Assuming half the freshly mined btc is sold for fiat(as the poll of a tiny sample seems to show) that represents a supply of 3600btc/day to be sold for fiat. (this will be halved this year). The total daily transaction volume at MtGox and tradehill combined is roughly 100,000., varying quite a bit. Assuming miners will still sell half their mined btc and trade volume will still be 100,000, this means that when the change happens, the supply of btc will drop by only 1.8% or less. In other words, the price should not change that much. However, miners will have their revenue drop by 50% If one's mining ops is not making much money before the change, it will be a money-losing proposition for most, unless something else changes or I am simply wrong. Penny for your thoughts.....

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[Mousepotato]

This is one instance where there's an argument for alt block chains, if for no other reason than to give us an idea of how the chain behaves when you diminish the reward.  A quick look at the history of prices of SolidCoin when it reduced block rewards tells us that the price of each coin increases whenever this happens.  I'm uncertain whether you can draw any parallels about the exact ratio of block reward reduction and market price though.

[Brunic]

If there's no panic(or bubble, or special events), it will gradually forces the price higher. You'll not see a big difference on a small period, but on a longer period, it will affect the price.

It will probably cause a bunch of miners to lose their profitability, and my guess is that some will quit the market. If miners quit the market, it will force the difficulty down, giving more Bitcoins to those who stay, helping them stay profitable.

But it could also create a panic. "Oh my god, there's going to be less Bitcoins, let's buy them!" sort of thing. In that case, well, everything can happen.

My call? My entire being except my instinct tells me that there will be no panic. My instinct tells me that people are going to freak out and create Bitcoin Bubble 2.

[grue]

My call? My entire being except my instinct tells me that there will be no panic. My instinct tells me that people are going to freak out and create Bitcoin Bubble 2.

BUY NOW! profit in 2012

[DeathAndTaxes]

Miners will be equally profitable.  If price remains static then profits will drop massively and the marginal miners will get squeezed out.  When they quit difficulty will fall and the remaining miner's revenue will go up.

To a miner difficulty alone is irrelevant.
To a miner price alone is irrelevant.
All that matters is the ratio (price / difficulty).

From a miner's perspective the drop from 15 USD:BTC to 8 USD:BTC is really no different than the drop from 50 BTC / block to 25 BTC / block.

Moral of the story:
Don't be the marginal miner.
Is your power rate > $0.10 per kWh?
Is your efficiency less than 2 MH/W?

If either one is true you might be the marginal miner.
If both are true well your fucked you ARE the marginal miner.

[Stephen Gornick]

Let's say maybe a third of the miners quit the minute the block reward drops to 25 BTC.   As a result the blocks confirm in 15 minutes instead of in 10 minutes each.  Three weeks later difficulty adjusts back to every 10 minutes.

[Brunic]

Let's say maybe a third of the miners quit the minute the block reward drops to 25 BTC.   As a result the blocks confirm in 15 minutes instead of in 10 minutes each.  Three weeks later difficulty adjusts back to every 10 minutes.

And maybe next year, miners will have nice software that's going to sort the transactions, to pick up the ones with a fee included and delay those without fees, forcing people to add fees to their transactions, and give a reason for miners to do their jobs 

[Stephen Gornick]

And maybe next year, miners will have nice software that's going to sort the transactions, to pick up the ones with a fee included and delay those without fees, forcing people to add fees to their transactions, and give a reason for miners to do their jobs  

As long as at least a small fraction of miners accept the no-fee transactions as well, even those transactions will eventually make it into the blockchain.  i.e., miners can try to force fees, but that action won't have much of an effect on the total amount of fees being paid.  The BTC generation reward will likely remain to be the primary incentive [edit: rather than transaction fee revenue] to miners for some time yet.

[DeathAndTaxes]

And maybe next year, miners will have nice software that's going to sort the transactions, to pick up the ones with a fee included and delay those without fees, forcing people to add fees to their transactions, and give a reason for miners to do their jobs  

As long as at least a small fraction of miners accept the no-fee transactions as well, even those transactions will eventually make it into the blockchain.  i.e., miners can try to force fees, but that action won't have much of an effect on the total amount of fees being paid.  The BTC generation reward will likely remain to be the primary incentive [edit: rather than transaction fee revenue] to miners for some time yet.

Well it depends on how many miners.

For example:
if 50% of network includes your transaction in the next block, your 1 confirmation time is now 20 minutes.
if 25% of network includes your transaction in the next block, your 1 confirmation time is now 40 minutes.
if 10% of network includes your transaction in the next block, your 1 confirmation time is now 100 minutes.
if 4% of network includes your transaction in the next block, your 1 confirmation time is now 4 hours.

On edit:  Corrrection the % of network including the transaction doesn't directly affect 2+ confirmation times, only the first confirm time.

I agree though that as a practical matter it is unlikely one will be able to organize enough miners to push transaction fees higher.  Transaction fee rules likely need to be "revamped" to support a secure network in the face of falling subsidies. Honestly though I don't think it will really become critical until the cut to 6.25 BTC.  

[mtminer]

And maybe next year, miners will have nice software that's going to sort the transactions, to pick up the ones with a fee included and delay those without fees, forcing people to add fees to their transactions, and give a reason for miners to do their jobs 

As long as at least a small fraction of miners accept the no-fee transactions as well, even those transactions will eventually make it into the blockchain.  i.e., miners can try to force fees, but that action won't have much of an effect on the total amount of fees being paid.  The BTC generation reward will likely remain to be the primary incentive [edit: rather than transaction fee revenue] to miners for some time yet.

Well it depends on how many miners.

For example:
if 50% of network hashes your transaction your 1 confirm time is now 20 minutes and the magic 6 confirm is 2 hours.
if 25% of network hashes your transaction your 1 confirm time is now 40 minutes and the magic 6 confirm is 4 hours.
if 10% of network hashes your transaction your 1 confirm time is now 100 minutes and the magic 6 confirm is 10 hours.
if 4% of network hashes your transaction your 1 confirm time is now 4 hours and the magic 6 confirm is one day.

I agree though that as a practical matter it is unlikely one will be able to organize enough miners to push transaction fees higher.  Transaction fee rules likely need to be "revamped" to support a secure network in the face of falling subsidies. Honestly though I don't think it will really become critical until the cut to 6.25 BTC. 

That is interesting only the pool operators will be able to effectively make a change like that. Would only need 2-3 of the top pools.

[[Tycho]]

As long as at least a small fraction of miners accept the no-fee transactions as well, even those transactions will eventually make it into the blockchain.  i.e., miners can try to force fees, but that action won't have much of an effect on the total amount of fees being paid.  The BTC generation reward will likely remain to be the primary incentive [edit: rather than transaction fee revenue] to miners for some time yet.

Well it depends on how many miners.

For example:
if 50% of network hashes your transaction your 1 confirm time is now 20 minutes and the magic 6 confirm is 2 hours.
if 25% of network hashes your transaction your 1 confirm time is now 40 minutes and the magic 6 confirm is 4 hours.
if 10% of network hashes your transaction your 1 confirm time is now 100 minutes and the magic 6 confirm is 10 hours.
if 4% of network hashes your transaction your 1 confirm time is now 4 hours and the magic 6 confirm is one day.

Something is wrong with your calculations. 6 confirms is 1 confirm + 50 minutes on average.

[DeathAndTaxes]

Something is wrong with your calculations. 6 confirms is 1 confirm + 50 minutes on average.

Oops.  Fixed.

[Brunic]

I agree though that as a practical matter it is unlikely one will be able to organize enough miners to push transaction fees higher.  Transaction fee rules likely need to be "revamped" to support a secure network in the face of falling subsidies. Honestly though I don't think it will really become critical until the cut to 6.25 BTC.  

When all the miners will see their pay being cut down in half, I'm pretty sure a couple of them will start looking for a way to manage transactions fees. 

[Drsmite]

I fear that the block reward halving may actually occur on 12/12/12, the dreaded end of the Mayan calendar. What this means for humanity is unknown. I've buried a few hundred packages of ramen noodles (stuffed into my sleeping bag) in the back yard just in case. I sure hope these Mayans get their stuff together before then.

It's actually 12/21/12.  We wouldn't want you devouring your ramen before you actually need to.

[Syke]

Dibs on the beef ramen.

[Fiyasko]

Miners will be equally profitable.  If price remains static then profits will drop massively and the marginal miners will get squeezed out.  When they quit difficulty will fall and the remaining miner's revenue will go up.

To a miner difficulty alone is irrelevant.
To a miner price alone is irrelevant.
All that matters is the ratio (price / difficulty).

From a miner's perspective the drop from 15 USD:BTC to 8 USD:BTC is really no different than the drop from 50 BTC / block to 25 BTC / block.

Moral of the story:
Don't be the marginal miner.
Is your power rate > $0.10 per kWh?
Is your efficiency less than 2 MH/W?

If either one is true you might be the marginal miner.
If both are true well your fucked you ARE the marginal miner.

Hey! Dont forget about us miners that dont "pay" for electricity, Mommy does that..
and..
HEY!, dont forget about the noobs that sell at (any and every) price just to "get rid of this worthless 'coin' and get some (fiat) Real Money"
Or is it that either of the two suggestions that i have stated are Negligible to the overall market?
This peice is always the Hate card for me... Stupid people that just want to "get rid" of thier coins... and "just get money!!!"
The price could be $20, Then Three days later if it's $9, They still fucking sellout, Just Cause they want 'Real money' that 'Doesnt fluctuate'
They have no damn care for they're own market impact! And it hurts the market!

[rph]

IMO the block reward reduction "singularity" is one of the only real design flaws in Bitcoin.

Halving the reward in one shot will create an incentive for rational, profit-maximizing miners
to organize a 51% attack on the network, to maintain or even increase their mining profits
through evil means.

This possibility exists even today of course, but miners seem a lot more likely to organize and
attack right after (or right before) the mainstream network kicks them in the nuts
by halving the reward.

Maybe we will see a fork of BItcoin, which keeps the block reward at 50BTC, with a very high %
of the mining power moving to that - basically playing chicken with users to try
to make them switch to the 50BTC-for-life fork, by reducing the hashrate on the 25BTC
network to the point where someone else can 51% attack it.

To minimize these risks - the block reward should have been constant, or reduced gradually,
a little bit each block. People are less likely to notice, protest, and organize
against a gradual change. That is how governments become increasing large and oppressive,
fiat currencies become increasingly worthless, etc.

-rph

[rampone]

Beware of block reduction!!!

[DeathAndTaxes]

To minimize these risks - the block reward should have been constant, or reduced gradually,
a little bit each block. People are less likely to notice, protest, and organize
against a gradual change. That is how governments become increasing large and oppressive,
fiat currencies become increasingly worthless, etc.

Hindsight being 20/20 and all but this is something I brought up in the past.  A continual decaying function would have been useful for determining block reward.  One would think some alt-coin would try it out but it seems alt-coins exist solely to be pump and dump junk.

[cbeast]

In Bitcoin time that is years away. There will be many bubbles, innovations, and scams before that happens.