What will happen to the Bitcoin network after the halving?

2. After the halving, the proportion of miners’ income from transaction fees will increase immediately in the short term

When the Bitcoin network undergoes its planned third halving, the block reward will be reduced from 12.5 to 6.25 bitcoins, thereby reducing the proportion of block rewards in miners' total income (total miners' income = block rewards + transaction fees).

The chart below shows how the share of transaction fee revenue for miners jumped after the Bitcoin network’s second halving in 2016.

In addition to the increase in proportion, it is foreseeable that the absolute value of the average transaction fee of the Bitcoin network will also rise briefly after the halving. The main reason is that after the less efficient miners shut down their mining equipment, the computing power of the network decreases, and the difficulty adjustment of Bitcoin requires a certain period (2 weeks).

According to TokenInsight’s analysis, the following two situations are the main factors causing the short-term jump in Bitcoin network transaction fees:

1. In the same difficulty adjustment cycle, while the network computing power remains stable, the network activity increases. Specifically, the interval between block generation remains unchanged, while the average transaction fee increases;

November 2017: Due to a significant drop in network computing power in the short term (factor 2)

August 2017: Due to a significant drop in network computing power in the short term (factor 2)

June 2017: Due to increased network activity (factor 1)

Therefore, we believe that the third halving on May 12, 2020 will result in a short-term surge in transaction fees due to a decrease in computing power. (Factor 2)

In the long run, the activity of the Bitcoin network will determine the proportion of transaction fees. From this perspective, the more congested the Bitcoin network is, the more beneficial it is for miners.

From a longer-term perspective, the majority of miners' future income will come from transaction fees. At that time, the Bitcoin (main) network must become a luxury item, and using the Bitcoin (main) network must be extremely expensive to ensure the security of the Bitcoin network (i.e., the computing power is high enough).

This can also explain why the Bitcoin Lightning Network is not developing fast enough. One of the reasons is that the Bitcoin (main) network is still in a relatively "cheap" stage, and does not need the Lightning Network as a "cheap" secondary network to solve the efficiency problem of the main network.

3. The average interval of blockchain generation will increase in the short term after halving

As some inefficient miners shut down their mining machines, the network computing power decreased, thereby increasing the difficulty of mining on the Bitcoin network at that time, directly affecting the average interval of block generation.

However, once Bitcoin goes through the next difficulty adjustment window, the mining difficulty will be balanced again based on the level of computing power, reaching an average of one block every 10 minutes.

IV. Conclusion

The Bitcoin network is a self-balancing network that will dynamically adjust the network mining difficulty according to the computing power to maintain an average generation interval of 10 minutes for each block. When the network activity is very high or the network computing power is significantly reduced in the short term, network participants have sufficient (economic) motivation to pay higher fees in the short term.