Ethereum Triple Halving Explained

Have you heard the term “triple halving” floating around the Web3 and Crypto community, but don’t quite have your head fully wrapped around it? Let us explain.

Some time tentatively around September 19th, 2022, the Ethereum Blockchain is going to transition to Ethereum 2.0. The biggest aspect of this change is that the blockchain will change from a “Proof of Work” to a “Proof of Stake” blockchain.

Now, we need to quickly define those terms. Proof of Work is a system in which a large group of crypto miners compete to solve cryptographic equations to validate transactions on a blockchain. 1000s of miners churn high-powered computing rigs trying to be the first one to crack the code. The winner gets the reward for verifying the transaction - they get some ETH. This is how every ETH transaction happens. It consumes a tremendous amount of energy.

On the other hand, Proof of Stake is when one person or “validator” is chosen at random to validate the transaction. Instead of 1000s if not millions of miners expending a ton of energy competing to solve the code, a single person is just chosen to do it. Proof of Stake consumes roughly ~99% less energy than Proof of Work.

Now the Ethereum blockchain will operate under the Proof of Stake model. So what is “triple halving”?

Every few years, Bitcoin goes through a “halving” where the amount of Bitcoin rewards yielded from mining is cut in half. From 2010 to 2013, the reward for solving an entire Bitcoin block was 50 BTC. From 2013 to 2016 it was 25. From 2016 to 2020 it was 12.5, and from 2020 to the present it’s been 6.5.

Why?

This periodic halving of rewards increases the value of Bitcoin - as rewards take increasingly more work to attain, the amount of Bitcoin mined into the market lowers Year Over Year, which increases the value of Bitcoin as increased scarcity is obtained.

Ethereum has never worked this way. Lowering of Ethereum rewards for mining has been decided by the community since the beginning, and though the rewards HAVE lowered from 5 ETH per block solved at the beginning of ETH’s life to 2 ETH currently, the amount of Ethereum added to the market has actually increased by about 4% every year.

The reason why Ethereum adopted this model was actually very smart. At the time when Ethereum came into existence, there was already stiff competition from other blockchains - especially Bitcoin. Why would you mine on the ETH blockchain when you could mine on BTC? The Ethereum system insured that rewards were always very high for mining - which incentivized people to mine the ETH blockchain INSTEAD of their many other, more popular options. The sheer amount of miners attracted to Ethereum guaranteed that the blockchain was more secure and stable, which attracted a large amount of Bullish traders.

Now we get to the “Triple Halving.” Transitioning to Ethereum 2.0, or “The Merge” as it’s being called, is expected to cut the amount of Ethereum supply in the market in half three times.

Halving #1: Because Proof of Stake causes far less energy to be consumed and needs far less miners to solve blocks of Ethereum, the blockchain can pay smaller rewards to validators while still incentivizing them to keep the chain secure and stable. Issuance of ETH rewards will likely drop from 4.3% annually to just 0.4%.

This reduction in operational costs to maintain the blockchain will decrease daily sell pressure on ETH holders by 10x. Less ETH will be sold daily, so there will be significantly less ETH in the market - by roughly half.

Halving #2: Along with “The Merge” there is also a new software update to the ETH blockchain called EIP-1559. This update will “burn” a portion of fees from every single transaction done on the blockchain.

Burning is when a certain amount of ETH is sent to a burn wallet where it can never be accessed by anybody ever again - effectively removing it from circulation. Burns are good because they reduce the supply of a token or coin, which in effect increases its value.

With this new software update, some ETH is automatically burned with every single transaction - which will effectively dramatically reduce the ETH supply over time. Again…by about roughly half.

Halving #3: Finally, with the transition to Proof of Stake comes to ability to stake your ETH - you can basically loan any amount of the ETH you hold to a validator as collateral to help them verify transactions. The incentive for staking with a validator is that you are given a percentage of their ETH rewards for solving blocks of the chain.

When you are staking ETH, you cannot access it, trade it, or spend it. It’s locked up - similar to lending stocks. And crypto holders love staking for the passive income it generates.

This staked ETH is effectively removed from the supply, and it’ll likely stay out of circulation indefinitely as holders continue to want to earn passive income on their assets.

The compound effect of these three “halving” events should guarantee that there will be SIGNIFICANTLY less Ethereum in circulation post-merge to Ethereum 2.0. Reduced by roughly half three times.

And what happens when there is less supply? Line goes up. After September, it should be really interesting to be an ETH holder.

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