Bitcoin halving is only the halve of it

Many words were written last week on the occasion of the Bitcoin halving on May 11. Since this is only the third halving in Bitcoin history, it’s a good time to pause and explain a thing or two to newcomers searching for information on cryptocurrency and blockchain technology.

First, the “halving” refers to a change in the amount rewarded to Bitcoin miners whose computer rigs do the calculations that secure transactions in blockchain. I know, there are at least four things in that sentence that need explaining. We’ll get there. But simply stated, for my investment in computers that do those calculations, and the cost of running those computers, and the cost of cooling those computers (data centers for crypto mining are insanely hot), I used to receive X Bitcoins as a reward, and now I receive ½-X. There are new technologies ahead to cut the costs down by reducing computer muscle necessary, but let’s plow ahead.

So what am I being rewarded for doing? What is fascinating about blockchain technology is that it allows parties to a transaction to maintain privacy and security while intentionally leaving many of the details in plain sight, and the “miners” who perform the mathematical puzzle-building associated with recording those transactions get a Bitcoin reward for doing it. No one gives you the reward, because it is all decentralized and runs automatically.

Encryption, explained

Simply stated, I trade with my neighbor. A description of that trade gets submitted to the network, but my identity and my neighbor’s are locked inside our encrypted blockchain wallet addresses that just show up as an indecipherable string of numbers and letters. (The bad rap crypto gets for harboring criminals derives from this aspect of privacy, but any blockchain system eager for official recognition and regulatory compliance will adhere to strict banking rules of Know Your Customer [KYC] and AML [Anti-Money Laundering]). Each transaction is translated into more letters and numbers called a “hash,” because that’s what it is. Try separating the peppers from the onions from the potatoes from the corned beef after you’ve made hash, and you’ll understand what it would be like to try to pry apart meaning from those letters and numbers in a blockchain transaction.

Those individual transactions get bundled into large groups of transactions, which computers encrypt into another indecipherable string of letters and numbers. That’s called a block. That block gets added to a previous block and contains an indecipherable string of letters and numbers representing the previous block. Now you’ve got a chain of blocks, or a blockchain. Transactions are locked to each other within a block. Blocks are locked to each other forwards and backwards. The whole chain gets duplicated hundreds of times on different computer nodes within the network, and is updated every ten minutes, meaning even if you COULD unlock the thing and falsify data you’d have to do it on at least a majority of the computer nodes all at once, or your subterfuge would fail.

So, yeah — it’s safe. And the “miners” whose rigs performed the calculations receive Bitcoin for doing the work. At first, that was 50 Bitcoin. It was halved to 25. Then, halved again to 12.5. The most recent halving last week reduced the reward to 6.25 Bitcoin for creating a block. The halving occurs automatically after a set number of transactions, roughly every four years.

Why halving?

There are different reasons expressed for why halving exists, but keeping the cryptocurrency from leading to inflation is about the best one. Remember, Bitcoin was invented the last time the country went through an economic crisis, in 2008, when governments just started printing money. Compared to what is happening today, with trillions in U.S. dollars being printed like flyers for “Live DJ night” at the local pizzeria, 2008 was nothing. The theory goes that as the reward for Bitcoin is reduced, it slows the demand for the currency because the cost to mine it overwhelms the demand. As for what the halving does to the value of Bitcoin, it seems there can be a short-term spike (we’ve had one this week), followed by a longer period of Who The Hell Knows. Many “experts” believe the value of Bitcoin could grow enormously in the coming years, but it is quite possible those same experts are also experts in promoting long term growth so they can sell after modest gains, wait until it is low again after sell-offs, buy more, and make the same predictions so they can sell at the high. We’ll never know, since wallet holders are secret.

But to be honest, for many people excited by blockchain technology and its potential, what Bitcoin was worth yesterday and what it is worth today and what it will be worth in five years and how much we earn for performing transactions is all way less interesting than what we can do with a transactional system that is transparent but borderless.

Let’s get real

Blockchain currencies (there are others besides Bitcoin, and could someday be many more) give people without bank accounts a way to receive and make digital payments. There are 1.7 billion of those people in the world. People can make micro investments in businesses in developing nations without complex and costly broker relationships. Parties to transactions can create smart contracts that exchange value as they exchange work, services, or goods, eliminating vast armies of middle men and women who could introduce fraud, delay, theft, or mistakes into the system. Individual investors could purchase shares in municipal projects directly and participate in the building of their local infrastructure. You could send “money” to the family back home without dealing with currency transfers, delays, and fees.

There’s more. Your medical history can be secure in blockchain and yet accessible to any provider you deem worthy, at your election. And speaking of elections, blockchain voting is the obvious answer to remote voting that remains secure and verifiable. We all get to vote, regardless of how many polls they close, and no one coughs on me.

Because blockchain transactions can include huge troves of detail around each operation, cities running municipal operations can learn from resource usage like never before. Every time I get on a bus, that’s a transaction. Every time I use electricity, that’s a transaction. More data around those transactions will promote better monitoring of need and more efficient delivery.

Transactions require some way to record the exchange of value. That’s where the cryptocurrencies get interesting. A little bit of currency is reserved to record each transaction (as value is exchanged), and a little gets created to reward the person building the diary.

That USAGE of cryptocurrency is the real promise of this technology for all of us, not just the people who can benefit from stockpiling it. So happy halving to the miners. And happy future to the rest of us.

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