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Ethereum Halving – All You Need To Know

Sep 24, 2024

Transition to Staking

Just like Bitcoin, for years Ethereum has been using proof-of-work (PoW) as a consensus mechanism. PoW safeguards the network from spam attacks through requiring the nodes to perform some math calculations in order to validate the transaction or perform any other action on the network. As the calculations are difficult and require much resources, spammers cannot overtake the network. To do so they will need to control over a half of all the hashing power involved in transaction validations (i.e., mining).

Although mining was good for securing the Bitcoin network, it proved to be too harmful towards the environment as it consumes too much energy. On top of that, Ethereum is infamous for its problems with scalability that make transactions of Ethereum slow and the transaction fees high. In 2017, the Ethereum-based video game Crypto Kitties caused a serious congestion slowing down the transactions on the network.

Image source: Medium

At some point the Ethereum dev team decided to switch consensus mechanism from proof-of-work to proof-of-stake, the model that doesn’t require mining at all. In staking, no one is calculating anything. Participants lock up their tokens (stake them) for certain amounts of time and the system randomly chooses the node to validate the transactions. The rewards are distributed between all the stakers. The reward amount depends on the stake size. In 2022 Ethereum switched to proof-of-stake. The transition was called the Merge.

After transition, the ETH mining operations started to cease. Now, the Ethereum halving is not the same as the Bitcoin halving as Bitcoin halving is associated with mining rewards while Ethereum halving is a complex multi-layered process associated with staking rewards and transaction fees.

What Is Ethereum Halving & How Does It Work?

Ethereum halving (or Ethereum triple halving) is a process that will eventually lead to the slower token emission (the staking rewards cut). The process started several years ago and the Merge (a transition from PoW to PoS) was a huge part of it. Unlike the Bitcoin halving that takes place at a certain moment predicted before-hand pretty accurately, the Ethereum triple halving is a stretched process that doesn’t have a strict timing. It’s already going on and is yet to finish.

A notable change in the Ethereum system was the 2022 EIP 1559 (Ethereum improvement proposal 1559). After implementation of this proposal the transaction fees are burnt instead of moving to miners. It made mining less profitable but set the mechanism that turns Ether into a deflationary asset. Ether has no supply hard cap so the tokens volume has been growing all the time. Now, every transaction decreases the amount of tokens in circulation, making Ether scarcer and thus potentially more valuable.

So, in general, the three concepts within the Ethereum triple halving are:

Transition to proof-of-stake (replacing the mining rewards with staking rewards)
Transaction fees burn (increasing the ETH scarcity, moving to a deflationary model)
The token issuance reduction (cutting the staking rewards)

As of September 2024, the transition to proof-of-stake is complete, the fee burn is active, and the token issuance reduction is discussed. The experts note that ¼ of all the ETH supply is staked. This amount is more than enough to provide the security of the Ethereum network. The inflation rate is close to zero.

However, as the new mechanisms (e.g., delegated staking, etc) makes it easier for more people to participate in validation. It may lead to excessive share of the staked ETH in relation to the total supply. One of the possible ways to keep the balance is correcting the staking reward amount.

The Impact of Halving

There are different consequences of the Ethereum triple halving for different groups of the Ethereum ecosystem participants. The ETH miners weren’t pleased by the reduction in mining rewards, transaction fee burns (these fees were making a fair share of their profit), and, finally, the total cease of the Ether mining. Mining equipment is costly. Without the opportunity to continue mining, this equipment costs can’t be covered anymore. Some miners switched to mining other cryptocurrencies while others preferred to quit mining. It’s fair to say that miners were well-informed about the upcoming switch to proof-of-stake model a long time before the actual transition.

Image source: TABInsights

The ETH investors went through a shaky period after the Merge. The Bitcoin halving is always the event that drives the price up. The Ethereum triple halving is different. There was no confidence that the Merge will cause the ETH rally and in fact the ETH price went through a bear market following the Merge. As some expected the price to go up after the Merge, they decided to sell their ETH tokens. As a result the ETH price dropped even harder.

Image source: Investopedia

The rest of the Ethereum users weren’t affected by the Ethereum triple halving that much. As the market starts to offer more options to stake ETH, people find new ways to capitalize on the Ethereum triple halving using delegated staking, staking-as-a-service, MEV, DeFi platforms, etc.

The Full History of Ethereum Halving

During the proof-of-work phase the Ether block reward didn’t shrink in two like the Bitcoin mining reward. Instead, the Ether mining reward was decreasing after the specific forks were implemented. Initially the ETH mining reward was 5 ETH. In 2017 the reward dropped to 3 ETH after the Byzantium fork. Two years later, the Constantinople fork decreased the ETH mining reward to 2 ETH.

Two of the most important events for the Ethereum triple halving took place in 2022. The first of them was the EIP 1559 implementation in the summer. It set Ethereum on the deflationary track by burning the ETH tokens used for covering the transaction fees instead of sending them to miners as the reward. Miners lost a huge share of their revenue while the inflation rate on Ethereum eventually reached a negative value.

The second event was the Merge which happened on September 15. On that day, the Ethereum mainnet started to use proof-of-stake, reducing the energy consumption by over 99%. The further issuance rate reduction is being discussed.

Conclusion

The Ethereum triple halving is not the same as Bitcoin halving. While Ethereum was utilizing the PoW model and used mining, its reward reduction has always been irregular and situational. At times the difficulty bomb was used to control the ETH emission.

The Ethereum triple halving is a long process that involves the transition to proof-of-stake, fee burns, and the reduction of the token issuance.

In 2022, the conditions for the ETH miners got really severe as the team started to prepare for the network transition to the proof-of-stake consensus mechanism. As of September 2024, the token emission volume is being discussed.

FAQs

Does Ethereum halving propel the ETH price?

Unlike Bitcoin halving, the Ethereum halving doesn’t happen in one moment. The immediate market reaction is not possible. However, the Merge (which is the part of the Ethereum halving) led to the price decline.

Is Ether a deflationary cryptocurrency now?

The Ethereum triple halving made Ether a deflationary currency as the inflation rate is a negligible negative number. EIP 1559 makes every ETH transaction burn the total supply of the currency, making it scarcer.

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