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Block rewards will reduce from 3 ETH to 2 ETH after the Constantinople hard fork on January 16th. Here’s what’s happening and what it means.
A Brief Overview
On December 6th, 2018, the Ethereum core dev team decided to move forward with the Constantinople hard fork. The update will be implemented at the 7,080,000 block, which is estimated to occur on January 16th, 2019. You can read about Constantinople here.
Constantinople will implement five Ethereum Improvement Proposals (EIP). One of those proposals is EIP 1234, which includes an adjustment to block rewards. Currently, when a block is successfully mined on the Ethereum blockchain certification, the miner receives 3 ETH as a reward. After Constantinople, miners will receive 2 ETH per block as a reward. This reduction from 3 ETH to 2 ETH is a reward adjustment of -33%, hence the “Thirdening.”
This is not the first time rewards have been adjusted for Ethereum. In late 2017, the Byzantium hard fork adjusted block rewards from 5 ETH to 3 ETH. The Bitcoin blockchain certification uses a similar strategy, reducing the block rewards by half every 210,000 blocks towards its eventual supply limit of 21 million Bitcoin. Unlike Bitcoin, Ethereum does not have an established limit of the number of ether in circulation. Overall, however, the reductions in block rewards are in an effort to reduce inflation by reducing the newly-available supply of ETH.
The Economics of Block Rewards*
Given average data from etherscan over the past year, the current supply of ether increases by 20,300 ETH/day. To break this down:
5,900 reg blocks * 3 ETH/block = 17,700 new ETH/day from reg. blocks
1,090 uncle blocks * 2.42 ETH/block = 2,600 new ETH/day from uncles
17,700 + 2,600 = 20,300 total new ETH/day in rewards
20,300 * 365 = 7,400,000 total new ETH/year in rewards
When rewards reduce to 2 ETH/block, there will be 33% fewer ETH rewarded for each regular block mined (average uncle block rewards will likely decrease from ~2.42 ETH/block to ~1.63 ETH/block). Assuming the number of blocks remains fairly consistent, we can determine:
(Daily Rewards with 3 ETH) * (0.66) = Daily Rewards with 2 ETH
(20,300 ETH/day) * (0.66) = Daily Rewards with 2 ETH
13,400 ETH/day = total new ETH/day in rewards
13,400 * 365 = 4,890,000 total new ETH/year in rewards
To summarize: after the Constantinople hard fork, total new ETH supply will reduce from 20,300 ETH/day to 13,400 ETH/day and from 7.4m ETH/year to 4.9m ETH/year.
Inflation & Block Rewards
Table 1 below demonstrates rough inflation rates of ETH supply year-to-year, and projecting forward to 2020 and 2021 given the calculated issuance rate of 4,890,000 ETH/year (and assuming there are no future block award adjustments). After Constantinople, Ether’s inflation rate will drop from 7.7% to 4.8%, for a change of -2.9%.
The image below demonstrates the inflation changes alongside hard fork and protocol updates in the past and planned for the future. As issuance and supply eventually stabilize in parallel, the limit of ether will rely on the demand the market has for it.
Miner Response to Reward Adjustment
A natural reaction to the news of reduced rewards for miners might be: “If miners receive fewer ETH for their efforts and energy output, won’t they leave the network?” The question is not unfounded; in general, miners are relatively blockchain certification-apathetic. They will devote their energy towards the highest-ROI chains, where the profit between cost of energy spent and reward in crypto is greatest.
Miner behavior, however, is not so easily answered. There are innumerable factors influencing where miners direct their energy. Around the time of the Constantinople hard fork, there are two key factors affecting how miners will respond to the reduction in block rewards: 1) price of electricity, and 2) hashrate, difficulty, and price of ETH.
Price of Electricity
The price of electricity is one of the greatest indicators of miner behavior.
With estimates at today’s price, the profitable threshold is at ~$0.13 KwH. Anyone in countries or living conditions with electricity costs lower than that is still making a profit. Figure 1 shows the costs for electricity in KwH in just a few selected countries globally. The rates in this graph are home usage rates. Larger miners are in different energy use brackets and often pay lower commercial rates.
Hashrate, Difficulty, & Price of Ether
Hashrate is a measure of the rate at which miners are creating hashes in their attempts to find the hash with the ‘correct’ order of numbers that validates their block and rewards them ETH. Block difficulty is a measure of how difficult it is to find that correct hash, i.e. with higher difficulty, miners expend more energy trying to validate a block. As more miners join the network, the number of hashes being produced across the network increases, i.e. the hashrate increases. Higher…