As the countdown to the fourth Bitcoin (BTC) halving continues, there is growing concern among experts that this event could increase the risk of centralization, potentially posing a threat to the blockchain network.
Every four years, the block reward for Bitcoin miners is halved in order to maintain the asset’s scarcity. This event is known as halving. In the past, miners have continued to operate at full capacity and have even increased in numbers following the last three reward reductions, thanks to the rising value of BTC.
However, there are questions about whether the current BTC price is sufficient for miners to sustain operations, or if there could be centralization and existential risks looming after the upcoming halving event.
In an interview with crypto.news, Lani Dizon, co-founder of Ryo Coin, expressed that market dynamics are subject to change and unforeseen events could have significant impacts. Dizon believes that while some miners may find the reduced block reward “challenging,” especially if the price does not immediately or adequately increase to offset the reduction in rewards, the “Bitcoin network is designed to adapt.” She added:
The main concern surrounding the centralization of Bitcoin revolves around how miners are compensated for their role in keeping the network operational. With the upcoming halving reducing the block reward by 50% – dropping from 6.25 BTC to 3.125 BTC – the high price volatility of Bitcoin could make it difficult for individual miners to be adequately compensated to maintain their nodes in challenging conditions.
Historically, the price of BTC has reached new all-time highs approximately a year or 18 months after each halving event. Here is how the Bitcoin price reacted following each halving:
– First halving on Nov. 28, 2012: Bitcoin was trading at $12.35 and surged to $964 a year later.
– Second halving on July 9, 2016: Bitcoin’s price increased from $663 to $2,500 in around one year.
– Third halving on May 11, 2020: BTC was trading at around $8,500 and reached almost $69,000 in just 17 months.
Lucian Calin, a former data center technician at Argo Blockchain, mentioned that some miners who are over-leveraged might struggle to survive the halving due to high overhead costs or substantial debt, but in the end, things will balance out. He stated:
By reducing Bitcoin’s block reward through halving, small-scale and individual miners could face financial strain due to the expensive nature of mining. Smaller miners may exit the market if they lack the necessary resources, potentially paving the way for larger mining companies to dominate, leading to a more centralized network control.
Bitcoin’s centralization could pose a significant threat to the global financial system, with BTC exchange-traded funds (ETFs) registering over $11.2 billion in total net flows. This could expose the Bitcoin network to a 51% attack and potentially result in a single entity gaining full control over the blockchain.
Despite these concerns, Lani Dizon believes that Bitcoin’s decentralized nature is specifically designed to prevent any single entity from gaining control over it. The network relies on a proof-of-work (PoW) consensus mechanism where miners compete to validate transactions and secure the network. Dizon added:
Christopher James Crowell, a Bitcoin miner and the director of business development at Canaan, shared his perspective that Bitcoin mining is a global phenomenon that cannot be controlled by a central entity. Crowell told crypto.news:
In the event of centralization occurring, experts have varied opinions on how governments might respond. Dizon suggested that governments would view any attempt by a single entity to control Bitcoin as a significant threat to financial stability and may take regulatory actions to prevent the concentration of power. She commented:
On the other hand, Calin believes that due to the international nature of Bitcoin, governments may be limited in their ability to take action. He said: