Ahead of the Merge update that will turn off the PoW consensus mechanism for good, Ethereum is facing a "once-in-a-lifetime" phenomenon marked as a "Triple Halvening." Blockchain engineer Montana Wong explains what this really is.
Halvening itself is a concept applied to the Bitcoin mining algorithm that reduces the amount of coins awarded in each block by half every few years. The concept creates deflationary pressure on the price of the asset on the market, as miners provide less selling pressure because of the decreased supply in their hands.
The halvening follows the simple economic rule of supply and demand, which is why we are seeing the start of a bull cycle prior to the halvening.
What about Ethereum?
Instead of the automatic reduction of miner rewards, Ethereum uses software updates that the community approves or disapproves of. With the help of manual updates and a couple of EIPs, block rewards for ETH miners dropped from 5 to 2 ETH.
Currently, Ethereum blockchain miners produce 6,500 new blocks every day, which gives us around 13,000 ETH issuance. With the Merge update, Ethereum's issuance is going to drop exponentially, and this is under the radar of most retail investors.
To summarize, ETH is experiencing— Montana Wong (@Montana_Wong) August 8, 2022
- Exponential reduction in issuance rate
- Reduction in supply due to burning of a portion of every transaction fee
- Reduction in available supply due to staked ETH being locked before withdrawals are implemented
Annual issuance of ETH is going to drop from 4.3% to 0.4%, which is around a 10x reduction in selling pressure from miners. In addition to the absence of mining, the Ethereum supply is constantly reduced with the help of the burning mechanism and the supply reduction due to staked ETH being locked as there are no withdrawals implemented yet.
Three forces combined: drop in issuance, burning and the ETH lock create a "Triple Halvening" phenomenon that will most likely have an enormous impact on the coin's future.