It’s been almost a month since the anticipated Bitcoin halving occurred, even if it feels like months go by as decades in 2020. In this edition of This Week in Crypto: A Data Perspective, we will take a deep dive into the multiple impacts that the Bitcoin halving has had in its underlying blockchain, and explain why — despite the price not skyrocketing yet as many expected — the halving was overall a successful landmark for the top cryptocurrency.
Before the long-take on the Bitcoin halving, though, we will cover another cryptocurrency top of its class that has been making headlines this week: MakerDAO. Leveraging blockchain’s transparent nature, IntoTheBlock is able to extract key on-chain insights that provide a clearer picture of the effects that recent news had on both MakerDAO and Bitcoin. Hope you enjoy it.
MakerDAO’s Busy Week
Decentralized finance (DeFi) powerhouse MakerDAO may be on the verge of a new era. The protocol behind the decentralized stablecoin DAI recently approved the acceptance of its first “real-world assets” as collateral, as covered by The Block (not the same company as IntoTheBlock). Through a vote using MakerDAO’s governance token MKR, token holders supported the option of adding tokenized music royalties and trade invoices as collateral for a “vault,” or a smart contract locking tokens in order to receive a DAI loan.
Even though this may not sound like something revolutionary, being able to borrow money trustlessly and permissionlessly has the potential to expand the reach of finance. Imagine, for example, being a vegetable farmer in a rural area in a developing country. In this scenario, you may not have a government identification and most likely not have access to financial services in case you need them.
If you were able to tokenize your crops and have them validated, you may be able to obtain a loan without having to trust a company or provide any formal identification. While this is still years (if not decades) away, being able to tokenize real-world assets and borrow against them is a large step towards crypto’s broad vision of banking the unbanked.
While this community vote finished on June 8, it appears that another catalyst recently had a significant impact on the MKR token as well: the “Coinbase Effect.” This term refers to tokens recently listed on the San Francisco-based exchange seeing impressive price returns within days (or hours) of trading being supported. The term “Coinbase Effect” was coined in 2017 after the price of Litecoin and Bitcoin Cash doubled a few weeks after their listing on the exchange.
In MakerDAO’s case, Coinbase announced that it would launch trading of MKR on May 29. The tweet announcement led to an increase in 40% in price within 24 hours as people began speculating. On June 9, MKR launched for trading and saw an increase of over 20%. At the time of writing [9am EST], the price of MKR sits at $691. In the past twenty-four hours though, the price reached a high of $896 on Coinbase, a premium of 23% vs the high recorded on BitFinex. The resulting impact on-chain was an all-time high in the number of large transactions (which IntoTheBlock classifies as transactions above $100,000) as can be seen below:
The number is relatively large when you consider that several days in the last month there have been zero large transactions. On June 8, the number of large transactions had already spiked to a year-to-date high of 48. While it is unclear whether the increase derived from the news of the support of real-world assets as collateral, or from people preparing for the Coinbase listing, there has been clear uptick in interest for MakerDAO as evidenced by on-chain metrics.
Post-Halving Effects on Bitcoin’s Blockchain
Bitcoin’s much-anticipated third halving took effect on May 11. While this reduction in mining rewards is mostly known as a potential catalyst for upwards price action, it also has strong implications in Bitcoin’s blockchain itself. With almost a month gone by since the halving took place, there have been intriguing on-chain effects worth covering.
One of the most obvious consequences of the reward halving is its first-order effect on miners. Recall that in Bitcoin’s proof-of-work (PoW) consensus, miners are awarded with a block reward for solving complex algorithmic problems that validate transactions. Well, during the halving, the block reward dropped from 12.5 BTC to 6.25 BTC per block (on average every 10 minutes). Since Bitcoin’s price has been relatively steady since the halving, this resulted in miners’ revenues dropping approximately by half, thus making many smaller miners unprofitable.
As miners started to lose money, Bitcoin’s hash rate — a measure of the aggregate processing power of Bitcoin miners — dropped by 40% within a week of the halving. This made the Bitcoin blockchain less secure, as at this point a potential hacker could have attempted to commit a 51% attack with less processing power, making it less costly to attack.
Fortunately, though, Bitcoin’s PoW has a system in place preventing the network vulnerable in these scenarios: the mining difficulty. The mining difficulty, as the name suggests, represents the degree of complexity that it takes to mine a Bitcoin block. The difficulty level adjusts every 2,016 blocks — approximately every two weeks — to incentivize the supply of miners to adjust such that the average Bitcoin block is produced every 10 minutes. Essentially, if there are not enough miners, the average time to solve PoW’s algorithmic problem increases above the 10 minute threshold, therefore triggering a mining difficulty decrease to incentivize miners to return to the desired level. The opposite is also true.
The former of these two scenarios is what happened on the Bitcoin blockchain following the halving: the mining difficulty decreased 9.29% in order to increase block production back to the desired level. As covered by The Block, this was the second highest percentage change in the mining difficulty all year behind the one occurring after the volatile period in March, dubbed Black Thursday. The changes in mining difficulty are shown below:
Going back to Bitcoin’s hash rate, the difficulty adjustment also had a direct impact on this important metric. By making it easier to mine Bitcoin, it also became less costly for miners to participate in the consensus process. Therefore, this incentivized more miners to join the network, increasing the aggregate hash power securing the blockchain while keeping decreasing the time to validate a transaction block. As can be seen below the hash rate spiked back to 133 terahashes/second, just shy of its all-time high of 137TH/s achieved on March 1st.
Overall, the Bitcoin halving had several effects on the underlying blockchain. While most people were aware of the decreases in mining revenue, the second and third order effects resulting from this event highlight the robustness of the Bitcoin blockchain. The decreases in miner difficulty shown above incentivized miners to re-join the network by making it less costly to mine. Finally, this ensured Bitcoin’s security by increasing the hash rate back to levels before the halving. Ultimately, even though Bitcoin’s price has not changed much since the halving, the fact that the blockchain remains as secure and with sustained block times demonstrates that it was a successful milestone for the network.
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