The Thirdening: What You Need To Know

Block rewards will reduce from 3 ETH to 2 ETH after the Constantinople hard fork on February 27th. Here’s what’s happening and what it means.*

*Edit: The first version of this article reportedConstantinople happening at block 7,080,000 ~Jan. 16, as was the initial plan. On 01.15.19, the Constantinople upgrade was delayed. The deployment of Constantinople was changed to block 7,280,000.

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 7,280,000 block, which is estimated to occur on February 27, 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, 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 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%.

Table 1. ETH supply alongside date, inflation, and block reward.

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-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.

Figure 1. Electricity costs of a few selected countries.

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 hashrate means a higher likelihood that the correct hash is found, thus decreasing the time between blocks. In order to maintain the consistent block time of ~15 seconds/block, the network automatically responds to high hashrate by increasing the difficulty, thus recalibrating the network to produce one block every ~15 seconds.

In November, crypto news outlets reported that mining on GPUs (graphics processing units) no longer proved profitable. The price decrease in late 2018 limited the profitability of many miners, and some chose to leave the network. The network automatically adjusts to the decrease in hashrate (due to fewer miners hashing across the network) by decreasing the difficulty. The remaining miners enjoy increased rewards that come from decreased difficulty, and miners who previously stopped mining may seize the opportunity to rejoin with the promise of higher rewards. Currently, hashrate and difficulty have reduced to February 2018 levels, after a high in mid-2018.

The conclusion is that the primary force behind miner behavior on the Ethereum network is not the number of ETH rewarded per block, but rather the price of electricity and the price of ETH. The decrease in hashrate and difficulty are consequences of when those two factors do not create a profitable environment. The thirdening of Ether’s block rewards will lead to a decrease in inflation. Should the reduction in ETH inflation have a positive impact on the market, miner behavior holds that miners will return to the network.

Looking Ahead: February 27th & Beyond

The Thirdening is an exciting development for the Ethereum network. When the first block reward happened, “crypto,” “blockchain,” and “Ethereum” were words still largely confined to subreddits and niche publications. With the eyes of global blockchain enthusiasts on the progression of the network in the face of decreased inflation, the Thirdening is gearing up to be a landmark in Ethereum’s development.

Everett Muzzy, ConsenSys

With thanks to Jon Stevens