Ethereum: What are the Advantages and Disadvantages of a Continuously Decreasing Block Reward Compared to the Current Method
The Ethereum blockchain, like Bitcoin, has a capped supply of 21 million tokens. To maintain a relatively small and manageable number of unique addresses, developers have implemented various mechanisms to control the block reward. One such mechanism is the reduction of the block reward by 50% every 210,000 blocks, a period known as the «block reward halving.»
In this article, we’ll explore both the advantages and disadvantages of continuously decreasing the block reward compared to the current method.
Advantages of Continuously Decreasing Block Reward
- Reduced Centralization: By reducing the block reward by 50% every 210,000 blocks, Ethereum’s network becomes less centralized. This is because fewer individuals have control over the block reward, making it more difficult for a single entity to manipulate the network.
- Increased Adoption: The decreased block reward incentivizes more people to participate in the network, leading to increased adoption and usage of the Ethereum platform.
- Reduced Mining Volatility: A decrease in block reward can lead to reduced mining volatility, as fewer miners would be willing to take on the high-risk endeavor of mining. This could result in a more stable ecosystem for new entrants.
Disadvantages of Continuously Decreasing Block Reward
- Decreased Transaction Speed: With a decreased block reward, transaction processing time increases significantly, leading to slower network performance and higher fees.
- Reduced Scalability: The increased mining difficulty required to maintain the 50% halving rate can lead to reduced scalability on the network, making it more challenging to accommodate new users and transactions.
- Increased Incentivization for Mining Conglomerates: A decrease in block reward incentivizes mining conglomerates to accumulate wealth through mining, rather than individual miners contributing to the network.
- Reduced EVM Capacity: With a decreased block reward, the Ethereum Virtual Machine (EVM) capacity decreases, limiting the amount of smart contracts that can run on the network.
Comparison with Bitcoin’s Current Method
Bitcoin’s current method involves reducing the block reward by 50% every four years (currently scheduled for 2025), but not every 210,000 blocks. This approach has both advantages and disadvantages:
Advantages:
- Reduced centralization compared to Ethereum
- Increased adoption due to reduced mining difficulty
Disadvantages:
- Increased transaction processing time and fees in the short term
- Lower scalability and increased congestion on the network
- Encourages mining conglomerates to accumulate wealth through Bitcoin mining, rather than individual miners contributing to the network
Conclusion
The continuously decreasing block reward mechanism has both advantages and disadvantages compared to the current method. While it reduces centralization, increases adoption, and incentivizes more people to participate in the network, it also leads to reduced transaction speed, scalability issues, and increased mining difficulty.
As Ethereum continues to evolve and improve its scalability solutions (e.g., sharding), a balanced approach that combines decentralized validation mechanisms with incentives for individual miners may be necessary. This balance will help maintain a relatively small and manageable number of unique addresses on the network while still ensuring increased adoption and usage.
Recommendations
- Introduce Scalability Solutions: Implement solutions like sharding, off-chain transactions, or layer 2 scaling to improve scalability and reduce congestion.
2.