What are the advantages/disadvantages of a continuously decreasing block reward compared to the current method?

The current method to control the bitcoin supply to a maximum of 21 million BTC is to reduce the block reward (currently 50 BTC/block) by 50% every 210000 blocks. In this forum post there is a discussion about "why doesn't the block reward decrease continuously?".

The OP writes:

So I personally wish that Satoshi had instead implemented a continuous block reward decrease. With that approach, the reward will decrease ever-so-slightly with each successive block but still converge to 21 million. That would avoid potentially disruptive discontinuities. It's too late to change that now but, still, does anyone know why he chose a block reward function that looks like a staircase rather than a smooth curve?

This gets rid of the discontinuity (block reward going from 50 to 25 BTC) at the 210000 block mark and at each subsequent block reward readjustment. Would this be better than the current method? Are there other advantages to this method? Are there any disadvantages to a continuously decreasing block reward?

One disadvantage I can possibly think of is that this would favor "early adopters" even more than the current bitcoin implementation.

kirian

Posted 2011-10-15T00:26:31.130

Reputation: 3 179

Answers

The main advantage of the staircase rewards is simplicity. It's easier to implement; easier to describe; easier to plan with.

The main disadvantage is that it is less mathematically elegant. It will not be very disruptive in practice because it is known in advance and can be planned for.

The early adopter advantage is not a consideration, as it can trivially be controlled with the timescale parameter.

Meni Rosenfeld

Posted 2011-10-15T00:26:31.130

Reputation: 18 542

One severe disadvantage is that the hashrate will plunge dramatically right after the last 50BTC block instead of decaying slowly.

In the long run (i.e. over multi-month horizons) people will mine if the reward per share exceeds their cost of electricity per share. Most miners know their electricity cost, and a lot of them will see in advance that the 50BTC->25BTC drop will put them "in the red", where it costs them more in electric bills to mine 1BTC than it would cost them to buy 1BTC on an exchange. These miners will be ready in advance and will switch off within a day of the 50BTC->25BTC block. I'm not convinced that the community, the network, or the developers are prepared for this, and having it happen over the course of a few days is going to make dealing with it harder rather than easier.

One advantage is that it probably helped bootstrap the network hashrate more quickly. It's easier to say "oh, I'll investigate this mining thing next week" if you know that each week's reward is only slightly less than next week's. On the other hand, if you know the rate will be cut in half at some point, waiting a week to get started means you're sacrificing (approximately) a "50BTC/block week" of which there are a limited supply. I know it certainly got me to prioritize starting my mining experiments above other stuff that could wait a few weeks/months.

eldentyrell

Posted 2011-10-15T00:26:31.130

Reputation: 1 221

Here in the future, the hash rate doesn't seem to have been impacted by the reward halving at all.

– Samuel Edwin Ward – 2013-05-14T02:15:14.350

1The hashrate drop will not be dramatic, for several reasons.

The decreased supply (and anticipation of it) will increase the price, thus increasing profitability at a given block reward.
People who are considering buying mining hardware before the halving will avoid it anticipating the reduced profitability, so the difficulty will be less than it would otherwise have been, improving profitability.
The hardware cost and varying electricity costs mean there will be plenty of people for whom the expense is a fraction of the revenue, so they can handle reduced profits.

Meni Rosenfeld

2011-10-18T20:39:20.053

indeed, i have to agree with meni here. market participants will adjust their actions well in advance, since the information about future block reward is known with certainty. – nanotube – 2011-10-18T22:39:53.760

Uh, no. Of course they'll see it coming. But there are a huge number of miners for whom it is profitable to mine the last 50BTC block but unprofitable to mine the first 25BTC block. They will leave en masse at the same time. Ability or inability to predict the future has nothing to do with this. – eldentyrell – 2011-10-21T20:18:11.433

I think most likely the thinking was basically short term. The fear of the sudden drop was probably expected to create significant interest as people wanted to get in as soon before the drop as possible. Also, the hope that the drop in mining rewards would trigger a significant sudden increase in value was probably calculated to help fuel speculation.

There are a lot of aspects of the design of Bitcoin that appear calculated to increase adoption. The catastrophic drops in mining rewards appear to be one of them.

David Schwartz

Posted 2011-10-15T00:26:31.130

Reputation: 46 931