Bitcoin Halving, ETFs, & Bitcoin L2s: 2024 Insights Countdown

What is the Bitcoin Halving?

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The halving is a deflationary event in Bitcoin's lifecycle where block rewards are cut in half.

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It occurs every four years. This schedule was set by Satoshi Nakamoto at Bitcoin's origin. From 2020 to April 2024, 900 BTC were mined daily. On 19 April 2024, this number reduces to 450, constraining supply for potential buyers.

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At Bitcoin's genesis, the bitcoin reward was 50 per block. As of the halving on 19 April 2024, the block reward stands at 3.125 bitcoin. This reflects bitcoin's growing scarcity, and its status as 'digital gold'. There have been three halvings to date in this history of Bitcoin, triggered every 210,000 blocks.

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After more than a decade, this is also the first halving with an approved Bitcoin ETF on the market. Some speculate, therefore, that this halving may set the stage for a potential supply shock, as demand for newly mined bitcoin may outstrip daily supply.

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On 11 January 2024, the crypto industry witnessed a watershed moment when eleven spot Bitcoin exchange-traded funds (ETFs) were listed in the U.S. market. This followed their successful approval the day before, 10 January, by the U.S. Securities and Exchange Commission (SEC). At this time, the price of Bitcoin hovered around 42k. Two months later, in March 2024, Bitcoin reached an all time high.

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As interest in these new vehicles grows over time, thousands of BTC may be required daily to match Bitcoin ETF inflows. If demand for Bitcoin ETFs continues at pace, the industry may witness a case in which demand greatly outstrips supply for the next four years.

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Bitcoin Fundamentals

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Bitcoin's block rewards have now been reduced by 50%. But where do these rewards come from?

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Bitcoin, the network, rewards those who contribute to consensus with bitcoin, the native currency.

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Every blockchain network uses a consensus mechanism to validate new blocks. Consensus mechanisms enable blockchain nodes to confirm the accuracy of each block of transactions before adding it to the chain, preventing fraud and errors. A blockchain consists of data stored on nodes, which can be devices like computers, laptops, or servers.

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These interconnected nodes form the blockchain's infrastructure.

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What is Proof of Work?

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The proof of work consensus mechanism, made famous by Bitcoin, is one of the most recognized and widely adopted methods.

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Cynthia Dwork and Moni Naor first introduced the concept in a 1993 article, and Markus Jakobsson later coined the term "proof of work" in 1999. Bitcoin adopted proof of work as its consensus model, based on Satoshi Nakamoto's inclusion in the Bitcoin whitepaper. This method protects against fraud, except in cases of a 51% attack, one where a rogue miner could double-spend coins in transactions that benefit them by manipulating a sequence of blocks, spending and unspending coins in different transactions in different blocks they produce.

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Proof of work involves nodes, or miners, racing to solve mathematical equations. In Bitcoin's case, the first miner to solve the equation receives the minted bitcoin, known as the block reward.

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This miner also receives a portion of the transaction fees generated by the network. Solving the equation verifies the new block of transactions, which then joins the existing chain of blocks. While proof of work equations are difficult to solve, once a miner finds a solution, the rest of the network can easily verify it's correct.

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Miners must solve these equations through brute force, giving each miner an equal opportunity to succeed. However, this method needs significant computational power to solve equations within a reasonable time frame. Also, the difficulty of brute force block solving increases every 2,016 blocks, or about every two weeks, based on the time taken to mine the previous set.

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When nodes confirm a block's validity, it is added to the chain.

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Blockdaemon's Support for Bitcoin Layer 2s

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Bitcoin Layer 2s (L2s) enables smart contracts and decentralized applications to use Bitcoin as a secure base layer. L2s offer a new utility for Bitcoin holders who'd like to participate in DeFi.

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Notably the Lightning Network has been a key player in supporting Bitcoin payments and enabling smart contracts for many years. While we acknowledge Lightning's important contributions to Bitcoin's development, Blockdaemon currently supports other L2 solutions like Babylon (coming soon) and Stacks.

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Babylon's Bitcoin staking protocol establishes a two-sided market and serves as the market's control plane. Bitcoin holders can securely lock their bitcoins and select proof of stake (PoS) chains to stake and generate rewards. PoS chains and dApps can opt for bitcoin-backed security, benefiting from enhanced security, robust economics, and wider adoption. The protocol's modular design secures any PoS chain and allows scalable restaking for bitcoin holders.

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Earlier this year, Blockdaemon announced integration with the Stacks network as a Signer (or "Stacker"), enabling Bitcoin L2 rewards for institutions holding BTC and looking to secure the Stacks network. In addition, Blockdaemon also became a newly committed Signer, joining an open and decentralized Signer set.

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With the anticipated Nakamoto Release and sBTC, Stacks is set to enhance transaction speeds and introduce transactions backed by 100% of Bitcoin's finality. This evolution positions Bitcoin as a fully programmable, productive asset, opening up new possibilities for use cases across the digital and financial landscapes.

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If you are interested in learning more about Bitcoin nodes or Bitcoin staking opportunities, chat with us today!

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