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Bitcoin... You Haven't Heard The Half Of It

24/08/2016 12:54

Last month a major event happened in the cryptocurrency community: Bitcoin's block reward halved for the second time in its history. The halving event or "Halvening" saw the cryptocurrency's reward reduce from 25 to 12.5 bitcoins.

This halving mechanism is part of the mechanics of cryptocurrencies, designed to act as an inflationary brake to stabilise the currency. All of these types of currencies will start out with a predefined monetary policy i.e. a fixed monetary supply. At LEO this means that only 1 billion LEOcoins will ever be in existence. Halving happens about once every four years, ensuring that the total supply of coins doesn't exceed its cap too fast.

These events are highly anticipated but can have damaging consequences; miners who work on high-powered computers to verify the transactions will as a result receive half the Bitcoin reward that they would previously. The sudden drop in income can lead to miners shutting down their hardware, which can have a destabilising effect on the network.

This halving mechanism is more detrimental to a currency that operates solely using a Proof of Work system, like Bitcoin; primarily it increases Proof of Work's vulnerability. With halving suddenly making the act of validating blocks far less lucrative, a lot of smaller participants will drop out, therefore concentrating power in the larger miners.

Mining farms in China, for example, are able to validate blocks far cheaper, meaning that the reduced reward will have less of an effect. Smaller companies like KnCMiner, a mining hardware manufacturer in Sweden have not fared as well however. They filed for bankruptcy at the end of May ahead of the halving, claiming that the cut in reward would lead to a significant profit loss.
Proof of Work has been one of the defining characteristics of digital currencies, but this way of mining is arguably outdated and largely unnecessary. The halving process only makes these currencies even harder to mine and can exacerbate the issues around usability, crowding out even more amateur miners from the market.

But these disadvantages needn't dissuade consumers from using digital currencies. If we consider how many places currently exist to exchange money or trade stocks, there are inevitably some market leaders and other more niche venues that appeal to different people because of their USPs. Digital currency venues work much in the same way; competing venues allow a greater choice for the consumer, which is undoubtedly a good thing. Competition in the marketplace is what drives innovation in the sector.

Our recent move to a Proof of Stake model makes it even easier for the general public to get involved in mining digital currencies. As a more consensus driven method, it does not encounter the same problem with the halving process. Proof of Stake requires far less computation power, which means lower hardware costs and lower electricity costs. It follows that lower costs would therefore mean that a lower reward is not as punitive.

We have always intended that LEOcoin be a coin for the mass-market and as user friendly as possible. And while our move to Proof of Stake may be daunting for some, LEOcoin now presents an excellent alternative to those consumers for whom purchase of a huge mining rig is out of reach. It is those individuals who are not afraid to embrace this change who will ultimately go furthest on the journey.

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