While Ethereum’s transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS) consensus algorithm has received significant attention in the news and events, another important development has taken place in Ethereum’s network and economy: the implementation of the “Triple Halving” mechanism. This mechanism, which affects the circulating supply of ETH, became fully operational on the Ethereum blockchain as part of the transition to PoS, marking a significant milestone in Ethereum’s upgrades.

In this article, let’s learn about Ethereum Triple Halving in detail and its working.

Let’s start our journey!

What is Ethereum Triple Halving?

The Ethereum Triple Halving is a unique process that involves a significant reduction in the block reward for Ethereum (ETH) from three (3) ETH to one (1) ETH. This occurs approximately every four to six years and aims to reduce the Ethereum network’s inflation rate. The goal is to potentially increase the value of ETH over time by limiting the new supply of ETH entering the market.

The term “Triple Halving” is derived from the concept of Bitcoin Halving, where the mining rewards for Bitcoin are halved every four years. However, in the case of Ethereum, the reduction in block rewards is implemented on a larger scale, further emphasizing its significance. This is achieved by lowering the block reward miners receive for successfully verifying a transaction block on the Ethereum blockchain.

Similar to Bitcoin Halving, Ethereum miners receive newly minted tokens as a reward for their mining efforts. Ethereum miners also receive transaction fees associated with each mined block, providing an additional incentive for their participation in the network.

Who is Nikhil Shamapant?

Nikhil Shamapant is credited with formulating the concept of the Ethereum Triple Halving, which is a mechanism that renders Ethereum a deflationary asset.

According to Nikhil’s explanation, the Ethereum Triple Halving is based on an analysis of financial flows to model the impact of the halving event on Bitcoin and forecast the potential price movement of Ethereum by January 2023. Although Nikhil’s thesis on the Triple Halving was released in 2021, it has regained significance after the successful Merge of the Ethereum network.

How does Ethereum Triple Halving work?

Just like how Bitcoin Halvings occur every four years and create deflationary pressure, the Ethereum Triple Halving will also introduce deflationary pressure on Ethereum, but from three different directions. These include a significant reduction in the issuance of ETH, the burning of tokens, and a substantial amount of staked ETH that will remain locked up for a significant portion of the next 12 months.

Part 1: Reduced Issuance

With the implementation of the Proof-of-Stake (PoS) system, the rewards for validating new blocks of Ethereum are set to experience a substantial reduction. The annual issuance of ETH is projected to decrease significantly, from 4.3% to 0.4%, after the successful completion of the Merge, as estimated by former blockchain engineer Montana Wong. This translates to a drastic drop in daily issuance, from approximately 15,000 ETH to a much lower figure of around 1,500 ETH.

Furthermore, the increased efficiency of the Ethereum network resulting from the Merge is expected to decrease the daily sell pressure on ETH that comes from miners. With miners requiring less capital to secure the energy needed for their operations, their daily incentives to flood the market with ETH are anticipated to decrease by 10x.

Part 2: Burning

The EIP-1559 update, which was implemented during the London Hard Fork last year, introduced a mechanism to the Ethereum network that could potentially contribute to deflation. This mechanism involves burning a portion of each transaction fee under specific conditions. The ongoing burning resulting from this update will further add to the overall deflationary pressure on the Ethereum network.

Part 3: Staked Ethereum Withdrawals

The PoS consensus mechanism that is employed after the Ethereum Merge relies on individuals staking their ETH through validators, who are responsible for securing the next block on the chain. Even before the Merge, individuals have had the opportunity to participate in staking and are rewarded for doing so. It is predicted that staking rewards will increase by 100% or more after the Merge.

The increasing amount of locked-up ETH due to staking represents another deflationary pressure that will likely impact the value of the cryptocurrency throughout the upcoming year.

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To understand Ethereum Triple Halving better, here’s a quick roundup of Ethereum’s history.

Ethereum’s History: PoW, PoS, and The Merge

To comprehend the reasons behind these changes, it is crucial to have an understanding of Ethereum’s history. Initially, Ethereum was launched as a conventional cryptocurrency. However, as it grew, the founders recognized scalability issues and decided to make modifications to the network to address them, ensuring that the blockchain could continue functioning as a development platform.

The official transition of Ethereum began in 2020 with the Ethereum Merge. Proof of Work (PoW) is a token mining method where individuals use computers to solve mathematical puzzles and receive rewards for their efforts. On the other hand, Proof of Stake (PoS) relies on the random selection of validators who stake their cryptocurrency to validate transactions.

PoW has been controversial due to its cost and environmental impact, while PoS is relatively simpler to implement and less resource-intensive to manage. This makes PoS more scalable for validating new transactions and encourages greater participation of token holders in the Ethereum blockchain.

In December 2020, Ethereum launched the Beacon Chain to test Ethereum staking, which was successful. Subsequently, they decided to move the Beacon Chain to the main chain in an event called The Merge, which was implemented in September 2022, transforming the main Ethereum chain into a PoS consensus mechanism.

Final thoughts

The ETH Triple Halving is an intriguing consequence of the Ethereum Merge, a series of upgrades that have shifted the Ethereum network from the Proof-of-Work (PoW) model to the Proof-of-Stake (PoS) model, resulting in a significant reduction in the issuance of new Ethereum tokens. While these changes may introduce some short-term volatility in ETH prices, they hold the potential to increase the long-term value of the coin.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.