With the upcoming Ethereum hard fork called Constantinople, block rewards will reduce from 3 ETH to 2 ETH, making mining Ether less profitable.
ConsenSys, one of the biggest players in the Ethereum ecosystem, recently discussed the implications of the hard fork on their blog.
A Reduction in Block Rewards After Constantinople
The Ethereum core development team announced that they would go ahead with the fork which will be implemented at block 7,080,000 and is estimated to happen on January 16, 2019.
With this new fork, five Ethereum Improvement Proposals (EIP) will come to life. One of which is EIP 1234 that will result in what ConsenSys are calling a ‘thirdening.’
This refers to the fact that the Ethereum block reward for successfully mining each block will be reduced by 33%. Miners will now receive 2 ETH instead of 3 ETH.
Block miners previously got reduced rewards in late 2017, when the Byzantium hard fork was applied. Then, the block rewards reduced from 5 ETH to 3 ETH.
Bitcoin, the largest cryptocurrency in the world has a similar approach and reduces block rewards by 50% every 210,000 blocks.
The reduction will continue for Bitcoin miners until BTC reaches its hard cap at 21 million.
Why do Block Rewards Need to Be Reduced?
Some blockchains have thresholds or hard caps on the number of coins in circulation, but Ethereum doesn’t have any, unlike Bitcoin.
The reduction of block rewards serves the purpose of reducing inflation. As the block reward decreases, the supply of new ETH coins in circulation will also decrease.
“After the Constantinople hard fork; total new ETH supply will reduce from 20,300 ETH/day to 13,400 ETH/day and from 7.4m ETH/year to 4.9m ETH/year.”
It also suggests that after the Constantinople hard fork, the rate of inflation in Ether will drop to 4.8% from 7.7%.
However, it is difficult to gauge how the miners will respond before the fork since they do not just calculate the block reward, but also the price of electricity as well as the hashrate, price, and difficulty of ETH.