The Litecoin Halving - Do Less Rewards Mean More Value For Miners?

Here is a question: "Does the scarcity of the digital asset make it more valuable or is it the utility of a token?"

The Litecoin blockchain halving was succesful at the block height of 1,680,000 at 10:16 UTC (Monday August 5, 2019). The halving reduces the Litecoin reward in half, from 25 LTC to 12.5 LTC per block mined. There was no immediate dramatic rise in the price of LTC, but it showed plenty of optimism in the market. Litecoin, like Bitcoin, has a limited supply which caps at 84 million LTC. The halving is an event that occurs on the Litecoin network every 840,000 blocks or approximately every 4 years. As the name implies, it is a 50% reduction of the miner's rewards for every block they validate on the network. This is part of the Litecoin consensus mechanism called PoW (Proof-of-Work) which is also used in the Bitcoin blockchain.

The halving creates digital scarcity, and to some analysts this means the digital asset becomes more valuable. Whether it is due to the lower supply of LTC or the hype surrounding the event, prices have not increased at the levels some may have expected. Perhaps this is due to the halving being priced in with investors already having accumulated the digital asset ahead of time. If these transactions were done over the counter style, then it will not really affect the market prices on digital exchanges. Some analysts believe there should be more to expect in terms of the utility of the token rather than just anticipate the digital scarcity will increase prices. Perhaps the law of supply and demand doesn't exactly equate to expectations in a volatile cryptocurrency market.

LTC is used mainly in making direct P2P online electronic payments. It functions like any other cryptocurrency, where the transactions are made transparent and immutable, allowing for greater accountability. In terms of speed, it isn't any faster than traditional payment systems like VISA or Mastercard. However, LTC can instantly transfer value across any border because of its P2P feature. The transactions also have lower fees than money transfer agents or bank charges. When you don't have intermediaries in the payment network, you can pretty much transfer value easily in a frictionless manner. All that is needed is an exchange that supports LTC that converts the cryptocurrency to fiat.

The problem is that regulatory clarity has not fully accepted cryptocurrency like LTC. Although it is being used by some people to make payments or transfer value, it is not happening on a large scale yet. Not all exchanges are available in all countries that support a fiat to LTC pairing. If any exchange has a Litecoin pairing then it would be easier to transact. This would be like how using the USD becomes viable because of currency exchanges that support it. Therefore it makes it accessible to everyone and it is the legal medium for exchange. LTC on the other hand is not readily available to be used to purchase items, unless the business supports it. So far there are very few establishments that will accept LTC as a payment for let us say a cup of coffee or breakfast sandwich. How easy it is to use fiat to pay for those items.

There is more concern among the mining community though. Since block rewards have been cut in half, operations will be affected due to decrease in profitability among miners. It would be fine if the price of LTC greatly increases, but if not then the miners will have to absorb net losses. The issue here is related to the electricity costs to cover producing LTC from mining blocks. What this can result to is an exit among miners who cannot absorb the costs, while established miners will continue mining and making profit. The bigger mining pools can survive because they have the resources to do so. The hash rate of the overall network could also decrease, making the difficulty target easier and block mining just as profitable for the miners who remain in the game.

Let's look at how blocks are mined on Litecoin's blockchain. The block production time, on average, is 1 block every 2.5 minutes, which is 576 blocks are produced every 24 hours. Due to the halving, each block mined now rewards miners 12.5 LTC. That means that every day or every 24 hour period 7,200 LTC is created. This will go on for the next 840,000 blocks which will be the next halving. With a total supply cap of 84 million LTC, the halving leads to less and less rewards for miners. The incentive here is to produce blocks, but with less rewards there may be less miners providing hash power to the network. The idea is that demand will exceed supply, so miners will still be incentivized to validate and mine blocks so the value of LTC will increase. The point here is that the lower amount of LTC is not going to stop miners if the price of LTC increases due to the demand. Fees should also be reasonable enough that people will use LTC to make payments. So far it seems current fees are low enough in terms of LTC/KB with 3 priority levels (the highest level costing more than the rest). This is what the Litecoin team refers to as "near-zero cost payments" i.e. cheap fees.

The only thing that has not been determined is whether LTC will continue. The LTC is only valuable if it is being used, but if it is just speculation fueling the prices then there is really no utility behind it. The developments in Litecoin need to catch up to the demand which is what is creating it in the first place. There has been encouraging news about new ways to bring privacy to transactions on the Litecoin blockchain. Developers will need to make sure that the value of LTC doesn't rely on pure hype and speculation alone. Instead it must demonstrate that the technology is capable of providing the features of a decentralized instant electronic payment system for the world.