When a nation transitions from dictatorship to democracy, the main challenge is not, as one might think, a successful first presidential election. Instead, the biggest challenge is a successful second election. If the institutional strength necessary to resist the lingering restraining forces of the status quo ante remains in place, and in the absence of international observers, that nation’s chances of remaining democratic are said to be pretty good.

Cryptocurrencies like bitcoin are to fiat currencies as democracy is to dictatorship. Recently, bitcoin endured what might be the equivalent of its own second presidential election, which came to be known as “the halvening”.

The qualities that make bitcoin unique among currencies are almost too many to list, but primary among them is the fact that new bitcoin are generated through a process called mining, in which computers compete to solve the complex math problems by which bitcoin transactions are proven valid. As a reward, the owner of the winning computer is rewarded with a pre-determined amount of bitcoin. When the bitcoin software was initially created in 2009 the reward rate was 50 bitcoin, which initially, was the equivalent of pennies. In 2012, the rate was cut in half to 25 bitcoin, which by then was the equivalent of hundreds of dollars – enough for some to make a living mining bitcoin. In early July 2016, the bitcoin reward rate was cut in half again, to 12.5, which is still the equivalent of thousands of dollars.

The debate preceding the bitcoin mining reward halving were twofold: the effect on the price of bitcoin and, secondarily, the impact on bitcoin’s beloved decentralized nature.

Price

There were three anticipated and obvious effects of the halving on bitcoin’s price: up, down and neutral.

UP: Given the law of supply and demand, a significant reduction in the future supply of bitcoin would necessarily have the long term effect of increasing price. And, indeed, the price of bitcoin increased in ridiculous ways in the months following the 2012 halving, although it’s unlikely the manifold rise was entirely the result of the change in supply.

DOWN: On the other hand, the reduction in the mining reward will also make mining less profitable, which will necessarily force some miners out of the business, which will in turn decrease the size of the bitcoin mining network, which could in turn make it less able to handle high transaction volumes and ostensibly less secure.

NEUTRAL: Given the fact that the bitcoin network has known in one way or another that this halving was coming for eight years, a very strong case can be made for the idea that the market long ago priced in the effect.

Two weeks after the halving event, the price remained very slightly off, but well within the normal range for such a volatile currency.

Decentralization

Its decentralized nature is among the most cherished and defining properties of cryptocurrency, and among the most difficult for the uninitiated to comprehend. In short, the community that builds and maintains the bitcoin code goes to great lengths to reject any changes that might lead to more control placed in the hands of fewer people. There are three reasons for this, one philosophical and two practical.

Philosophically, the bitcoin community is made up of a disproportionate number of anarchists and libertarians who value digital currency for its ability to operate free of interference of governments or financial institutions. By making mining less profitable, the concern is that smaller mining operations will be obligated to quit the practice, necessarily leaving more mining capacity in the hands of fewer miners, thereby decreasing decentralization.

Practically, more centralization can potentially lead to the one flaw to which bitcoin could without question theoretically fall prey: a 51% attack, in which a single entity controls the majority of mining power, and is thereby in a position to alter the bitcoin ledger however it wants. This would clearly be catastrophic, although the math

The second practical concern over reduced centralization is the effect this would have the speed of the bitcoin network, in terms of its ability to keep up with demand. The bitcoin network is already struggling to keep up, given its limit of seven transactions per second.

Two weeks post halvening, bitcoin's hash rate had fallen off slightly, but also within the range that has come to seem normal.

At first glance, it would appear that bitcoin has passed the second major test of its young existence.