Ethereum has outperformed Bitcoin by 13% over the past few days (since Jan 18th). After being battered for the majority of 2018, the token of the leading smart contract platform is finally showing some signs of revival, possibly aided by the slash in block rewards after the difficulty bomb kicked in. On the one hand, it is easy to downplay the significance of ETH’s relative outperformance as one of a piece with the vagaries of the crypto markets, which we are at peace with. However, what is not so easy to ignore is the effects of the mining reward reduction on ETH’s price. The mining difficulty
bomb, in theory, deters miners from mining ETH using PoW as part of ETH’s eventual transition to PoS and was supposed to be one of the key changes of Constantinople hard fork. The difficulty bomb kicked in despite the hard fork being called off at the eleventh hour. The difficulty bomb roughly doubles mining difficulty every 100,000 blocks and without a commensurate increase in hash rate, the block interval is expected to increase, resulting in a reduction of daily supply inflation. In the extreme, the mining difficulty bomb is expected to significantly increase the blocktime, which translates into lesser and lesser rewards for miners.
Block times could end up being as high as 14 minutes by 2025, and while this might not seem too different from Bitcoin’s 10-12 minute block times, 14 minutes block times will significantly slow down Dapps running on the Ethereum network. However, this should not be a concern for either miners or users. Miners are anyway only concerned about marginal return on hardware before the complete shift to POS, and whenever that shift to POS happens, they can always move over to mining other POW coins, such as ZCash or ETC. For applications, the transition to POS, though hotly debated in certain BTC maximalist and crypto-puritinanical circles, will significantly improve throughput
In any event, for now, as we see from the figure below, there has been a steep increase in the average block interval shortly after the difficulty bomb kicked in. As a result, the average daily block rewards have decreased to 12,500 ETH per day, a 30% reduction from the rewards earlier.