At block number 525,960 the Safex cryptocurrency (SFX) mining reward will increase from 130 SFX per block to 200 SFX per block. This is the second mining reward increase in the series. The change of the block reward is a fundamentally important event since it has an influence on the market price, mining cost and mining profitability.
The cryptocurrency of the Safex protocol that is used to pay transaction fees and settle purchases on the marketplace is distributed through a proof of work mining algorithm. The monetary base curve is designed to mirror the adoption curve and as a result to be attractive for new miners joining the network especially in the first few years of increasing block rewards. While most people will discover Safex over time (the natural adoption of new technology) the rewards follow that adoption to give a level playing field for new miners and to reward existing miners with increasing block rewards.
The current Safex Cash (SFX) block reward is 130 SFX per block and will increase to 200 SFX per block in the near future. The resulting increased mining profitability will very likely affect the market price and the total network mining effort which will be discussed and illustrated in this article.
Relative Reward Increases based on the Coin Emission Schedule
In a previous article published by the Safex foundation - Safex Mining Innovative Currency Distribution Algorithm: The S-Curve - the monetary base history was being focused on and compared with the one of other cryptocurrencies. Based on the coin emission rate that changes from year to year, the yearly relative changes of block rewards can be examined.
The table below gives the different block rewards and shows the relative block reward change of each block reward increase compared to the previous one. The current block reward of 130 SFX per block will increase to 200 SFX per block in the next few days.
It can be seen that the block reward increases yearly for the first 7 years - the extent of relative increase is decelerating in this time. Notice that the first block reward increase did result in a relative change of more than 100%. The currently ongoing phase of increasing block rewards will be then followed by a longer phase of decreasing block rewards. Notice that the reward will never decrease by more than 25% in this phase.
Generally, it can be said that the phase of increasing block rewards results in a favorable situation for new miners joining the network. The block reward increase results in a jump of mining profitability under the assumption of a constant market price of the mined cryptocurrency and a constant total mining effort within the network.
The upcoming marketplace protocol being launched on mainnet would then be a catalyst for new demand for the Safex cryptocurrency since vendors will need it to list new offers, and new buyers will need to stock the Safex Network currency in order to purchase the items they want. So far this dynamic has not been a factor until recently since the marketplace protocol has been in ongoing development.
Correlation of Market Price, Mining Cost and Mining Profitability
The increase of block reward drastically changes the mining profitability within a very short time frame. Now, different scenarios can play out based on game theory:
- market price and mining effort remain constant
- market price decreases and mining effort remains constant
- market price remains constant and mining effort increases
- market price decreases and mining effort increases
Now, these different scenarios will be illustrated under the assumption of a current market price of $0.008/SFX and a current mining cost of $0.005/SFX. The market price and mining cost will be displayed on the primary y-axis (left), the mining profitability will be displayed on the secondary y-axis (right).
The calculation of the mining profitability based on the relevant parameters was discussed and illustrated in a previous article published by the Safex foundation - The Economics of Mining: Calculating your cost basis and P/L.
Scenario I: Constant Market Price and Constant Mining Effort
In a scenario of constant market price and constant mining effort the mining cost would drastically decrease after the block reward change. This would then result in a drastically increased mining profitability. It can be seen that the equilibrium of market price and mining cost would majorly shift towards a significantly higher mining profitability which makes it a rather unlikely scenario to be sustained in the long-term unless an equally increased demand for the Safex currency was to become present. This could be as a result of new avenues to acquire the cryptocurrency, new technological breakthrough such as the marketplace protocol launch, and outreach to new interested users, among many other outcomes that could drive demand.
Scenario II: Decrease of Market Price, Constant Mining Effort
In a second scenario the market price would gradually decrease due to an increased selling pressure by miners whose profitability has significantly increased after the block reward increase. The constant total mining effort results in a sharp decrease of the mining cost. After some time the increased selling pressure has resulted in a lower market price and an equilibrium of market price and mining cost at a constant mining profitability is reached again.
Scenario III: Constant Market Price, Increase of Mining Effort
In a third scenario the market price is remaining constant and the mining effort gradually increases. It can be seen how the mining profitability rises sharply and then gradually goes down again in order to level out at a value similar to the one before the block reward increase.
Scenario IV: Decrease of Market Price, Increase of Mining Effort
The fourth scenario is a combination of the second and third scenario. The two forces that bring down the mining profitability to a lower level again after the sharp increase - increased selling pressure caused by highly profitable miners, increased total mining effort caused by new miners - are working together here.
Note: These scenarios should generally illustrate the trends of market price, mining cost and resulting mining profitability. The extents of increase and decrease as well as the time interval for each parameter can highly vary. Also, these scenarios only cover a rather short period of time around the block reward change. The long-term trend of market price, mining cost and resulting mining profitability within the upcoming one year period of constant block rewards will be majorly determined by actual demand of the cryptocurrency.
The phase of increasing block rewards in Safex Cash's monetary base scheme is favorable for new miners joining the network, and new users eager to transact on the Safex Marketplace (TWM). A time window of increased mining profitability is existent in a specific time interval after each block reward increase. Depending on the strategy of the market participants - miners who sell parts of their rewards based on their mining profitability and/or new miners joining the network as well as existing miners adding new mining hardware - an equilibrium of a new market price and new mining cost at a constant mining profitability can be expected to develop within some time after the upcoming block reward increase.