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Miners validate new transactions and record them on the global ledger. A new block, containing transactions that occurred since the last block, is "mined" every 10 minutes, thereby adding those transactions to the block chain. Transactions that become part of a block and added to the block chain are considered "confirmed," which allows the new owners of bitcoin to spend the bitcoin they received in those transactions.
Miners receive two types of rewards for mining: new coins created with each new block, and transaction fees from all the transactions included in the block. To earn this reward, the miners compete to solve a difficult mathematical problem based on a cryptographic hash algorithm. The solution to the problem, called the proof of work, is included in the new block and acts as proof that the miner expended significant computing effort. The competition to solve the proof-of-work algorithm to earn reward and the right to record transactions on the blockchain is the basis for bitcoin's security model.
Miners receive two types of rewards for mining: new coins created with each new block, and transaction fees from all the transactions included in the block. To earn this reward, the miners compete to solve a difficult mathematical problem based on a cryptographic hash algorithm. The solution to the problem, called the proof of work, is included in the new block and acts as proof that the miner expended significant computing effort. The competition to solve the proof-of-work algorithm to earn reward and the right to record transactions on the block chain is the basis for bitcoin's security model.
((("new coin generation")))The process of new coin generation is called mining because the reward is designed to simulate diminishing returns, just like mining for precious metals. Bitcoin's money supply is created through mining, similar to how a central bank issues new money by printing bank notes. ((("bitcoin","rate of issuance")))The amount of newly created bitcoin a miner can add to a block decreases approximately every four years (or precisely every 210,000 blocks). It started at 50 bitcoin per block in January of 2009 and halved to 25 bitcoin per block in November of 2012. It will halve again to 12.5 bitcoin per block sometime in 2016. Based on this formula, bitcoin mining rewards decrease exponentially until approximately the year 2140, when all bitcoin (20.99999998 million) will have been issued. After 2140, no new bitcoins will be issued.
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Mining is the invention that makes bitcoin special, a decentralized security mechanism that is the basis for peer-to-peer digital cash. The reward of newly minted coins and transaction fees is an incentive scheme that aligns the actions of miners with the security of the network, while simultaneously implementing the monetary supply.
In this chapter, we will first examine mining as a monetary supply mechanism and then look at the most important function of mining, the decentralized emergent consensus mechanism that underpins bitcoin's security.
In this chapter, we will first examine mining as a monetary supply mechanism and then look at the most important function of mining: the decentralized emergent consensus mechanism that underpins bitcoin's security.
==== Bitcoin Economics and Currency Creation