@ -254,7 +254,7 @@ Jing started mining in 2010 using a very fast desktop computer to find a suitabl
((("blocks", "mining transactions in")))New transactions are constantly flowing into the network from user wallets and other applications. As these are seen by the bitcoin network nodes, they get added to a temporary pool of unverified transactions maintained by each node. As miners construct a new block, they add unverified transactions from this pool to the new block and then attempt to prove the validity of that new block, with the mining algorithm (Proof-of-Work). The process of mining is explained in detail in <<mining>>.
Transactions are added to the new block, prioritized by the highest-fee transactions first and a few other criteria. Each miner starts the process of mining a new block of transactions as soon as he receives the previous block from the network, knowing he has lost that previous round of competition. He immediately creates a new block, fills it with transactions and the fingerprint of the previous block, and starts calculating the Proof-of-Work for the new block. Each miner includes a special transaction in his block, one that pays his own bitcoin address the block reward (currently 12.5 newly created bitcoin) plus the sum of transaction fees from all the transactions included in the block. If he finds a solution that makes that block valid, he "wins" this reward because his successful block is added to the global blockchain and the reward transaction he included becomes spendable. ((("mining pools", "operation of")))Jing, who participates in a mining pool, has set up his software to create new blocks that assign the reward to a pool address. From there, a share of the reward is distributed to Jing and other miners in proportion to the amount of work they contributed in the last round.
Transactions are added to the new block, prioritized by the highest-fee transactions first and a few other criteria. Each miner starts the process of mining a new block of transactions as soon as he receives the previous block from the network, knowing he has lost that previous round of competition. He immediately creates a new block, fills it with transactions and the fingerprint of the previous block, and starts calculating the Proof-of-Work for the new block. Each miner includes a special transaction in his block, one that pays his own bitcoin address the block reward (currently 6.25 newly created bitcoin) plus the sum of transaction fees from all the transactions included in the block. If he finds a solution that makes that block valid, he "wins" this reward because his successful block is added to the global blockchain and the reward transaction he included becomes spendable. ((("mining pools", "operation of")))Jing, who participates in a mining pool, has set up his software to create new blocks that assign the reward to a pool address. From there, a share of the reward is distributed to Jing and other miners in proportion to the amount of work they contributed in the last round.
((("candidate blocks")))((("blocks", "candidate blocks")))Alice's transaction was picked up by the network and included in the pool of unverified transactions. Once validated by the mining software it was included in a new block, called a _candidate block_, generated by Jing's mining pool. All the miners participating in that mining pool immediately start computing Proof-of-Work for the candidate block. Approximately five minutes after the transaction was first transmitted by Alice's wallet, one of Jing's ASIC miners found a solution for the candidate block and announced it to the network. Once other miners validated the winning block they started the race to generate the next block.
@ -17,7 +17,7 @@ Miners validate new transactions and record them on the global ledger. A new blo
((("fees", "mining rewards")))((("mining and consensus", "mining rewards and fees")))((("Proof-of-Work algorithm")))((("mining and consensus", "Proof-of-Work algorithm")))Miners receive two types of rewards in return for the security provided by mining: new coins created with each new block, and transaction fees from all the transactions included in the block. To earn this reward, 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 the reward and the right to record transactions on the blockchain is the basis for bitcoin's security model.
The process is called mining because the reward (new coin generation) 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. The maximum 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 halved again to 12.5 bitcoin in July 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 bitcoin will be issued.
The process is called mining because the reward (new coin generation) 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. The maximum 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 halved to 12.5 bitcoin in July 2016 and again to 6.25 bitcoin in May 2020. 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 bitcoin will be issued.
Bitcoin miners also earn fees from transactions. Every transaction may include a transaction fee, in the form of a surplus of bitcoin between the transaction's inputs and outputs. The winning bitcoin miner gets to "keep the change" on the transactions included in the winning block. Today, the fees represent 0.5% or less of a bitcoin miner's income, the vast majority coming from the newly minted bitcoin. However, as the reward decreases over time and the number of transactions per block increases, a greater proportion of bitcoin mining earnings will come from fees. Gradually, the mining reward will be dominated by transaction fees, which will form the primary incentive for miners. After 2140, the amount of new bitcoin in each block drops to zero and bitcoin mining will be incentivized only by transaction fees.
@ -29,7 +29,7 @@ To understand mining and consensus, we will follow Alice's transaction as it is
((("mining and consensus", "bitcoin economics and currency creation")))((("currency creation")))((("money supply")))((("issuance rate")))Bitcoin are "minted" during the creation of each block at a fixed and diminishing rate. Each block, generated on average every 10 minutes, contains entirely new bitcoin, created from nothing. Every 210,000 blocks, or approximately every four years, the currency issuance rate is decreased by 50%. For the first four years of operation of the network, each block contained 50 new bitcoin.
In November 2012, the new bitcoin issuance rate was decreased to 25 bitcoin per block. In July of 2016 it was decreased again to 12.5 bitcoin per block. It will halve again to 6.25 bitcoin at block 630,000, which will be mined sometime in 2020. The rate of new coins decreases like this exponentially over 32 "halvings" until block 6,720,000 (mined approximately in year 2137), when it reaches the minimum currency unit of 1 satoshi. Finally, after 6.93 million blocks, in approximately 2140, almost 2,099,999,997,690,000 satoshis, or almost 21 million bitcoin, will be issued. Thereafter, blocks will contain no new bitcoin, and miners will be rewarded solely through the transaction fees. <<bitcoin_money_supply>> shows the total bitcoin in circulation over time, as the issuance of currency decreases.
In November 2012, the new bitcoin issuance rate was decreased to 25 bitcoin per block. In July of 2016 it was decreased to 12.5 bitcoin per block, and in May of 2020 it was decreased again to 6.25 bitcoin per block. The rate of new coins decreases like this exponentially over 32 "halvings" until block 6,720,000 (mined approximately in year 2137), when it reaches the minimum currency unit of 1 satoshi. Finally, after 6.93 million blocks, in approximately 2140, almost 2,099,999,997,690,000 satoshis, or almost 21 million bitcoin, will be issued. Thereafter, blocks will contain no new bitcoin, and miners will be rewarded solely through the transaction fees. <<bitcoin_money_supply>> shows the total bitcoin in circulation over time, as the issuance of currency decreases.
[[bitcoin_money_supply]]
.Supply of bitcoin currency over time based on a geometrically decreasing issuance rate
When block 277,316 was mined, the reward was 25 bitcoin per block. Since then, one "halving" period has elapsed. The block reward changed to 12.5 bitcoin in July 2016. It will be halved again in 210,000 blocks, in the year 2020.
When block 277,316 was mined, the reward was 25 bitcoin per block. Since then, two "halving" periods have elapsed. The block reward changed to 12.5 bitcoin in July 2016 and to 6.25 bitcoin in May 2020.
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Jing's node creates the coinbase transaction as a payment to his own wallet: "Pay Jing's address 25.09094928 bitcoin." The total amount of reward that Jing collects for mining a block is the sum of the coinbase reward (25 new bitcoin) and the transaction fees (0.09094928) from all the transactions included in the block as shown in <<generation_tx_example>>.
@ -877,7 +877,7 @@ Let's look at a specific example. Assume a miner has purchased mining hardware w
...where 210240 is the number of blocks in four years. The miner has a 98% probability of finding a block over four years, based on the global hash rate at the beginning of the period.
If the miner does find a single block in that timeframe, the payout of 12.5 bitcoin, at approximately $1,000 per bitcoin, will result in a single payout of $12,500, which will produce a net profit of about $7,000. However, the chance of finding a block in a 4-year period depends on the miner's luck. He might find two blocks in 4 years and make a very large profit. Or he might not find a block for 5 years and suffer a bigger financial loss. Even worse, the difficulty of the bitcoin Proof-of-Work algorithm is likely to go up significantly over that period, at the current rate of growth of hashing power, meaning the miner has, at most, one year to break even before the hardware is effectively obsolete and must be replaced by more powerful mining hardware. If this miner participates in a mining pool, instead of waiting for a once-in-four-years $12,500 windfall, he will be able to earn approximately $50 to $60 per week. The regular payouts from a mining pool will help him amortize the cost of hardware and electricity over time without taking an enormous risk. The hardware will still be obsolete in one or two years and the risk is still high, but the revenue is at least regular and reliable over that period. Financially this only makes sense at very low electricity cost (less than 1 cent per kW-hour) and only at very large scale.
If the miner does find a single block in that timeframe, the payout of 6.25 bitcoin, at approximately $1,000 per bitcoin, will result in a single payout of $6,250, which will produce a net profit of about $750. However, the chance of finding a block in a 4-year period depends on the miner's luck. He might find two blocks in 4 years and make a larger profit. Or he might not find a block for 5 years and suffer a big financial loss. Even worse, the difficulty of the bitcoin Proof-of-Work algorithm is likely to go up significantly over that period, at the current rate of growth of hashing power, meaning the miner has, at most, one year to break even before the hardware is effectively obsolete and must be replaced by more powerful mining hardware. Financially this only makes sense at very low electricity cost (less than 1 cent per kW-hour) and only at very large scale.
Mining pools coordinate many hundreds or thousands of miners, over specialized pool-mining protocols. The individual miners configure their mining equipment to connect to a pool server, after creating an account with the pool. Their mining hardware remains connected to the pool server while mining, synchronizing their efforts with the other miners. Thus, the pool miners share the effort to mine a block and then share in the rewards.
Will Binns
4 years ago