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@ -22,9 +22,9 @@ In this chapter, we will first examine mining as a monetary supply mechanism and
==== Bitcoin Economics and Currency Creation
((("currency creation", id="ix_ch08-asciidoc2", range="startofrange")))((("mining","currency creation", id="ix_ch08-asciidoc3", range="startofrange")))Bitcoins 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 bitcoins, 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.
((("currency creation", id="ix_ch08-asciidoc2", range="startofrange")))((("mining","currency creation", id="ix_ch08-asciidoc3", range="startofrange")))Bitcoins 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 bitcoins, 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 bitcoins.
In November of 2012, the new bitcoin issuance rate was decreased to 25 bitcoin per block and it will decrease again to 12.5 bitcoin at block 420,000, which will be mined sometime in 2016. The rate of new coins decreases like this exponentially over 64 "halvings." until block 13,230,000 (mined approximately in year 2137) when it reaches the minimum currency unit of 1 satoshi. Finally, after 13.44 million blocks, in approximately 2140, all 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 bitcoins per block and it will decrease again to 12.5 bitcoins at block 420,000, which will be mined sometime in 2016. The rate of new coins decreases like this exponentially over 64 "halvings" until block 13,230,000 (mined approximately in year 2137), when it reaches the minimum currency unit of 1 satoshi. Finally, after 13.44 million blocks, in approximately 2140, all 2,099,999,997,690,000 satoshis, or almost 21 million bitcoins, will be issued. Thereafter, blocks will contain no new bitcoins, 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 the example code in <<max_money>>, we calculate the total amount of bitcoin that will be issued.
@ -59,7 +59,7 @@ image::images/msbt_0801.png["BitcoinMoneySupply"]
****
((("deflationary money")))The most important and debated consequence of a fixed and diminishing monetary issuance is that the currency will tend to be inherently _deflationary_. Deflation is the phenomenon of appreciation of value due to a mismatch in supply and demand that drives up the value (and exchange rate) of a currency. The opposite of inflation, price deflation means that the money has more purchasing power over time.
Many economists argue that a deflationary economy is a disaster that should be avoided at all costs. That is because in a period of rapid deflation people will tend to hoard money instead of spending it, hoping that prices will fall. Such a phenomenon unfolded during Japan's "Lost Decade," when a complete collapse of demand pushed the currency into a deflationary spiral.
Many economists argue that a deflationary economy is a disaster that should be avoided at all costs. That is because in a period of rapid deflation, people tend to hoard money instead of spending it, hoping that prices will fall. Such a phenomenon unfolded during Japan's "Lost Decade," when a complete collapse of demand pushed the currency into a deflationary spiral.
Bitcoin experts argue that deflation is not bad per se. Rather, deflation is associated with a collapse in demand because that is the only example of deflation we have to study. In a fiat currency with the possibility of unlimited printing, it is very difficult to enter a deflationary spiral unless there is a complete collapse in demand and an unwillingness to print money. Deflation in bitcoin is not caused by a collapse in demand, but by a predictably constrained supply.
@ -70,23 +70,23 @@ In practice, it has become evident that the hoarding instinct caused by a deflat
((("consensus","decentralized")))((("decentralized consensus")))In the previous chapter we looked at the block chain, the global public ledger (list) of all transactions, which everyone in the bitcoin network accepts as the authoritative record of ownership.
But how can everyone in the network agree on a single universal "truth" about who owns what, without having to trust anyone? All traditional payment systems depend on a trust model that has a central authority providing a clearinghouse service, basically verifying and clearing all transactions. Bitcoin has no central authority, yet somehow every node has a complete copy of a public ledger that it can trust as the authoritative record. The blockchain is not created by a central authority, but is assembled independently by every node in the network. Somehow, every node in the network, acting on information transmitted across insecure network connections, can arrive at the same conclusion and assemble a copy of the same public ledger as everyone else. This chapter examines the process by which the bitcoin network achieves global consensus without central authority.
But how can everyone in the network agree on a single universal "truth" about who owns what, without having to trust anyone? All traditional payment systems depend on a trust model that has a central authority providing a clearinghouse service, basically verifying and clearing all transactions. Bitcoin has no central authority, yet somehow every full node has a complete copy of a public ledger that it can trust as the authoritative record. The block chain is not created by a central authority, but is assembled independently by every node in the network. Somehow, every node in the network, acting on information transmitted across insecure network connections, can arrive at the same conclusion and assemble a copy of the same public ledger as everyone else. This chapter examines the process by which the bitcoin network achieves global consensus without central authority.
((("Nakamoto, Satoshi")))Satoshi Nakamoto's main invention is the decentralized mechanism for((("emergent consensus"))) _emergent consensus_. Emergent, because consensus is not achieved explicitly—there is no election or fixed moment when consensus occurs. Instead, consensus is an emergent artifact of the asynchronous interaction of thousands of independent nodes, all following simple rules. All the properties of bitcoin, including currency, transactions, payments, and the security model that does not depend on central authority or trust, derive from this invention.
Bitcoin's decentralized consensus emerges from the interplay of four processes that occur independently on nodes across the network:
* Independent verification of each transaction, by every full node, based on a comprehensive list of criteria
* Independent aggregation of those transactions into new blocks by mining nodes, coupled with demonstrated computation through a Proof-Of-Work algorithm
* Independent aggregation of those transactions into new blocks by mining nodes, coupled with demonstrated computation through a proof-of-work algorithm
* Independent verification of the new blocks by every node and assembly into a chain
* Independent selection, by every node, of the chain with the most cumulative computation demonstrated through Proof-Of-Work
* Independent selection, by every node, of the chain with the most cumulative computation demonstrated through proof of work
In the next few sections we will examine these processes and how they interact to create the emergent property of network-wide consensus that allows any bitcoin node to assemble its own copy of the authoritative, trusted, public, global ledger.
[[tx_verification]]
=== Independent Verification of Transactions
((("consensus","transactions independent verification")))((("transactions","independent verification of")))In <<transactions>> we saw how wallet software creates transactions by collecting UTXO, providing the appropriate unlocking scripts, and then constructing new outputs assigned to a new owner. The resulting transaction is then sent to the neighboring nodes in the bitcoin network so that it may be propagated across the entire bitcoin network.
((("consensus","transactions independent verification")))((("transactions","independent verification of")))In <<transactions>>, we saw how wallet software creates transactions by collecting UTXO, providing the appropriate unlocking scripts, and then constructing new outputs assigned to a new owner. The resulting transaction is then sent to the neighboring nodes in the bitcoin network so that it can be propagated across the entire bitcoin network.
However, before forwarding transactions to its neighbors, every bitcoin node that receives a transaction will first verify the transaction. This ensures that only valid transactions are propagated across the network, while invalid transactions are discarded at the first node that encounters them.
@ -102,7 +102,7 @@ However, before forwarding transactions to its neighbors, every bitcoin node tha
* The number of signature operations contained in the transaction is less than the signature operation limit.
* The unlocking script (+scriptSig+) can only push numbers on the stack, and the locking script (+scriptPubkey+) must match +isStandard+ forms (this rejects "nonstandard" transactions).
* A matching transaction in the pool, or in a block in the main branch, must exist.
* For each input, if the referenced output exists in any other transaction in the pool, reject this transaction.
* For each input, if the referenced output exists in any other transaction in the pool, the transaction must be rejected.
* For each input, look in the main branch and the transaction pool to find the referenced output transaction. If the output transaction is missing for any input, this will be an orphan transaction. Add to the orphan transactions pool, if a matching transaction is not already in the pool.
* For each input, if the referenced output transaction is a coinbase output, it must have at least +COINBASE_MATURITY+ (100) confirmations.
* For each input, the referenced output must exist and cannot already be spent.