Mining is the process by which new bitcoin is added to the money supply. Mining also serves to secure the bitcoin system against fraudulent transactions or transactions spending the same amount of bitcoin more than once, known as a double-spend. Miners act as a decentralized clearinghouse, validating new transactions and recording them on the global ledger. A new block, containing transactions which occurred since the last block, is "mined" every 10 minutes thereby adding those transactions to the blockchain. Transactions that become part of a block and added to the blockchain are considered "confirmed", which allows the new owners of bitcoin to spend the bitcoin they received in those transactions. Miners receive two types of reward 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.
Mining is the process by which new bitcoin is added to the money supply. Mining also serves to secure the bitcoin system against fraudulent transactions or transactions spending the same amount of bitcoin more than once, known as a double-spend. Miners act as a decentralized clearinghouse, validating new transactions and recording 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 blockchain. Transactions that become part of a block and added to the blockchain are considered "confirmed", which allows the new owners of bitcoin to spend the bitcoin they received in those transactions. Miners receive two types of reward 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.
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, just like a central bank issues new money by printing bank notes. 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 (20.99 million) will have been issued. After 2140, no new bitcoins are issued.
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. 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 (20.99 million) will have been issued. After 2140, no new bitcoins are 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 bitcoins. 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. After 2140 all bitcoin miner earnings will be in the form of transaction fees.
@ -16,13 +16,13 @@ In this chapter, we will first examine mining as a monetary supply mechanism and
==== Bitcoin Economics and Currency Creation
Bitcoins are "minted" during the creation of each block at a fixed and diminishing rate. Each block, generated on average every 10 minutes, contains a entirely new bitcoins, created ex nihilo (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 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 in year 2137, approximately) 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.
Bitcoins are "minted" during the creation of each block at a fixed and diminishing rate. Each block, generated on average every 10 minutes, contains an entirely new bitcoins, created ex nihilo (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 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 in year 2137, approximately) 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]]
.Supply of bitcoin currency over time based on a geometrically decreasing issuance rate
The finite and diminishing issuance creates a fixed monetary supply that resists inflation. Unlike a fiat currency which can be printed in infinite numbers by a central bank, bitcoin can never be inflated by printing.
The finite and diminishing issuance creates a fixed monetary supply that resists inflation. Unlike a fiat currency, which can be printed in infinite numbers by a central bank, bitcoin can never be inflated by printing.
===== Deflationary Money
@ -40,7 +40,7 @@ In the previous chapter we looked at the blockchain, the global public ledger (l
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.
Satoshi Nakamoto's main invention is the decentralized mechanism for _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 central authority or trust derive from this invention.
Satoshi Nakamoto's main invention is the decentralized mechanism for _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 central authority or trust derive from this invention.
Bitcoin's de-centralized consensus emerges from the interplay of four processes that occur independently on nodes across the network:
@ -223,7 +223,7 @@ Unlike regular transactions, the generation transaction does not consume (spend)
==== Coinbase Reward and Fees
To construct the generation transaction, Jing's node first calculates the total amount of transaction fees, by adding all the inputs and outputs of the 418 transactions that were added to the block. The fees are calculated as:
To construct the generation transaction, Jing's node first calculates the total amount of transaction fees by adding all the inputs and outputs of the 418 transactions that were added to the block. The fees are calculated as:
----
Total Fees = Sum(Inputs) - Sum(Outputs)
@ -303,7 +303,7 @@ In a generation transaction, the first two fields are set to values that do not
==== Coinbase Data
Generation transactions do not have an unlocking script (a.k.a scriptSig) field. Instead, this field is replaced by coinbase data, which must be between 2 and 100 bytes. Except for the first few bytes (see below) the rest of the coinbase data can be used by miners in any way they want, it is arbitrary data.
Generation transactions do not have an unlocking script (a.k.a. scriptSig) field. Instead, this field is replaced by coinbase data, which must be between 2 and 100 bytes. Except for the first few bytes (see below) the rest of the coinbase data can be used by miners in any way they want; it is arbitrary data.
In the genesis block, for example, Satoshi Nakamoto added the text "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks" in the coinbase data, using it as a proof of the date and to convey a message. Currently, miners use the coinbase data to include extra nonce values (see <<mining>>) and strings identifying the mining pool, as we will see in the following sections.
@ -545,7 +545,7 @@ switching back to hexadecimal:
This means that a valid block for height 277,316 is one that has a block header hash that is less than the target. In binary that number would have more than the first 60 bits set to zero. With this level of difficulty, a single miner processing 1 trillion hashes per second (1 tera-hash per second or 1 TH/sec) would only find a solution once every 8,496 blocks or once every 59 days, on average.
==== Difficulty Target and Re-Targetting
==== Difficulty Target and Re-Targeting
As we saw above the target determines the difficulty and therefore affects how long it takes to find a solution to the Proof-of-Work algorithm. This leads to the obvious questions: Why is the difficulty adjustable, who adjusts it and how?
@ -637,9 +637,9 @@ The final step in bitcoin's de-centralized consensus mechanism is the assembly o
Nodes maintain three sets of blocks: those connected to the main blockchain, those that form branches off the main blockchain (secondary chains) and finally blocks that do not have a known parent in the known chains (orphans). Invalid blocks are rejected as soon as any one of the validation criteria fails and are therefore not included in any chain.
The "main chain" at any time is whichever chain of blocks has the most cumulative difficulty associated with it. Under most circumstances this is also the chain with the most blocks in it, unless there are two equal length chains and one has more proof-of-work. The main chain will also have branches with blocks that are "siblings" to the blocks on the main chain. These blocks are valid but not part of the main chain. They are kept for future reference, in case one of those chains is extended to exceeds the main chain in difficulty. In the next section (<<forks>>), we will see how secondary chains occur as a result of an almost simultaneous mining of blocks at the same height.
The "main chain" at any time is whichever chain of blocks has the most cumulative difficulty associated with it. Under most circumstances this is also the chain with the most blocks in it, unless there are two equal length chains and one has more proof-of-work. The main chain will also have branches with blocks that are "siblings" to the blocks on the main chain. These blocks are valid but not part of the main chain. They are kept for future reference, in case one of those chains is extended to exceed the main chain in difficulty. In the next section (<<forks>>), we will see how secondary chains occur as a result of an almost simultaneous mining of blocks at the same height.
When a new block is received, a node will try to slot it into the existing blockchain. The node will look at the block's "previous block hash" field, which is the reference to the new block's parent. Then the node will attempt to find that parent in the existing blockchain. Most of the time, the parent will be the "tip" of the main chain, meaning this new block extends the main chain. For example, the new block 277,316 has a reference to the hash of its parent block 277,315. Most nodes that receive 277,316 will already have block 277,315 as the tip of their main chain and will therefore link the new block and extend that chain.
When a new block is received, a node will try to slot it into the existing blockchain. The node will look at the block's "previous block hash" field, which is the reference to the new block's parent. Then, the node will attempt to find that parent in the existing blockchain. Most of the time, the parent will be the "tip" of the main chain, meaning this new block extends the main chain. For example, the new block 277,316 has a reference to the hash of its parent block 277,315. Most nodes that receive 277,316 will already have block 277,315 as the tip of their main chain and will therefore link the new block and extend that chain.
Sometimes, as we will see in <<forks>>, the new block extends a chain that is not the main chain. In that case, the node will attach the new block to the secondary chain it extends and then compare the difficulty of the secondary chain to the main chain. If the secondary chain has more cumulative difficulty than the main chain, the node will _reconverge_ on the secondary chain, meaning it will select the secondary chain as its new main chain, making the old main chain a secondary chain. If the node is a miner, it will now construct a block extending this new, longer, chain.
A "fork" occurs whenever there are two candidate blocks competing to form the longest blockchain. This occurs under normal conditions whenever two miners solve the Proof-of-Work algorithm within a short period of time from each other. As both miners discover a solution for their respective candidate blocks, they immediately broadcast their own "winning" block to their immediate neighbors who begin propagating the block across the network. Each node that receives a valid block will incorporate it into their blockchain, extending the blockchain by one block. If that node later sees another candidate block extending the same parent, they connect the second candidate on a secondary chain. As a result, some nodes will "see" one candidate block first, while other nodes will see the other candidate block and two competing versions of the blockchain will emerge.
In the diagram below, we see two miners who mine two different blocks almost simultaneously. Both of these blocks are children of the blue block, meant to extend the chain by building on top of the blue block. To help us track it, one is visualized as a red block originating from Canada, the other is marked as a green block originating from Australia.
In the diagram below, we see two miners who mine two different blocks almost simultaneously. Both of these blocks are children of the blue block, meant to extend the chain by building on top of the blue block. To help us track it, one is visualized as a red block originating from Canada, and the other is marked as a green block originating from Australia.
[[fork2]]
.Visualization of a blockchain fork event - Two blocks found simultaneously
Ed Eykholt
10 years ago