One of the main areas of skepticism that people hold onto when they are new to the Bitcoin ecosystem has to do with who is receiving new bitcoins after they have been created. After all, if this is supposed to be a decentralized currency and payment system, it wouldn’t make too much sense if there was just some guy printing bitcoins off on his home computer. New bitcoins are distributed through the Bitcoin mining process, which is basically a lottery between many different miners who are trying to crack the algorithmic code associated with the next 25 bitcoins to be released. Let’s take a closer look at the mining process and how the recipients of newly minted bitcoins are really decided.
What is Bitcoin Mining?
Bitcoin mining is basically the act of checking all of the transactions on the Bitcoin network to make sure that there is no funny business going on. Some people have actually stated that “mining” would actually be the wrong word to describe this process of checking transactions on the Bitcoin network, but it seems that this phrasing has stuck for now. In addition to checking the Bitcoin ledger, the mining process also is also the way new bitcoins enter the Bitcoin ecosystem. In simple terms, there is basically a secret number that is being searched for roughly every ten minutes by the Bitcoin miners who are currently connected to the network. The miner who is able to guess that number before anyone else is the one who gets to add the latest block of transactions to the Bitcoin ledger. For his work, the miner is rewarded with 25 bitcoins.
A Lowering Reward
Although the reward for solving a transaction block’s secret code is 25 bitcoins at this point in time, it actually used to be twice that in the early days of the Bitcoin blockchain. The “block reward” will continue to half roughly every four years. This means that the block reward will actually decline to 12.5 bitcoins per block in the year 2016. The main reason for this block reward halving is to make sure that the supply of bitcoins is limited. Bitcoin’s creator, Satoshi Nakamoto, understood the value of a sound money that needed to be limited in supply if it was going to turn into a currency to be used in real world transactions. At a certain point in the distant future, there will actually be no new bitcoins that need to be created with each new block of transactions. The total supply of 21 million bitcoins is estimated to be in circulation by the year 2140.
Bitcoin After Mining
As mentioned above, the main reason that people mine bitcoins right now is the fact that they are rewarded for their work with newly minted bitcoins. Trying to win the Bitcoin mining lottery every ten minutes can take an immense amount of computing power, which has become rather expensive as the Bitcoin network has grown. So what is going to happen in 2140 when the mining rewards are taken away? This is where transaction fees come into play. In addition to the block reward, the miner who finds the solution for the latest block of transactions is also rewarded with the transaction fees from that roughly ten minute window of Bitcoin transactions. Each Bitcoin transaction comes with a roughly $0.05 fee on it right now, but we could see this number increase rather substantially if the total value of all the bitcoins in the world continues to rise. This is something that will be worked on by the core developers of the Bitcoin protocol in the years to come, but something will have to change if bitcoins are going to be both hugely valuable and a useful means of payment. Otherwise, we could see the hashing power that secures the entire Bitcoin network continue to decline as transaction fees start taking up a larger percentage of the overall reward for miners.