Bitcoin is a digital currency that was created in 2009 by an unknown person using the name Satoshi Nakamoto. Transactions are made with no middle men – meaning, no banks! Bitcoin can be used to book hotels on Expedia, shop for furniture on Overstock and buy Xbox games. But much of the hype is about getting rich by trading it. The price of bitcoin skyrocketed into the thousands in 2017.
Bitcoin is a decentralized digital currency that is based on a peer-to-peer network. It is not controlled by any central authority and can be used to transfer money directly between individuals. It was created as an alternative to traditional currencies and is often referred to as a cryptocurrency.
One of the unique features of Bitcoin is its block reward system. In this article, we will explain how Bitcoin block rewards work.
What is a Bitcoin block?
In the Bitcoin network, transactions are grouped together into blocks. Each block contains a list of recent transactions and a reference to the previous block in the chain. This creates a blockchain, which is a public ledger of all Bitcoin transactions.
Blocks are created by miners, who use powerful computers to solve complex mathematical problems. When a miner solves a problem, they create a new block and add it to the blockchain. This process is called mining.
What is a block reward?
When a miner creates a new block, they are rewarded with a certain number of bitcoins. This is known as a block reward. The block reward serves two main purposes:
1. It incentivizes miners to create new blocks and secure the network.
2. It introduces new bitcoins into circulation.
When Bitcoin was first created, the block reward was 50 bitcoins. However, the block reward is designed to decrease over time. Every 210,000 blocks, the block reward is cut in half. This is known as the halving.
The first halving occurred in 2012, when the block reward was reduced from 50 bitcoins to 25 bitcoins. The second halving occurred in 2016, when the block reward was reduced from 25 bitcoins to 12.5 bitcoins. The next halving is expected to occur in 2020, when the block reward will be reduced from 12.5 bitcoins to 6.25 bitcoins.
Why do block rewards decrease?
The block reward system is designed to limit the total number of bitcoins that can be created. The maximum number of bitcoins that can be created is 21 million. Once all 21 million bitcoins have been created, no more bitcoins will be introduced into circulation.
The decreasing block reward is designed to simulate the production of a finite resource. This is similar to how gold is mined from the earth. When gold is first discovered, it is relatively easy to mine. As more gold is mined, it becomes harder to find and extract. This is known as the law of diminishing returns.
The decreasing block reward is also designed to prevent inflation. If the block reward remained constant, the total number of bitcoins in circulation would increase at a steady rate. This would lead to inflation, as the value of each bitcoin would decrease over time.
What happens when all the bitcoins are mined?
Once all 21 million bitcoins have been mined, miners will no longer receive block rewards. Instead, they will earn transaction fees for processing transactions. Transaction fees are paid by users who want their transactions to be processed quickly. The higher the fee, the faster the transaction will be processed.
Transaction fees are currently a small percentage of the total reward received by miners. However, as the block reward decreases, transaction fees will become a more important source of income for miners.
Conclusion
The Bitcoin block reward system is a key feature of the Bitcoin network. It incentivizes miners to secure the network and introduces new bitcoins into circulation. The decreasing block reward is designed to limit the total number of bitcoins that can be created and prevent inflation. Once all 21 million bitcoins have been mined, miners will earn transaction fees for processing transactions.
