The most invasive misunderstanding related to Cryptocurrencies, is about mining rewards and the generation of coins. I sometimes wonder if seemingly intelligent and learned people willingly mislead the less informed to affect the trading price of a Cryptocurrency.
I am going to take this opportunity to explain, in the context of Bitcoin, how mining rewards work and how the network was designed to first have a stable increase in the supply of currency and second to cap the amount of currency that a would be created.
I have mentioned in earlier posts (Mining Cryptocurrencies, Mining Bitcoin with ASIC) that Bitcoin has a built in throttling system called “Difficulty” that increases or decreases the amount of computing power needed to perform the work required to find blocks on the Blockchain and earning the reward for doing so. The Difficulty is a number, a factor applied to the SHA-256 cryptographic calculation that makes it harder to do the math. Here is a chart showing the network Hash Rate and he changes in difficulty over time. The Hash Rate is the amount of work being done by miners all over the world, hunting for Blocks to earn the reward. Bitcoin was designed to issue a block reward (because a new block was found) every 10 minutes. Throttling the Difficulty is how this Block generation rate is maintained despite the rise or fall of the Network has rate. You might also notice, from the chart, that after each raise in difficulty there is a raise in Hash Rate. In addition to more users mining Bitcoin, existing miners will purchase more or upgrade their existing equipment to keep their reward rate constant.
You’re saying, “Ok so the network has built in throttling to keep the block generation time around ten minutes. But will it ever stop? How long will miners earn coins? How many coins will be minted?” One of the problems Bitcoin wanted to address, that fiat currency does not, is inflation. The controllers of any given fiat currency, while limited by laws, are left to their own to decide how much of their fiat is in circulation. Before the rise of Nazi Germany, the German government had printed so much money to pay debts, that people would need a wheel barrel to carry enough currency to purchase a loaf of bread. That’s inflation, when goods require more and more currency for their purchase. If the Bitcoin miners were awarded an unlimited number of coins forever, their value would decrease, inflation. Another attribute of the Bitcoin network is the gradual reduction of Block rewards. At the start, the Blockchain block reward was 50 bitcoins, then it was halved to 25, again to 12.5, and then finally 6.25 until Block rewards stop altogether, sometime in 2024. A total of around 21 million coins will be generated when the rewards cease. Equate that to $USD. Warren Buffet keeps that much $USD in his wallet.
I have read panicked blog posts around each halving time worded to either drive up or drive down the fiat trading price of Bitcoin. These posts usually imply a halving of the supply, not the reward. If you have any understanding of the topics discussed on the blog is should be obvious that the supply of Bitcoin CANNOT be split or reverse split like corporate stocks. It is impossible. Every transaction in the Blockchain would have to be adjusted and every block’s GUID would have to be changed and every node on the network would have to be ready to accept these changes…
Only miners are affected by the halving of the reward, not users of the supply. Miners will need to double their hash power to retain their reward rate after each halving. And then should every miner double their Has Rate, the difficulty would raise to regulate the average Block generation time to 10 minutes…. Thus, lessening the effects of the increased Hash Rate.
You might be wondering why would anyone invest heavily in mining when the reward stops in 2024. Well, right now all miners are in a race to find blocks and earn the reward. Miners who make a high level of investment in hardware and electricity earn coins as a high rate with the anticipation the investment will be profitable. But after the cessation of rewards in 2024 miners will still be able to reap the rewards of mining through transaction fees.
Network nodes validate and pass on transactions in the Blockchain. But miners are responsible for generating the blocks that contain those new transactions, so they are a vital part of the Network, or Cryptocurrency ecosystem. Rather than generating new coins, miners will acquire coins from the transaction fees attracted to the movement of currency. For instance, A transfer from address A to address B for 1.5 BTC would have an additional 0.05 BTC attached that goes to the miner that generated the block containing the transfer. Address A sends 1.55 BTC and Address B shows 1.5 BTC credited and 0.05 goes to the miner. The total supply does not raise above 21 Million, the distribution of the 21 Million coins just flows between the wallet addresses.
One of the differentiators between Bitcoin and its various Altcoin competitors is the supply to be generated. Most Altcoins have adjusted the amount of their currency to be generated and the duration of said generation of coins. Additionally, different networks have varied on the frequency of block rewards. Through altering the Cryptographic calculation and difficulty, some Blockchains generate a new block every few seconds and some much longer than 10 minutes. Generation a limit of the Altcoin’s supply is one of the factors you should research when I say “Research the Product” in, Trading Bitcoin.
Wikipedia – Bitcoin
Bitcoin Forum – The most popular place to discuss all Cryptocurrencies
Cryptocurrency Trading Charts
Most Profitable Mining Calculations