Bitcoin is a decentralized network. No single entity is trusted to update the blockchain.1 Instead, a subset of network participants, called miners, collectively take on this responsibility. This isn’t to say that miners run the network. Bitcoin’s history proves that they don’t.2 Instead, you can think of miners as security guards who are paid by the network for their labor.
Miners secure the network so that the same bitcoin can’t be spent multiple times by the same user. They do so by ordering the network’s transactions into blocks, or batches of transactions, which is akin to time-stamping them.
For providing this valuable service, miners are incentivized to bring computing power to the network with new bitcoins. Miners receive 6.25 new bitcoins3 — as of May 11, 2020 — for each block they add to the blockchain plus the associated fees from the transactions within that block.
Bitcoin’s pseudonymous creator Satoshi Nakamoto understood the temptation miners would have to break the rules to enrich themselves. So to discourage malicious behavior, he designed a system where miners have skin in the game.
Adding blocks comes at a cost. In what is known as “proof-of-work,” miners have to make an incredible number of simple computations to have a chance at winning a block (it is a competition, after all). Running so many calculations requires real-world energy consumption, and lots of it. In this way, mining connects the physical and digital worlds. A miner who would try to submit a block with invalid transactions does so at their peril. Other network participants would reject an invalid block, thereby wasting the miner’s own time and money in the process.
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- The blockchain is the history of transactions made on the network.
- Between 2015 and 2017, a faction of Bitcoin developers proposed changing the code to increase the block size beyond one megabyte. The largest miners at the time were in favor of this modification, yet the proposal never gained consensus among node operators and ultimately failed to be implemented.
- The amount of bitcoin miners receive for discovering blocks is cut in half approximately every four years in what is known as a halving. This regular event is programmed into the protocol. Halvings occur, arguably, for two reasons: 1) Satoshi anticipated that with the rising value of bitcoin it would take less of a reward (in bitcoin terms) to incentivize miners to participate and 2) halvings limit the supply of new bitcoin resulting in a decreasing rate of inflation.
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