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Bitcoin Mining Explained


What is Bitcoin Mining and how are Miners incentivised to mine, short and long-term.

Miners provide the computing power

Bitcoin’s true genius is more in its economic design than in any technical innovation. To create a payment system where participants do not have to rely an intermediary (such as a bank or payment processor) to facilitate transactions while also preventing “double-spending” of coins, Bitcoin had to create an incentive for multiple nodes in a network to maintain a copy of the same transaction ledger – so that network participants do not have to depend on any single keeper of the ledger. Bitcoin’s solution was for “miners” to provide computing power to keep a validated public history of the transactions.

How Mining Works

Miners compete for the right to add new blocks (on average, every 10 minutes) to the blockchain. They win that right by solving a complex mathematical algorithm that requires significant computing power (“proof of work”) to find an extremely rare value and to validate and order transactions. It is like running computing servers randomly generating numbers until someone hits a lucky combination of winning lottery numbers. The first miner to find the extremely rare value wins the right to add the next block of validated transactions to the blockchain. This requires miners to run computing equipment constantly, at all hours, in a race to win each block.

What are the economic incentives for miners?

When a miner wins a block, it earns a block reward of Bitcoin that consists of two parts: (1) freshly released Bitcoin in a set number of coins – a time degrading static “subsidy” as their block reward; and (2) the transaction fees paid by senders for all transactions contained in their block.

The static subsidy amount for each block mined continues to halve every 4 years until the total circulation of 21 million Bitcoins (which were issued into the system upon Bitcoin’s launch) has been released, and then the subsidy completely vanishes. Thus, the static subsidy was never meant to be the primary source of revenue supporting miners.

Instead, as the static subsidy (of newly minted Bitcoin) decreased, Bitcoin’s design intended for miners to earn more in the transaction fees from each block. Eventually, once the block reward vanishes, it must be permanently replaced by transaction fees.

Bigger Blocks are Critical

For the miners to remain economically incentivised to continue to secure the Bitcoin Blockchain as the static subsidy continues to get cut in half, bigger block sizes are required. These bigger blocks are needed to fit millions and eventually billions of transactions, each generating more transaction fee revenue for the miners to offset the lost revenue from the reducing static subsidy.

Unfortunately, the BTC network has kept block size very small – just 1MB, which fits very few transactions. This will not provide miners enough transaction fee revenue as the fixed subsidy continues to cut in half.

Bitcoin SV restores Satoshi’s original vision. It uncaps the block size and makes data capacity unlimited; this means BSV can support blocks with huge numbers of transactions, which even with low transaction fees, can sustain mining profitability for years to come.

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