Who are Miners and Why are They Important to Bitcoin’s Design?

LearnWho are Miners and Why are They Important to Bitcoin’s Design?

Who are Miners and Why are They Important to Bitcoin’s Design?

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.

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.

Miners provide the computational investment to keep the Bitcoin ledger and secure the network. Thus, this block reward system economically incentivizes the miners to be rule enforcers. It uses a proof-of-work consensus mechanism to secure the network and have miners compete to validate transactions that get stored immutably on the blockchain.

Mining costs money – especially the electricity and maintenance costs needed to run computing equipment at all hours to compete for each block. Early in Bitcoin’s history, individuals could mine using their home computers and successfully win blocks. But Bitcoin mining has grown so large and specialized mining equipment has now emerged, so that mining has become professionalized. It now requires significant investments in hardware and possessing the technical expertise to run or participate in large scale data centers to successfully win blocks.

So, what are the economic incentives for miners to provide their computing power for the network? 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 Bitcoin protocol issued (upon its original launch) 21 million coins, the total number that will ever exist in the Bitcoin system. For every block mined, the software releases a number of coins (the static subsidy amount per block) from that 21 million supply to the winning mining node who then can further distribute those coins to other networks users. In this manner, the Bitcoin system uses a competitive proof-of-work process, based upon a set of rules, to release more coins from the fully-issued 21 million coins approximately every 10 minutes.

The Bitcoin Protocol is set so that the static subsidy amount for each block cuts in half approximately every four years. The amount began as 50 coins per block; the Bitcoin protocol cuts this subsidy number in half approximately every 4 years, first to 25 coins and currently at 12.5 coins. In May 2020, the static subsidy per block halves again to 6.25 coins.

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 Bitcon’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. At the next halving in 2020, nearly 90% of all Bitcoins from the 21 million issued supply will have been released.

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.

For the miners to remain economically incentivized 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.