Bitcoin: The money supply The mechanisms by which the supply of bitcoins is controlled.
Bitcoin: The money supply
- In the last video
- I talked about how bitcoin transactions are really incorporated
- into a global and a publicly accessible ledger of sorts
- that we call the transaction block chain.
- This work is actually carried out by nodes in the Bitcoin network
- that are known as bitcoin miners.
- There is a reward for all that effort,
- especially since some of the computational heavy lifting is done by these bitcoin miners.
- They are basically awarded a certain numer of bitcoins for their efforts.
- This happens by the miners effectively constructing
- what is called a coinbase transaction.
- They basically assign themselves bitcoins within that transaction.
- In a sense, bitcoins are effectively generated almost out of thin air during this process.
- Of course, if you see something like that, that may raise in your mind the question
- of whether there is ever an upper limit to the Bitcoin money supply.
- And fortunately the answer...
- Maybe not so fortunately, depending on your viewpoint.
- ...the answer to that question is actually yes.
- The Bitcoin system is actually designed so that there can be at most 21 mln bitcoins ever generated.
- That's the maximum numer of bitcoins that can ever come up in the system.
- Beyond that point, no more new bitcoins will ever be accepted or generated or allowed to be generated.
- As a result, nodes from that point onward,
- once 21 mln bitcoins have been generated,
- will no longer get a reward for complementing the transaction block chain.
- The bitcoin miners who do all this effort
- are not gonna get guaranteed award for doing that effort.
- And keep in mind, that because every transaction in the Bitcoin system is public
- and the nodes in the system actually know how many coins have been generated
- it's possible to really enforce this limits
- on the total numer of bitcoins created.
- There are two points I wanna make regarding this particular limit.
- First of all, even after it is reached
- we will still gonna need to do what bitcoin mining does today.
- That involves things like incorporating transactions into transaction blocks
- and incorporating these transaction blocks into transaction block chains and so on.
- If you think about it, once the 21 mln coin limit is reached
- these nodes don't get that automatic reward of bitcoins
- for performing this extra effort.
- You may be wondering what incentive is there for these nodes
- to engage in this additional effort.
- I mean, why are they doing this sort of thing
- if they are not gonna get bitcoins as the guarantee for doing that work.
- At this point the hope is that when we reach the 21 mln bitcoin limit
- or as we get closer and closer to it,
- the transaction fees will play a more prominent role
- in a nodes decision to be a bitcoin mining node.
- In particular, the idea here is that we hope the transaction fees will be enough of an incentive
- and more and more people will
- in general, I think hopefully at this point will be using bitcoins,
- so as a result, I think there is an expectation or it's not unreasonable to think
- that as more and more people use bitcoins
- there will be more and more transactions
- and as a result, more and more opportunity to make money out of the transaction fees.
- It turns out that in the context of bitcoin mining
- a lot of the heavy lifting is in this proof of work piece,
- not in being able to incorporate all these transactions into a transaction block.
- Even if there is a lot of transactions in a transaction block
- it's not that much more effort for the miners to really incorporate those extra transactions.
- If they are getting all these extra transaction fees
- then that might be a good incentive for them.
- It's also worth noting that transaction fees are actually set by the pair in Bitcoin.
- The pair is gonna have their honours of setting the fee appropriately,
- so that the nodes in the Bitcoin network are incentivised to add that pair's transactions
- to their transaction blocks.
- Hopefully, that makes some sense.
- The second point I wanna make regarding this limit of 21 mln bitcoins
- is that really Bitcoin does allow for fractional coins.
- We haven't really talked much about that in this video
- since I've really implicitly talked only about the idea of coins being these whole entities
- like Alice transferring ten coins to Bob
- or twenty five coins to Bob.
- But it turns out you can actually have coins that are fractional.
- In fact, the smallest possible unit in Bitcoin is a very small numer.
- It's 0.00000001 bitcoins.
- This is one hundred milionth of a bitcoin.
- Just as an FYI, this is known as a Satoshi.
- This name actually comes from the name Satoshi Nakamoto.
- Satoshi Nakamoto is the pseudonim of the inventor of bitcoin.
- Nobody actually is sure that there is somebody named Satoshi Nakamoto,
- but as far as anybody can tell, the only person who's ever taken credit for the invention of bitcoin
- is the Satoshi Nakamoto name.
- It's unlikely there is actually a person behind that name
- but it's more likely it's some kind of a group or something of that nature.
- Aside from that, there are actually a couple of other additional controls that I wanna mention.
- They are built in the Bitcoin for keeping the growth of that money supply in check.
- First of all, the reward provided to bitcoin miners
- actually decreases over time.
- If you were aware, when Bitcoin began, which was around January of 2009,
- at that time the reward for a bitcoin miner to do their effort was 50 bitcoins.
- The way that the reward structure is set up
- is that every 210,000 blocks,
- so when you get to 210,000th block period,
- when 210,000 new blocks are generated,
- the reward size actually gets cut in half.
- What that means is that once 210,000 blocks are generated
- the reward goes from 50 bitcoins to 25 bitcoins,
- then from 25 to 12.5 and so on and so forth.
- It does take approximately four years to generate 210,000 blocks.
- I'll talk a little bit later where this four years numbers come from.
- Right now, when I'm recording this video it's May 2013,
- the current award is actually no longer 50 bitcoins.
- The current award now is 25 bitcoins per mining operation.
- It's gonna go down by half in approximately four years
- and that's just gonna keep happening until around the year 2140.
- In 2140 we will expect that the entire bitcoin supply will have been generated.
- So it is unlikely we will be generating bitcoins after 2140.
- 2140 is the point at which all bitcoins will have been generated.
- The last way to limit the generation of bitcoins
- is to actually calibrate the difficulty of solving that proof of work protocol at a global level.
- I was gonna point out another functionality that Bitcoin has built into it
- is that for every 2,016 blocks that are generated
- the network basically estimates the time that it took to generate those blocks.
- It looks at how long did it take to generate the first of these block
- and how lond did it take to generate the last of these blocks
- and then measures that amount of time.
- If that amount of time
- is something significantly bigger than two weeks
- then the proof of work protocol will be simplified.
- It will be calibrated so that it's easier to generate the blocks.
- On the flip side, let's say it took a lot less than two weeks to generate these 2,016 blocks.
- In that case, the proof of work will be again calibrated to be made more difficult.
- The goal is, we want it to be the case it takes about two weeks to generate 2,016 blocks.
- About 14 days to generate 2,016 blocks.
- To get a better sense for why that numer is the way it is
- you could see that, let's say it takes about two weeks to generate 2,016 blocks.
- What that actually will imply is that it takes about ten minutes
- before the proof of work is actually solved
- and a new transaction block is folded into the overall transaction block chain.
- You can actually work out that if it took ten minutes to come up with one new block at the global level
- and you multiply that by six to get the numer of blocks generated per hour,
- so you get six blocks per hour,
- or really six new proofs of work per hour,
- which in turn would lead to six new transaction blocks per hour,
- you multiply that by 24 hours per day
- and you multiply that by 14 days
- and you will find that when you multiply these things together
- you will get the numer 2,016.
- So, you can get the sense where this numer comes from.
- I wanna make one last final claryfing remark regarding this proof of work.
- Since solving the proof of work requires a bitcoin mining node to come up with the proof string,
- which it currently does through some type of excessive search,
- as you increase the numer of bitcoin mining nodes on a network,
- the proof of work will be solved faster.
- I don't mean faster for a particular node,
- I mean faster at the level of the entire network.
- In other words, it will take less time before at least one node comes up with the solution,
- because these nodes are all working on same problem concurrently.
- I also wanna mention quickly that even though different bitcoin mining nodes are all validating
- either the exactly same set of transactions
- or maybe largely overlapping set of transactions,
- they are all solving entirely different proof of work protocols when they are doing this sort of thing.
- The reason for that is that each node inserts its own coinbase or generational transaction
- into the block that it's working on to award itself coins.
- This generational or coinbase transaction is unique to each node.
- As a result, the challenge string for which each bitcoin mining node
- is seeking the corresponding proof of work
- will be different for each bitcoin mining node.
- Essentially, what you have is that because you have a cryptographic hash function being used in the process
- just this one difference, the fact that just this one piece is different
- completely randomizes the proof of work problem that results.
- That makes it likely that across the entire network
- the solutions are likely to be widely distributed
- and we can expect that if we have enough nodes
- one node will come up with the solution in about ten minutes.
- At least one node will do it
- and once one node comes up with the solution
- everyone else can proceed from that point onward with the new chain.
- As you can see, the Bitcoin protocol takes a numer of measures,
- implements a numer of mechanisms to both limit the total numer of bitcoins
- as well as he ray in which these bitcoins are ultimately generated.
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