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 and this work is actually carried out by nodes in the Bitcoin network that are known as Bitcoin miners and as a reward for all that effort especially since some of the computational heavy lifting is done by these Bitcoin miners then basically awarded a certain number of bitcoins for their efforts and this happens by the miners effectively constructing what's called a coinbase transaction and then basically assign themselves bitcoins within that transaction so in a sense then and this is kind of intriguing bitcoins are effectively generated almost out of thin air during this process and of course if you see something like that that might raise in your mind the question of whether there is ever an upper limit to the the big point money supply and fortunately the answer or maybe not so fortunately depending on your viewpoint the answer that a question is actually yes and the Bitcoin system is actually designed so that there can be at most at most 21 million bitcoins ever generated okay so that's the maximum number of bitcoins ever 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 and so as a result nodes at that point from that point onward once 21 million bitcoins have been generated nodes will no longer get a reward for augmenting the transaction block chain okay these Bitcoin miners who do all this effort are not going to get a guaranteed award for doing that effort and keep in mind 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 these limits on the total number of bitcoins created now there are actually two points I want to make regarding this particular limit so first of all even after it's reached you know we're still going to need notes to do what Bitcoin mining notes do today so that involves things like incorporating transactions into transaction and incorporating these transaction blocks into transaction block chains and so on and so forth but if you think about it for a moment once the 21 million point limit is reached these nodes don't get that automatic reward of bitcoins for performing this extra effort and now you might be wondering well 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're not going to get bitcoins as a guarantee for doing that work and really at this point the hope is that when we reach the 21 million bitcoins limit or as we get closer and closer to it that actually transaction fees will play a more prominent role in a nodes decision to be a Bitcoin mining node and in particular the idea here is that we hope the transaction fees will be enough of an incentive and more more people will in general I think hopefully at this point will be using Bitcoin and 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 off of transaction fees and 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 so even if there's a lot of transactions in the transaction block it's not that much more effort for the miners to really incorporate those extra transactions but if they're getting if they're getting all these extra transaction fees then that might be a good incentive for them okay it's also worth noting that transaction fees are actually set by the payer in Bitcoin okay the payer then is going to have the onus of setting the fee appropriately so that the nodes in the Bitcoin network are incentivized to add that payers transactions to their transaction blocks all right hopefully that makes some sense the second point I want to make regarding this this limit of 21 million bitcoins is that really Bitcoin does allow for fractional coins and I haven't really talked much about that in this video there's a really kind of implicitly talked only about the idea of coins being these whole he's like Alice transferring ten points to Bob or 25 points to Bob and and so on but it turns out you can actually have coins that are fractional okay and in fact the smallest possible unit in bitcoin two very small numbers zero point zero zero zero zero zero zero zero one bitcoins okay and this is one one hundred millionth of a Bitcoin and this actually useless unit by the way I just as an FYI is known as a Satoshi and this name actually comes from the name Satoshi Nakamoto and Satoshi Nakamoto is the the pseudonym of the inventor of Bitcoin nobody actually is sure that there is somebody actually named Satoshi Nakamoto but as far as anybody can tell the only person who's ever taken credit for the invention of Bitcoin is this the Satoshi Nakamoto name and it's unlikely there's actually a person behind that name but it's more likely maybe some type of a group or something of that nature okay now aside from that there are actually a couple of other additional controls that I want to mention that are built into Bitcoin for keeping the growth of that money supply in check so first of all the reward provided the Bitcoin miners actually decreases over time okay and if you 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 okay now the way that the reward structure is set up is that every two hundred and ten thousand blocks so when you get to a two hundred and ten thousand block period every time two hundred and ten thousand new blocks are generated the reward size actually gets cut in half okay and so what that means is that once two hundred ten thousand blocks were generated the work goes from 50 bitcoins to 25 bitcoins then from 25 to 12 and a half and so on and so forth all right now it does take approximately approximately four years to generate 200 10,000 blocks and I'll talk a little bit late about where this for years numbers come from but as of right now I'm recording this video it's May 2013 the current reward is actually no longer 50 bitcoins the current reward now is is actually 25 bitcoins per per mining operation and it's going to go down in half and approximately four years and that's just going to keep happening until the estimate is around the year around the year 2140 from the year 2140 where we will expect that the entire Bitcoin supply will have been generated okay so we're not going to it's unlikely we'll be generating bitcoins after 21:40 21:40 is the point at which you're all bitcoins all bitcoins will have been generated okay all bitcoins will have been generated now 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 okay and so I also want to point out that another functionality the Bitcoin has built into it is that for every 2016 blocks that are generated the network basically estimates the time that it took to generate those blocks it looks at you know how long did it take to join it the first of these blocks and how long it'll take to generate the last these blocks and it measures that amount of time now if that amount of time is let's say it's some I don't know let's say it's something that's significantly let's say it's significantly bigger than two weeks okay so if it's significantly bigger than two weeks then the proof-of-work protocol will be simplified okay we're going to calibrate it so that it's easier to generate blocks on the flip side let's say it took a lot less than two weeks to generate these 2016 blocks in that case the proof-of-work will be again calibrated to be made more difficult okay and the goal is that we want it could be the case of 2016 blocks we want it to be the case that it takes about two weeks to generate these blocks about 14 days to generate 2016 okay and to get a better sense for why that number is the way it is you can see that let's say let's say it takes about two weeks to generate 2016 blocks what that actually will imply is that it takes about 10 minutes before the proof of work is actually solved and a new transaction is our new transaction block rounders folded into the overall transaction block chain and you can actually work out that if you if you if it took 10 minutes to to validate or to come up with one new block in the system at a global level and you multiply that by it by obviously by 6 to get the number of blocks generated per hours you get 6 blocks per hour or really 6 new proofs of work per hour which in turn would lead to 6 new transaction blocks per hour you multiply that by 24 hours per day and then you multiply that by 14 days and you'll actually find that when you when you multiply these things together you will get the number 2016 ok and so you can you can get a sense of where this number comes from and I want to make one blast final clarifying remark regarding this this proof of work since solving the proof of work actually requires a Bitcoin mining node to come up with the proof string which it currently does through some type of exhaustive search as you increase the number of Bitcoin mining nodes on the network then really all else being equal the proof of work will be solved faster ok when I don't mean faster for a particular node I mean faster at the level of the entire network in other words it'll take less time before at least one node comes up with a solution because these nodes are all working on that same problem concurrently and actually on that note I do also want to mention quickly maybe a more subtle point which is that even though the different Bitcoin mining nodes are all validating either the exact same set of transactions or maybe a largely overlapping set of transactions they actually are all solving entirely different proof of our protocols when they're doing this sort of thing and the reason for that is that each node remember inserts its own coin base or generational transaction into the block that it's working to award itself points okay and this generational or a coin based transaction is actually unique to each node so as a result the challenge string for which let's say each Bitcoin mining node is is seeking the corresponding proof-of-work well that challenge then will be different for each Bitcoin know a Bitcoin mining node rather and so essentially what you have is that because you have a cryptographic hash function that's being used in the process just this one difference that the fact that this is one piece is different that actually completely randomizes the proof of our problem that results and 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 a solution in about ten minutes okay at least one of the nodes will they won't all do it but at least one will and once one node comes up with a solution everyone else can kind of proceed from that point onward with the new chain so as you can see the Bitcoin protocol you know takes a number of measures implement a number of mechanisms to both limit the total number of bitcoins as well as the rate in which these bitcoins are ultimately generated