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# Bitcoin: The money supply

Video transcript

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, they're 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 assigning
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 Bitcoin money supply. And fortunately, the
answer-- or maybe not so fortunately, depending
on your viewpoint-- the answer to that
question is actually yes. And the Bitcoin
system is actually designed so that there can be
at most 21 million Bitcoins ever generated. OK, so that's the maximum
number 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. 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. The Bitcoin miners
who do all this effort are not going to
get a 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 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, we're still going
to need nodes to do what Bitcoin mining
nodes do today. So that involves things like
incorporating transactions into transaction blocks, 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 coin 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 Bitcoin limit-- or as we get closer and
closer to it-- that actually transaction fees will play a
more prominent role in a node's 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 and more people will-- in general,
I think, hopefully, by 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 all
these extra transaction fees, then that might be an
incentive for them. It's also worth noting that
transaction fees are actually set by the payer in Bitcoin. 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 payer's transactions to their
transaction blocks. So hopefully that
makes some sense. The second point I want to
make, regarding 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 series. I've really implicitly talked
only about the idea of coins being these whole entities,
like Alice transferring 10 coins to Bob, or 25
coins to Bob, and so on. But it turns out
you can actually have coins that are fractional. And in fact, the smallest
possible unit in Bitcoin-- it's a very small number--
it's 0.00000001 Bitcoins. And this is 1/100-million
of a Bitcoin. And this actual--
this unit, by the way, just as an FYI-- is
known as a Satoshi. And this name actually comes
from the name Satoshi Nakamoto. And Satoshi Nakamoto
is 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 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. 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 to Bitcoin miners actually decreases over time. And 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. Now, the way that the reward
structure is set up is that every 210,000 blocks-- so when
you get to a 210,000-block period, every time 210,000
new blocks are generated-- the reward size actually
gets cut in half. And so what that means is
that once 210,000 blocks are generated, the reward goes from
50 Bitcoins to 25 Bitcoins, and from 25 to 12 and 1/2,
and so on and so forth. Now, it does take
approximately 4 years to generate 210,000 blocks,
and I'll talk a little bit later about where this 4
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 actually 25 Bitcoins per
mining operation, and it's going to go down
half in approximately 4 years. And that's just going
to keep happening, until-- the estimate is
around the year 2140. So in the year 2140, we will
expect that the entire Bitcoin supply will have been generated. So we're not going to--
it's unlikely we'll be generating
Bitcoins after 2140. 2140 is the point at
which 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. And so I also want to point
out that another functionality that 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 how long
did it take to generate the first of these blocks,
and how long did it take to generate the
last of these blocks, and it measures
that amount of time. And if that amount
of time is-- let's say it's something that's
significantly bigger than 2 weeks. So if it's significantly
bigger than 2 weeks, then the proof-of-work
protocol will be simplified. But we're going to
calibrate it so it's easier to generate blocks. On the flip side, let's say it
took a lot less than 2 weeks to generate these 2016 blocks. In that case, the proof of
work will be again calibrated to be made more difficult. And the goal is that
we want it to be the case that, of
2016 blocks, we want it to be the case that it
takes about 2 weeks to generate these blocks-- about 14 days
to generate 2016 blocks. And to get a better sense
for why that number is the way it is, you could
see that-- let's say it takes about 2 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--
or a new transaction block, rather-- is folded into the
overall transaction block chain. And you can actually
work out that if you-- if it took 10 minutes to
validate, or to come up with one new block in the
system at a global level, and you multiply that by 6
to get the number of blocks generated per hour-- so
you'd 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 multiply these things together, you will
get the number 2016. And so you can get a sense for
where this number comes from. And I want to make one last,
final clarifying remark regarding 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. But 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-work protocols when they're doing
this sort of thing. And the reason for that is
that each node, remember, inserts its own coinbase,
or generational transaction, into the block that it's working
on to award itself coins. And this generational
or coinbase transaction is actually unique to each node. So as a result, the challenge
string for which, let's say, each Bitcoin mining node is
seeking a corresponding proof of work-- well, that challenge
string will be different for each Bitcoin-- each
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-- the fact that just this one piece is
different-- that actually completely randomizes the
proof-of-work 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 10 minutes. 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 proceed
from that point onward with the new chain. So as you can see,
the Bitcoin protocol takes a number of
measures-- implements a number of mechanisms--
to both limit the total number of
Bitcoins, as well as the rate at which these
Bitcoins are ultimately generated.