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Does Bitcoin Have an Energy Problem? 16 ANNEX: What is Bitcoin Mining? Bitcoin is where the “blockchain” (the term “proof-of-work chain” was used in the original white paper) was first successfully implemented commercially. Mining is the “consensus mechanism” where the blockchain is made. We can think of miners as a bunch of computers that are connected to each other. These computers are application-specific integrated circuits (ASICs) computers customized for a specific use (in this instance, Bitcoin mining), that carry out mining via what is known as “hashing.” These computers are doing two things as they mine, 1) they are broadcasting or receiving information about transactions that are happening on the Bitcoin network and 2) they are validating that these transactions do not break the rules of Bitcoin. Miners bundle these transactions into a “block” while concurrently searching for a random number that satisfies the Bitcoin protocol’s rules. When a miner successfully finds a random number that fits the rules, that block is broadcast to the network and quickly validated. Once proved as valid, the block gets added to the current blockchain and the process starts again. As a reward, the miner that processed the block gets transaction fees (a small fee individuals pay to have their transaction included into blocks) and what is called the “coinbase transaction.” The coinbase transaction contains new bitcoins, at time of writing 6.25 bitcoins per transaction (see page 17 for issuance trend). Winning a block is also completely random. In fact, the Bitcoin protocol automatically adjusts to make it harder to win a block if a lot of computing power and energy is consistently thrown at it. As a result, the most likely way to win more bitcoin is to amass as much hashing power or “hashrate,” and therefore energy or work, as possible. Hence, the term proof-of-work chain. As the network grows and more power is put towards mining, it becomes prohibitively expensive to hack or attack the Bitcoin network. Right now, we are in the “first phase” of Bitcoin mining. We will remain in the first phase until around the year 2140 when the 6,930,000th block is mined. Every 210,000 blocks (~4 years) the coinbase transaction is halved. The coinbase transaction started at 50 with the launch of Bitcoin in 2009 and recently moved to 6.25 in 2020. By the year 2140, the coinbase transaction will contain no new bitcoin and all bitcoins that will ever exist will have been issued and distributed. This “halving cycle” is why you may hear bitcoin described as “deflationary” or “hard-capped at 21 million coins.” In the issuance trend you can see the three halvings that occurred in 2012, 2016 and 2020 that coincided with the drops in daily issuance. When the coinbase transaction reaches zero, we enter the “second phase” where the only compensation miners will receive for validating transactions is transaction fees. What that means for Bitcoin is unclear. There will be many changes to the Bitcoin ecosystem in the next 120 years and the move to a zero coinbase transaction will occur slowly over four year intervals.PDF Image | Does Bitcoin Have an Energy Problem
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