Bitcoin has three fundamental characteristics.
- Decentralization and Public Ledger: Bitcoin transactions and account information are not controlled or managed by any centralized authority or individual. Instead, they are maintained and updated collectively by all nodes participating in the network. The public ledger, or blockchain, records all Bitcoin transactions and account balances, making this data accessible to anyone for viewing and verification.
- Limited Supply and Decreased Production Rate: The total supply of Bitcoin is capped at approximately 21 million coins. Unlike traditional currencies, Bitcoin has no central issuing authority; new coins are produced as rewards for miners who validate transactions by forming blocks and linking them to previous block nodes. Each block is formed approximately every 10 minutes and contains around 4,000 transaction records. Every 210,000 new blocks mined (approximately every 4 years), the rate of new Bitcoin production is halved. The initial reward was 50 BTC per block, with the reward halving every 4 years (starting from 2019).
- Initial Reward: 50 BTC per block (2009)
- First Halving: 25 BTC per block (2012)
- Second Halving: 12.5 BTC per block (2016)
- Third Halving: 6.25 BTC per block (2020)
- Fourth Halving: 3.125 BTC per block (2024)
The halving mechanism will continue until the block reward approaches zero, at which point the total supply will reach the cap of 21 million bitcoins. The block generation rate of every 10 minutes is consistent, even if the network’s hashrate changes. The key factor determining Bitcoin mining difficulty is the total network hashrate.
- Increased Hashrate: If more miners join the network or existing miners increase their computational power, the overall hashrate will rise, leading to an increase in mining difficulty to maintain the average block generation time of 10 minutes.
- Decreased Hash Rate: If miners leave the network or reduce their computational power, the overall hash rate will decrease, causing a reduction in mining difficulty to maintain the average block generation time of 10 minutes.
In summary, if the block generation speed is too fast or too slow, the mining difficulty will automatically adjust (every 2016 blocks, roughly every two weeks one adjustment) to achieve the designed goal of generating one block every 10 minutes on average. Therefore, when Bitcoin prices fluctuate or mining hardware advances, more or fewer miners may join or leave the network, leading to variations in the network’s hashrate, which in turn affects the adjustment of mining difficulty.
3. Blockchain Ledger Entry Rights: Bitcoin “mining” involves miners using computational power to solve the hash puzzle for the next block, competing to secure the ledger entry rights and the associated rewards. Essentially, it’s a process of solving complex mathematical problems. The method is similar to brute force, where computational effort is heavily used to find the solution. The first miner to solve the puzzle gains the right to add the block to the blockchain and receives newly minted bitcoins as a reward.
Miners solve complex mathematical problems to find a solution that meets specific conditions, known as the “hash value.” The first miner to find the correct hash value creates a new block, which includes verified transactions and the hash value of the previous block. This new block is then linked to the previous one, forming a continuous chain, resulting in the blockchain structure, known as the “blockchain.”
Therefore, during the mining process, miners not only validate and record Bitcoin transactions by adding them to the Bitcoin blockchain (the decentralized public ledger) but also earn Bitcoin as a reward for providing computational power. The mining process consumes significant computational power (as shown in the figure, https://ccaf.io/cbnsi/cbeci)
Electricity costs play a crucial role in modeling mining economics. Assume electricity cost is USD 8 cents per kWh, a mining machine with an efficiency of 20 W/TH/s, the estimated cost for mining one Bitcoin is around USD 50k (as shown in the figure, https://ccaf.io/cbnsi/cbeci).
As of January 2022, Bitcoin mining is primarily distributed across the United States, China, and Kazakhstan. The U.S. accounted for approximately 37.82% of the global hash rate per month; China accounted for about 21%; and Kazakhstan accounted for approximately 13.21% (as shown in the figure, https://ccaf.io/cbnsi/cbeci).
