Generation and Management of Bitcoins:
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Bitcoin generation with a controlled way – The basic of bitcoin is the creation of coins in a controlled way to restrict the currency’s value as if we put a lot of currency in the system. The value of the currency will be gradually reduced. It is a standard concept of economy. Any maliciously generated currency needs to reject and only accept the actual currency flowing in your system. The bitcoin needs to be generated like a normal currency. It is generated during the mining procedure by the network and awarded to the miner as a reward when a miner successfully discovered a new block and added to the existing blockchain. The Miners receive rewards from the bitcoin network as they are investing money to mines the blocks. This is the only way through which the network generates coins.
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Regulation on the generation of coins – The flow of money or generation of new bitcoins needs to be regulated to have some rate at which it needs to adjust a block creation. The rate of block creation is adjusted over every 2016 block, and the aim is to have a constant 2 weeks adjustment period. Like every two weeks, the money generated by mining the blocks will readjust. The number of bitcoins generated per block is set to decrease geometrically. The amount of money awarded for mining a new block decreased with a rate of 50% reduction for every 210,000 blocks, which takes approximately 4 years. That means at approximately every four years, the price of mining will gradually drop. The theoretical limit for total bitcoins can generate slightly less than 21 million with this particular limit. Once the network has generated some 21 million bitcoins, the participation in the mining procedure will not get any reward anymore.
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Maintenance of the entire ecosystem – As time progresses, the miner will get less reward, but how can we pay them? What should be the incentive for them to participate in the mining procedure? Because currently, the miners participate in the mining procedure as they receive rewards. In the mining procedure, they have to solve some mathematical puzzle, for which they have invested the system powers and the time. As that will decrease with time, and once approximately 21 million bitcoins are generated, the system will not generate any new bitcoin. The miners will not get paid from the network to participate in the mining procedure. In that case, what can be their incentive? The network can use the transaction fee and pay the miners for participating in the mining procedure.
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Mathematical puzzle for Miners – As the entire transactions are stored in the blockchain, and powerful and malicious adversaries may exist in the network, they can collaborate and tamper with the blockchain; consequently, the entire ecosystem will fail. To avoid this, the system designed added the time-consuming puzzle-solving methodology such that to add a new block or alter the existing blockchain requires time and computing power. Like every 10 minutes, new blocks will be added to the blockchain, so the adversary has limited time to alter the entire blockchain.
Projected Bitcoins
As we can see, initially, in 2009, miners were receiving a reward of 50₿ coins per block, and as the time progress for the first 4 years, it was 50₿ then from 2012 to 2015, reduces by half and so on. Once it reaches 210000 million bitcoins in the network, there will not be any mining reward in the system.
Summary
Bitcoin Cryptocurrency generation and management include Bitcoin generation with a controlled way, Regulation on the generation of coins, Maintenance of the entire ecosystem.
References:
- NPTEL lecture series on Blockchains Architecture, Design and Use Cases by Prof. Sandip Chakraborty, IIT Kharagpur.
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