Bitcoin Like gold and other precious metals, bitcoin exists in finite quantities that are slowly being mined out of the virtual world.
Because it’s a decentralized cryptocurrency, anyone can start mining bitcoin, but only 21 million units will ever exist, and many people say this makes Bitcoin more valuable. But why is Bitcoin limited?
And how does mining work?
Let’s take a look at what happens when bitcoins are mined and why it’s not as simple as just digging up more of them as we might expect.
Mining Bitcoin Is Like Mining For Gold
Bitcoin mining works by using a computer's CPU power to process transactions, which earns bitcoin as a reward.
All the transaction data in the blockchain is stored in blocks, which are mined into existence every 10 minutes.
The miner who mines each block receives 12.5 bitcoins as a reward, but this amount will halve every 210,000 blocks until it reaches zero.
By then, the estimated 21 million bitcoins will have been mined, and no more new bitcoins can be created.
It might seem like miners could just keep mining for that last 22%, but there's another problem: if someone were to control 51% of all bitcoin mining, they would be able to create their own fake version of the blockchain that shows any past or future transaction they wanted.
For example, they could make it so that you never received your car from them (you paid with bitcoin) or so that you never gave your nephew $100 (you paid with bitcoin).
The Mechanics Behind Bitcoin
Bitcoin mining is the process of creating new blocks to validate transactions on the blockchain.
A bitcoin miner, or miner, creates a block by assembling recent valid transactions into a block and trying to solve a computationally difficult puzzle.
The puzzle functions as an automatically adjusting difficulty level that makes it more difficult to find each successive block.
In this way, bitcoins are mined at a predictable rate for approximately every 10 minutes.
While there will only be 21 million bitcoins in existence, which was written into the software from its earliest days, we can expect these coins to be mined at a relatively steady rate over time.
However, many people have asked why there is no mechanism built into the network to adjust the difficulty if we reach maximum capacity.
Here's how it works: when someone successfully solves a computational puzzle (finds a block), they publish their newly found work to all of the other miners out on the network so they can verify their work and start solving puzzles themselves.
What would happen if one person tried to mine more than everyone else?
What Happens When All Bitcoins Have Been Mined
When all of the bitcoins have been mined, no more bitcoins will be created. There are two ways this could happen
1) When the last bitcoin has been mined, there will be 21 million bitcoins in circulation.
2)The number of coins generated per time period will decrease until it reaches zero.
3) Transactions with a fee may allow for miners to receive some form of compensation for their work after mining for a block becomes infeasible due to low rewards.
4) Fees can also be used as an alternative when the network is congested and it's taking too long to confirm transactions on-chain; an example is transferring money out of Coinbase into another wallet.
Currently, these fees can range from 0.1% to 10%, depending on how quickly you want your transaction to go through.
In the future, if all bitcoins have been mined, people will not be able to make any payments without paying a fee which they cannot do now because they use bitcoin instead of fiat currency (traditional paper or digital money).
Mining Difficulty Increases Over Time
The blockchain, which is the public ledger of all bitcoin transactions in history, will eventually be full of transaction blocks.
When there's no more room in the blocks to accommodate new transactions, miners will compete over who can solve the next block and claim its reward.
The difficulty of solving each block increases as time goes on, so it becomes increasingly difficult for miners to find a solution every 10 minutes.
As this happens, the average number of bitcoins mined per day also decreases. Right now, it's 12.5 bitcoins per day, but it will take many years before that number reaches zero.
Miners are rewarded with transaction fees from other users when they create blocks, so even if they stop mining bitcoin because there's no financial incentive anymore, they'll still earn these fees.
Additionally, the slower pace means fewer coins are being generated overall.
With increased adoption comes increased demand for the currency, too. If people want to buy stuff with bitcoin, then miners need coins to provide them with what they need.