Bitcoin Proof-of-Work and miners incentives

The method of incentivising resource-consuming activities to reach a network consensus is called Proof-Of-Work.

This ensures:

  • Bitcoin emission rate is transparent.
  • Creation of blocks occurs approximately every 10 minutes.
  • Miners are incentivised to secure the network.
  • Transactions of digital assets are safe and trustless

Here's a recap of the process: from initiating a transaction to getting it mined on the blockchain.

  • Signature: Transaction is signed and sent to the network.
  • Network: Transaction waits to be added in the next block by miners.
  • Mining: Miners verify transaction by solving proof-of-work problem.
  • Confirmation: Block gets verified and added to the bitcoin blockchain.

Proof-Of-Work: a consensus mechanism to secure virtual currencies

Miners have to resolve a mathematical problem before getting rewarded by the network.

If it takes more resources to solve a problem than to verify it, the system can be a Proof-of-Work economic measure.
Because the number of miners plugged on the Bitcoin network varies, the mining difficulty adjusts itself to the network.

Every 2016 blocks, the mining difficulty changes so that the previous 2016 blocks mined would be mined in exactly two weeks from then.

On average, 2016 blocks in two weeks represents one block every 10 minutes.

  1. If more miners join the network, then the time to mine one single block reduces.
  2. If blocks are getting mined faster, then the mining difficulty will have to increase.
  3. When mining difficulty is increased, then miners need more time to solve the Proof-Of-Work problem.
  4. Then, the time to mine one single block increases.

The Bitcoin network automatically adjusts its difficulty in order to keep mining one block every 10 minutes.

Bitcoin rewards miner to secure their network.

Miners are capitalists, they work on the Bitcoin network because they are rewarded to do so, earn profit out it. The act of mining is resource-consuming and it involves both fixed and variables costs.

  • Hardware: Miners allocate their computing power to the network.
  • Energy: Computer equipment consumes power to function continuously.
  • Time: Miners also invest their time to the task. Resources could be allocated to another network or another task.

Miners could allocate their time, equipment and energy to other tasks, therefore, the network rewards miners in such a way that they are incentivised to continue working of the network. Miners seek profits and earn their income through two sources:

In order to issue a transaction, Bitcoin users incur a small fee, transaction fees, that are disbursed to miners.

On the other hand, when a new block is generated, new bitcoins are mined and rewarded to the best performing miners. The network has not reached its maximum supply just yet, when a new block is generated, new bitcoins are mined. These freshly created coins are rewarded to the miners that secured the specific block.