Recently, an extreme heat wave swept across Texas, driving the local temperature to above 38 degrees Celsius, which overwhelmed the local power grids. According to media reports, almost all industrial-scale BTC mining companies in Texas have been forced to shut down their mining machines.
Thanks to the previously cheap electricity price and loose crypto mining policies, Texas has attracted mining companies like Riot Blockchain, Argo Blockchain, and Core Scientific that run millions of devices with huge power demands. Today, the state has paid the price.
As the U.S. is now the world’s biggest destination for BTC mining, the massive shutdown of mining operations in Texas has affected the total BTC hashrate the next day of the incident, which has dropped to 159.4EH/s, the lowest record in the past five months. Despite that, the decline has not hindered the normal operation of the network. This is the case because Bitcoin is decentralized, and problematic nodes in one region or national/regional hostility towards the cryptocurrency will have no impact on the network, which also explains Bitcoin’s exceptional value.
That said, how does Bitcoin create value? And what is its total supply? Let’s try to explore the answer to these questions.
I. A fixed total supply
On October 30, 2008, someone named Satoshi Nakamoto published a paper titled Bitcoin: A Peer-to-Peer Electronic Cash System on the Internet, which marks the birth of Bitcoin.
As a blockchain-enabled cryptocurrency, Bitcoin significantly differs from traditional fiat currencies.
It is well-known that the supply of fiat money issued by a government is almost unlimited, and countries can often solve many problems by printing more money. As the money supply goes up, the purchasing power of fiat currencies will drop over time. For instance, over the past century, the purchasing power of the U.S. dollar, which is now the world’s strongest currency, has kept going down: a $100 bill today is only equivalent to $3.87 in 1913 concerning purchasing power.
To fight inflation, countries like El Salvador have adopted bitcoin as their legal tender because Bitcoin comes with anti-inflation features. To be more specific, Bitcoin’s total supply (21 million) and issuance speed are based on established algorithms and cannot be changed by any country, institution, or individual.
As blockchain technology advances and becomes more widely available, a growing number of people are holding and using Bitcoin. Since the number of BTC adaptors has gone up while the total supply always remains the same, driven by such a supply-demand relationship, the BTC price naturally soared. Over the past ten-odd years, Bitcoin has increased tens of thousands of times in value, and long-term BTC holders have all been handsomely rewarded.
II. The halving mechanism
According to the law of supply and demand, if the circulating supply of a commodity is not restricted, hyperinflation would be very likely, which would drastically reduce its price. To avoid hyperinflation, Bitcoin introduced the halving mechanism at its birth.
Each time a miner generates a block, he will be rewarded with the corresponding amount of Bitcoin. Moreover, early-stage miners could get more block rewards. Back in the early days, as the BTC price was low, more bitcoins were required to incentivize miners to start mining (i.e. issuing bitcoins) and keep the network safe and steady. As more bitcoins have been mined, the block reward has been reduced over time, and the issuance rate has also been slowed down. More specifically, the BTC issuance rate is exponentially reduced every four years, which is referred to as the halving mechanism.
Since Satoshi Nakamoto mined the first block in 2009, miners who generated a BTC block could receive 50 bitcoins as the mining reward. In addition, the block reward is halved every 210,000 blocks. Going from 50 to 25, and from 12.5 to 6.25, the BTC block reward will be halved once more in 2024 to 3.125 BTC.
To date, the Bitcoin block reward has been halved three times in November 2012, July 2016, and May 2020, and the next halving will take place in 2024. According to the relevant statistics, more than 90% of Bitcoin’s total supply has already been mined.
III. The mining process
Bitcoin uses the PoW (Proof of Work) consensus mechanism, and mining is a process by which the circulating supply of Bitcoin is increased. In the BTC network, miners play major roles. They validate each new transaction and record them on the blockchain ledger. On average, a new BTC block is mined every 10 minutes, and each block contains all transactions that occurred since the last block was generated, and these transactions are added to the blockchain in the right sequence. Transactions that are contained in blocks and added to the blockchain are called “confirmed” transactions, and the new holder may only spend the Bitcoin he got once the transaction is “confirmed”.
To encourage miners to mine blocks and maintain the network, Bitcoin offers miners two types of rewards: 1) the block reward, and 2) the fee incurred by transactions contained in the new block. To earn these rewards, miners race with each other and try to solve a math problem that’s based on Bitcoin’s hashing algorithm. In other words, they use BTC mining machines to carry out hashing computations, which require high hashrates. Additionally, information such as the time needed to complete such computations and whether the results are correct constitute a miner’s proof of work. This competitive algorism-based mechanism that allows the winner to package transactions on the BTC blockchain keeps the network safe and secure.
IV. Summary
Bitcoin’s design shows us the brilliance of Satoshi Nakamoto. Right now, there are as many as 15,530 Bitcoin nodes distributed around the world, which not only makes hacking less likely but also keeps the network safe. Even if some of the nodes were shut down due to one reason or another, the BTC network would still be able to run normally, making it much superior to centralized institutions such as banks — After all, the shutdown of banking nodes would lead to the collapse of the entire banking system, and users would not be able to engage in transactions.
