New bitcoins are created through Bitcoin mining. In some sense, Bitcoin mining is similar to digging for gold: It takes time and effort—hence the term mining. The difference between mining gold and mining bit-coins is that a Bitcoin miner uses electricity and computational labor rather than physical labor. Mining is also the process by which new Bitcoin transactions are added to the block-chain, or the public ledger. By adding a new block of transactions to the blockchain, the miner who added the block is rewarded with newly minted bitcoins (as well as old bitcoins in the form of transaction fees).
The number of new bitcoins being mined from each block is diminishing slowly over time and will continue to do so until all 21 million bitcoins have been excavated. But unlike mining for gold, Bitcoin miners know exactly how many bitcoins are left to be mined. By 2140, every bitcoin will have been extracted and will be in circulation.
Although it is potentially lucrative to mine bitcoins, it is not for everyone. As with gold, most people, regardless of how much they want gold, would not mine it themselves. Similarly, earning a profit mining bitcoins
is challenging and risky. Should you mine bitcoins? Probably not. In this chapter we'll explore the difficulties and hazards, but the short answer is that deciding whether to mine bitcoins is like deciding whether or not to mine gold. Mining gold in financially meaningful quantities requires a high degree of expertise, access to cheap labor and electricity, raising (and risking!) significant capital, and waiting years for a return on investment. If you are reading this book, it's best for you to leave Bitcoin mining to the professionals. However, if you are not motivated by profit and just want to mine (a trivial amount of) bitcoins for fun, you can certainly do that!
Why Is Bitcoin Mining Needed?
Whenever someone creates a new currency, one awkward problem usually surfaces at the outset: They need to figure out how to distribute newly minted money. If a government creates the money, this problem is easily resolved because the government can simply compensate itself and use the money to pay for government services. (Or, as in the United States, a government can use a complex scheme involving a Federal Reserve and treasury bond underwriting to lead to the same end result, giving the federal government capital it can spend that originated through the minting process.) However, if you're creating a distributed currency like Bitcoin, without a central party, dispersing newly minted money is surprisingly difficult. Part of the genius of Bitcoin's design was that Satoshi found a sensible way to distribute bitcoins. The currency would be given to those people willing to do computational work to protect the network, aka the miners.
Because protecting the Bitcoin network requires effort, time, and money, anyone willing to do this work would merit a monetary incentive. Therefore, Satoshi's strategy of using bitcoins as an incentive for miners acted as a decentralized mechanism for giving away new coins and created a community dedicated to protecting the network through the mining process. Let me tell you a little story to help you understand how mining protects the Bitcoin network.
A Parable of Two Generals
"The fat king is dead!" they yelled through the streets of the Principality of Cryptoville the day the king died. King Karl was not popular among the common folk for his cruelty to the peasants of his kingdom was exceeded only by his girth. Unfortunately, his son Crowley was crowned that same day, and he was believed to be very much his father's son.
For this reason and more, two generals, the General of the North and the General of the South, banded together in a plan to overthrow the monarchy. Quickly, they were able to conquer most of the lands outside the castle walls. All that remained to free the land from tyranny was to storm Castle Cryptoville!
The two generals' armies gathered at the north and south sides of the castle. On the east and west sides of the castle were the Kraggly Mountains, a treacherous mountain range with steep cliffs that had taken the lives of many Cryptovillians through the ages.
On the south side of the castle, the General of the South exclaimed, "Yes! This is the time to strike! I shall send a message to the north to begin the attack!" However, it then occurred to the general that his messenger would have to cross the Kraggly Mountains. What if a mishap prevented the message from getting through? If this happened, he, the General of the South, would attack the castle on his own and might be defeated by the foe. So the General of the South revised his plan: "I will send a message to the north to attack and will ask the General of the North to send a confirmatory reply indicating that he received my message!"
When the General of the North received the message, he declared, "Splendid! Surely we will be victorious! I shall send the confirmation to the south. Oh, but just to be sure, I'll ask the General of the South to return a message so I know he received my confirmation. I definitely wouldn't want to attack the castle on my own."
After receiving the confirmation, the General of the South asserted, "Great, we're almost ready. Now all I need to do is wait for the north to send a confirmation that the general received the confirmation of my confirmation. Victory shall be ours after I get my answer—maybe sometime tomorrow! "
That night, King Crowley's henchmen snuck into the north and south camps and assassinated both generals as they slept.