As we learnt in our Bitcoin 101, Bitcoins are created through a process called mining. Each time that a Bitcoin transaction is verified, it is added to a block, integrated into the Bitcoin blockchain, and the miner is rewarded.
Understanding Bitcoin Mining
The process of mining Bitcoin, and some other cryptocurrencies, is centred around the concept that blockchain is a decentralized entity and requires the work of the community to function.
With no central authority in control, miners are responsible for verifying all transactions, storing the information in blocks, and then adding them to the blockchain. Verifying transactions involves the miner fighting to be the first one to solve a cryptographic puzzle. This takes both computational power and electricity, so the network rewards the miner for their work.
Every 210,000 blocks, roughly every 4 years, the rewards that miners accumulate per block are halved. This is in line with Satoshi Nakamoto’s deflationary concept for Bitcoin and controls how many new coins enter circulation until the maximum limit of 21 million is reached.
That means that once the last Bitcoin has been mined, there will be no more, creating an anti-inflation mechanism. It, therefore, makes sense that gradually over the years the miners will be rewarded less and less so as to ensure that the supply doesn’t diminish too quickly.
Where Do Miner Fees Come From?
Each time that a user makes a Bitcoin transaction, a small fee is charged in order to complete the transaction. Bitcoin wallets typically integrate technology that looks at the network fee structure at that time and advises a fee based on the users' needs.
Fees are based on how busy the network is at that time - the busier the network, the higher the fee - and can be increased to fast-track a transaction.
In this case, the miner will be alerted to make this transaction a priority and will be rewarded a higher fee for doing so. 100% of the fees paid are given to the miner, incentivizing miners to operate and maintain the network.
Once the miner has verified the transactions and added them to a block, when the block is added to the blockchain the miner will receive a reward. This reward is paid from the remaining Bitcoin and is based on the amount stipulated from the last halving. This is how new Bitcoin enters circulation.
Understanding the Miner Fee
On every blockchain network, not just Bitcoin, there is a cost to make a transaction. This cost ensures that the network functions smoothly and that those putting in more effort to maintain the network are compensated for their time.