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Introduction to Proof-of-Work and Proof-of-Stake 3.0. Part 1

How cryptocurrency networks add coins to circulation

Cryptography, cryptographic algorithms, and blockchain networks have changed the way finances and money work in the modern world.

The introduction of the Bitcoin network in 2009 has shown how a peer-to-peer decentralized network can work as a way for people and organizations to engage in transactions without having to use a third party such as a bank or a government that guarantees its currency.

The Bitcoin network was able to do so because it has solved a number of problems that nobody before it was able to solve. One of these problems has been the problem of double spending, which is when a party that owns electronic funds is able to send the funds to several recipients at the same time as if it were sending them only once (hence the name of the problem, the problem of double spending).

Another problem that the Bitcoin network was able to solve was the problem of Byzantine Generals. This problem takes its name from a scenario in which several generals are receiving conflicting information from their sources and need to be able to determine the validity of the information.

One of the goals of the creators of the Bitcoin network was for the network to be fully transparent. With Bitcoin, not only does the Bitcoin blockchain record all the transactions and makes them visible to the public, but also the software of the Bitcoin network is open source, which means that anyone can download it, inspect it, or use it partly or in its entirety. Because of this, since the inception of the Bitcoin network in 2009 many other networks have appeared that have used the code of Bitcoin software.

Most cryptocurrency networks, including Bitcoin, Ethereum, and others, add coins to circulation by giving them as rewards to miners for creating blocks of decentralized blockchains, which are in essence sets of data with information about financial transactions that happen on the networks.

For example, you can see information about Bitcoin blockchain when you visit https://blockchain.info/ The height of the block means the number of the block since the introduction of the network in 2009. The first block on the Bitcoin network was created by the developer of the Bitcoin, Satoshi Nakamoto. It was block #1. As of the beginning of spring of 2018, the network had over 500,000 blocks. All blocks contain information about transactions that occur on the network. On the main page of the https://blockchain.info/, you will see a table with fields named “transactions” and “total sent.” The “transactions” field indicated the number of transactions that a block has information about and “total sent” is the total amount of funds that have been sent to users on the Bitcoin network via these transactions.

One of the goals of the Bitcoin network is to generate a block of the network every 10 minutes, which limits the number of transactions information about which can be included in one block of the Bitcoin blockchain.

For example, you can see that it took the network nine minutes to generate the block #516443 because the generation time of the block is April 3, 2018, 12:01:12 (you can see this by visiting the page of the block at https://blockchain.info/block/0000000000000000003436733fffc9b59af11be5c4bab7ec58d1d1a3e0b6721f) and the time of the generation of the previous block, block #51642, was April 3, 2018, 11:52:39, which you can see by visiting the page of the block at https://blockchain.info/block/0000000000000000002304dbcfa79520dac00f3dbb273c791cbd995cd25ae14f

If you want to get to the page of the previous block or the next block from a page of a block of the Bitcoin blockchain, all you have to do is to click on the corresponding hash in the “Hash” table on the right side of the page because hashes is now the blocks on the Bitcoin blockchain connect to each other. For example, from the page of block #516443 (located at https://blockchain.info/block/0000000000000000003436733fffc9b59af11be5c4bab7ec58d1d1a3e0b6721f) you can get to the page of the block #516444 by clicking on 0000000000000000001b823d6bc79a8ba1405f6967045e702946703a993219a7, which is the hash for the block #516444, and you can get to the page of the previous block, block #516442, by clicking on 0000000000000000002304dbcfa79520dac00f3dbb273c791cbd995cd25ae14f, which is the hash of block #516442.

Miners on the Bitcoin network get rewards from the network for creating the blocks of the Bitcoin blockchain. It works in a similar way with other cryptocurrencies, too. With Bitcoin, the reward for the first 210,000 blocks has been 50 Bitcoins per block. Then, it divided into half for the next 210,000 blocks and became 25 Bitcoins. The reward will keep dividing in the future, which means that altogether there can be 21 million bitcoins in circulation. In 2018 and 2019 the reward equals 12.5 bitcoins per block. The next estimated date of the reward decrease is May of 2020. This is when the reward will go from 12.5 Bitcoins per block to 6.25 Bitcoins per block.

All of this means that as of the beginning of 2018, the Bitcoin network had over 80% of Bitcoins that will ever be in circulation (over 16.5 million out of 21 million). On average, the network has been adding to circulation 1,800 Bitcoins per day. You can see the latest up-to-date information about how many coins the Bitcoin network has created by visiting http://www.bitcoinblockhalf.com/. Notice that the total number of minted coins is not the same as the number of coins in circulation because it is actually possible to destroy Bitcoins, for example by sending them to a wrong address. Also, many people have been mining Bitcoins in the early days of the network when Bitcoin didn’t cost much and then have destroyed the computers with Bitcoins on the hard drives. This is the reason why today you may hear about people trying to get a permit to find a computer in a landfill, yet from the perspective of the network, this means one thing, that there are fewer coins in circulation than the network added to circulation.