What You Need To Know To Understand Blockchain Technology Part 6

Nodes, miners and miner incentives.


When a person on a blockchain network only has a wallet and wants to participate in a transaction and is not being a node on the network at the same time, he or she, in essence, trusts some other node to broadcast the transactions to the network. While technically there is nothing wrong with that, running a node in addition to sending and/or receiving funds means that the node would be sending the announcements, which, again, adds to the security of the network. Many of the people who currently transact in cryptocurrencies do so because they firmly believe in the principles of freedom and self-reliance, and to them running a node is yet another way to support the freedom that cryptocurrencies bring to their uses and show self-reliance by having their own node.

If your experience with cryptocurrencies is very limited, running a node may seem like a highly technical task and a challenge. In reality, it is quite easy. All you have to do is download the latest available version of the software for the network that you plan to run the node for and run it just like you would run any other software. The requirements for nodes are also very reasonable. For instance, for Bitcoin Core they are a desktop or a laptop with a recent version of MacOS, Windows or Linux, 2GBs of RAM and an unlimited Internet connection.

While it is ideal to run the software all the time, including daytime and nighttime, it is possible to turn the software on and off. Even when you run the software 24/7, doing so is not very expensive.


Miners on blockchain networks

Miners on a blockchain network are those who create blocks of the blockchain. Typically, on a public blockchain anybody can become a miner if he or she satisfies the requirements of the network.

On proof-of-work network such as Bitcoin, all you need to become a miner is the right hardware. With proof-of-stake networks, you will need to have a “stake” in the network in some form. Usually, having a stake means having a certain number of coins in your account. Because of this, on a proof-of-stake network, miners can also sometimes be called delegates and users on such a network can delegate other users to create blocks of the blockchain. The votes can depend on the stake of both the voters and the delegates.

Here’s the logic behind proof-of-stake algorithms: if you have coins in your account, you are interested in coins holding their value. An attack on the network would make the value of the coins go down. Therefore, stakeholders are interested in the network functioning the way it is supposed to function.


Miner incentive

Miners on popular public blockchains today choose to engage in mining for one simple reason: profit. In the beginning of the Bitcoin network, around 2009 and 2010, when a bitcoin was worth under a penny and when it was possible to mine new blocks of the Bitcoin blockchain on a home computer, some people would mine the blocks just to try what it was and others would do it because they believed in the idea of Bitcoin. However, in 2018, when mining a block costs thousands of dollars of electricity and hardware and there are tons of people willing to do it, mining for altruistic reasons is hardly possible.

Miners on public networks get rewards in the form of the cryptocurrency of the network on which they mine. For example, the Bitcoin network adds coins to circulation by giving them as rewards to miners for mining blocks of the Bitcoin blockchain. In total over the lifespan of the network, it will only produce twenty-one million Bitcoins. The idea of Satoshi Nakamoto was that once the network becomes really popular, the miners will be getting their income from the transaction fees (which are not mandatory).

However, not all networks have a hard cap on how many coins they can have. Some prefer the inflation model that increases the circulation by a certain percentage per year and the total number of coins in existence is not limited. Others believe that twenty-one million is too small of a number that leads to the division of the Bitcoin into millionths parts (the smallest part of Bitcoin is Satoshi, which is 0.00000001 Bitcoin), which is not convenient for small day-to-day transactions and prefer to have the number of coins in circulation in billions.

On the Bitcoin network, the miner reward for the creation of the blocks of the Bitcoin blockchain for the blocks 1 through 210,000 has been 50 bitcoins. For the next 210,000 blocks it divided in half and became 25 bitcoins. Then, the network divided the reward again and currently it is 12.5 bitcoins. When the network is done mining another 210,000 block segment, the reward will split in half again. You can see when this will happen by visiting http://www.bitcoinblockhalf.com/ The website will also show you how many Bitcoins the network has in circulation as you are reading this article, how many Bitcoins the network will mine in the future, and other interesting up-to-date stats and facts.