Bitcoin basics

Transaction

Block

Mempool

Blockchain

Miner

What happens when you use Bitcoin?

You just met a cute girl and want to send all your BTC to her...

...You open your wallet and she gives you her address...

...Your wallet prepares a transaction...

...You send the transaction to the network, and it ends up in mempool...

...A miner sees your transaction and decides to put it in a block...

...The miner successfully mines the block...

...After six blocks, your transaction can't be reverted!

Mining

• Miners use energy to add new blocks to the blockchain
• Miners have a economic incentive to work
• The first transaction of the block is called coinbase
  • Pays to the miner some Bitcoin for the work done
    • Newly issued Bitcoin
    • Transaction fees

Incentives

Incentives - newly issued

• At the moment each block issues 6.25 new Bitcoin
  • Those are called "virgin", because they have no previous history
• The number of Bitcoin issued each block decreases over time
• In 2140 no more Bitcoin will be issued
  • There will never be more than 21 milion Bitcoin!

Incentives - newly issued

• Miners also earn the fees of all the transactions in the block
  • Each transaction must include a small fee to pay the miner
  • The miners choose the transaction with higher fees first
  • If you're in a rush, just pay more!

Incentives - transaction fees

• The fee doesn't depend on how many Bitcoin you're moving!
• It depends on the traffic in the Bitcoin network
  • The more congested the network is, the higher the fees
• It depends on how quickly you want the transaction to be confirmed
  • You can pay a super low fee if you're fine with waiting days
• It depends on your address type
  • It's cheaper to spend from addresses starting with "bc1..."

Incentives - transaction fees

• The miner chooses some transactions to include from the mempool
• The miner adds the coinbase transaction, which pays the reward
• The miner has to solve a puzzle to make the block valid
• When the puzzle is solved, the miner can publish the block

How to build a block

• Mathematical puzzle needed to create a new block
• The only way of solving it is trying random answers until you find one that works
• Let's try to understand the mining puzzle with an analogy...

The mining puzzle

The mining puzzle: an analogy

The mining puzzle

• Imagine playing rolling dices against thousands of opponents
• Only the first player who beats the target wins
• The more times you roll the dices, the higher the chance of winning
  • You would roll the dices as quickly as possible
  • You would avoid wasting time between the rolls

The mining puzzle

• Mining is really similar to our rolling dices game:
• Mining devices spend all day trying random numbers until they find the solution to the puzzle
• The first one who finds the solution gets the reward, and the game starts again
• Miners have to be as efficient as possible to maximize their reward

Adjusting the difficulty

• The more players join the rolling dices game, the quicker the solution will be found
• We don't want that! We want one block to be found every 10 minutes
• Game difficulty is adjusted every 2016 blocks
  • If the previous 2016 blocks where mined too slowly, the game becomes easier
  • If the previous 2016 blocks where mined too quickly, the game becomes more difficult

Mining device

• A mining device is a computer built only for Bitcoin mining
  • You can't surf the internet on a mining device, you can only try solving the puzzle

Mining device

• You can't mine Bitcoin on your own computer/ smartphone
  • They're not powerful enough
  • You would ruin your hardware
  • You wouldn't earn anything
• Any app who claims to make you mine BTC on your device is a scam. Be aware!

Mining pool

• Let's say you have some mining devices and you're able to find one block once a year
• That's ~7 BTC in revenue per year
• You would have to spend one whole year paying bills before being able to earn something
• That's unfortunate!

Mining pool

• Joining a mining pool means starting to mine with other people, and then sharing the reward
• Each miner gets a reward proportional to how many calculations their devices did
• Miners get paid a bit less (due to pool fees), but they're paid multiple times a day