How Miners Get Paid !

The blockchain explained

Think of the blockchain like a digital ledger, similar to a very secure, shared notebook where everyone can write down transactions, but no one can erase or change what’s already written. Each page of this ledger is a “block,” and once it’s full, a new page is added, forming a chain of pages—hence, “blockchain.”

Now, every time a transaction happens, it’s recorded on one of these blocks. But before that transaction is confirmed, it’s checked by many different people (computers, actually) to make sure everything adds up. Once everyone agrees, it gets permanently added to the chain, and it’s almost impossible to alter after that.

Just like how old-fashioned ledger books keep records safe from tampering, the blockchain does the same thing, but digitally. It’s decentralized, meaning no single person or company controls it—it’s a collective effort. This technology is what keeps things like Bitcoin running securely.

What is bitcoin mining

Imagine you’re part of a huge digital puzzle-solving game. In this game, you are a Bitcoin miner, and your job is to solve very complex math puzzles that are so difficult that only computers can work on them. Each time you and other miners compete to solve these puzzles, you’re actually helping verify transactions on the Bitcoin network, like making sure someone really sent Bitcoin to someone else.

When your computer finally solves the puzzle, it’s like finding the winning lottery number. As a reward for solving it, you get a prize—this prize is a small amount of Bitcoin. This process is called mining because, just like digging for gold, you’re doing a lot of work to get a valuable reward.

The more puzzles you solve, the more Bitcoin you earn, but the puzzles get harder over time. Also, since many miners are competing, it’s a race to see who can solve the puzzle first, and the winners are the ones who earn the Bitcoin rewards.

HOW MINERS GET PAID !!!

Understanding Gas Fees

Gas fees are like the “fuel” you need to make transactions happen on a blockchain network, particularly on Ethereum. Every time you perform a transaction (like sending cryptocurrency or executing a smart contract), you pay a gas fee to the miners or validators who process and confirm your transaction.

Why Gas Fees? Just like a car needs gas to run, a blockchain network needs resources (computing power) to process transactions. These fees compensate miners or validators for using their computing power to secure the network and confirm transactions.
How Gas Works: The amount you pay in gas depends on the complexity of the transaction and how fast you want it processed. If the network is busy, you may need to pay more to have your transaction processed quickly.

Understanding Block Reward

A block reward is what miners receive as compensation for successfully mining a new block on the blockchain. This reward is typically in the form of cryptocurrency.

How it Works: On networks like Bitcoin, miners solve complex cryptographic puzzles to add new blocks to the blockchain (as mentioned in the Bitcoin mining example earlier). When a miner successfully mines a block, they are rewarded with newly minted Bitcoin (the block reward) along with any transaction fees included in that block.
Halving: Over time, the Bitcoin block reward is reduced through a process called halving, which happens approximately every four years, to control the total supply of Bitcoin.

Understanding Ordinals

Ordinals, specifically in the context of Bitcoin, are a recent concept related to inscribing data or assets directly on the Bitcoin blockchain, similar to non-fungible tokens (NFTs) on Ethereum.

Bitcoin Ordinals: Ordinals allow users to assign and track unique identifiers to individual “satoshis” (the smallest unit of Bitcoin), enabling the creation of digital artifacts (like NFTs) directly on the Bitcoin blockchain. This makes it possible to track and create digital art, collectibles, and other data-based assets on Bitcoin.
How it Works: Instead of adding separate tokens or smart contracts like on Ethereum, Ordinals let you inscribe or embed data directly into the Bitcoin network by attaching it to individual satoshis, which makes them unique.

Each of these concepts plays a key role in how different blockchain networks function, whether it’s paying for transaction processing (gas fees), incentivizing miners (block rewards), or creating new forms of digital assets (ordinals).

What is Block Reward Halving?

When Bitcoin was first created, miners earned 50 Bitcoin each time they added a new page (or block) to the digital ledger (called the blockchain). But every four years, that reward gets cut in half. This is called a halving.

So:

In the beginning, miners earned 50 Bitcoin per block.
After the first halving in 2012, they earned 25 Bitcoin per block.
In 2016, the reward was cut to 12.5 Bitcoin.
In 2020, it dropped to 6.25 Bitcoin.

And in 2024, the reward will be 3.125 Bitcoin per block.

Why is This Important?

The idea behind these halvings is to make Bitcoin more rare over time. Just like gold is valuable because it’s hard to find, Bitcoin becomes harder to get as fewer new coins are created. This limited supply makes Bitcoin scarce, which is why people often compare it to gold.

How Does This Affect Bitcoin’s Value?

As the reward miners get for their work keeps shrinking, fewer new Bitcoins are made and enter the market. This limited supply, combined with growing demand for Bitcoin, can make the price go up. So, over time, Bitcoin could become more valuable because it’s harder to get.

How Does It Affect Miners?

In the early days, miners made a lot of Bitcoin for their efforts. But as time goes on and the reward shrinks, miners earn less.
To keep making money, miners hope that the price of Bitcoin goes up to make up for the lower rewards. They also earn some extra from transaction fees, which are paid by people using the network.

The Big Picture

There will only ever be 21 million Bitcoins in total. Once they’ve all been created (sometime around the year 2140), no new Bitcoin will ever be made. This makes Bitcoin one of the few assets in the world with a fixed, unchangeable supply. That’s why some people think it will become more valuable over time, just like something rare like a piece of fine art or a precious metal.

In simple terms, Bitcoin is designed to get harder and harder to get, which can make it more valuable as time passes.

This chart, titled “Asset Class Total Returns Since 2011”, compares the total returns of various asset classes, including Bitcoin, US growth stocks, large-cap stocks, bonds, and others, from 2011 to 2024 (data as of July 5, 2024). Below is a summary of the key takeaways:

Bitcoin’s Performance

Highest overall returns: Bitcoin (BTC) significantly outperformed all other asset classes, with cumulative returns from 2011 to 2024 of an astonishing 1,888,169% and an annualized return of 145.9%.
Volatility: Bitcoin also shows high volatility, with extreme swings like a 5507% return in 2013, followed by -58% in 2014 and -73% in 2018. Despite the downturns, Bitcoin has consistently rebounded with massive positive returns, especially in years like 2017 (1331%) and 2020 (301%).

US Growth & Large Caps

Steady performers: US Growth (IWF) and US Large Caps (SPY) have provided consistent, positive returns over the years. US Growth saw notable years like 2020 (+40%) and 2013 (+32%), with overall cumulative returns of 670% since 2011.
QQQ (US Nasdaq 100): Also showing strong growth with a 931% cumulative return from 2011 to 2024, this has been one of the best performers among traditional asset classes.

Gold (GLD)

Low returns: Gold has been relatively flat with a 16% cumulative return over the period, showing it’s a low-growth, lower-volatility asset. It’s had both small gains and losses, never showing extreme movements like Bitcoin or stocks.

Emerging Markets (EEM) and Commodities (DBC)

Poor performance: Emerging Market stocks (EEM) and Commodities (DBC) have underperformed over this period. For instance, DBC has been the lowest performer with a -0.5% annualized return and -5.3% in cumulative terms.
Volatility: EEM saw large swings, such as a -18.8% loss in 2011, followed by a 18.9% gain in 2017, but overall its performance has lagged.

Bonds & Cash

Steady but low returns: Bonds (CWB, BND, LQD) and US Cash (BIL) have generally delivered low, stable returns, with BIL showing almost no movement (0.9% annualized return).
High-yield bonds (HYG) provided modest returns, with a cumulative return of 62.8% since 2011.

Real Estate (VNQ)

Strong early years: Real Estate (VNQ) had high returns in the early part of the chart, particularly in 2014 (+30%) and 2019 (+28.7%). However, performance has flattened more recently, with 8.3% cumulative return for 2023 and slight negative returns in 2022 (-24.6%).

Conclusion

Bitcoin has been the clear winner in terms of returns, but with much higher volatility compared to other assets.
US Growth stocks and Nasdaq 100 (QQQ) have also performed very well with much lower risk compared to Bitcoin.
Bonds and Gold have offered more stability but much lower returns.
Emerging Markets and Commodities have struggled, showing poor long-term performance.

This chart demonstrates the diversity in asset class performance, with high-risk assets like Bitcoin offering massive returns at the cost of volatility, while traditional stocks, bonds, and cash provide more stable, albeit lower, returns.