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Now that we’ve introduced some of the basic Bitcoin terms in Part 1 of this blog series, which you can read here, we can investigate more advanced terms. We are rounding out this two-part series in today's blog, by covering terms that are more about the process of mining, Bitcoin ownership, and more! HODLHODL (pronounced hah-dl) is a rallying cry used in times of significant volatility. This (in)famous misspelling of “hold” has become a favorite meme of Bitcoiners, used to encourage people to not sell their bitcoins when prices are down (incurring a loss) or when prices are up (incurring a gain that’s less than a potential future gain). WhaleA whale is an individual who owns over 1,000 bitcoins. MinerA Bitcoin network participant who is trying to find a valid block of transactions. Most miners join mining pools, which allow many miners to combine computing power together in order to increase their chances of finding a block of transactions. All miners run full nodes or work with another miner who does. Bits monospace has a great visual site displaying all the transactions currently waiting to be mined into blocks. Block Subsidy (Block Reward)The block subsidy is a measure of bitcoins awarded to a miner who successfully mines a block of transactions. The original block subsidy was 50 bitcoins, and that number drops by half every 210,000 bitcoin blocks (approximately every 4 years), with each block subsidy period being known as an epoch. The bitcoin network is currently in the fourth epoch, with a block subsidy of 6.25 bitcoins. Sometime in early May 2024 the 840,000 block will be mined, triggering the fifth epoch and dropping the block subsidy down to 3.125 bitcoins. In addition to the block subsidy, miners are paid fees for mining transactions. Transaction fees currently are approximately 1% of the miner’s revenue. As the block subsidy approaches zero, the transaction fees will comprise a larger and larger percentage of miner revenue. Difficulty TargetA number, determined by the Bitcoin protocol, that the hash of a candidate block of transaction must be less than. This number gets smaller—and the difficulty gets harder—as more miners are competing to mine blocks. You can think of the difficulty target as an elaborate game of limbo. As the bar gets closer to the ground, it becomes increasingly difficult for the contestants to make it under successfully. This number is algorithmically determined by the protocol itself. Bitcoin blocks are supposed to be mined every 10 minutes and the difficulty target adjusts every 2016 blocks (approximately every two weeks) in order to keep the block rate as close to that goal as possible. If many miners are competing to find a block, the average block time will likely be below 10 minutes. If many miners stop competing, the average time will likely be greater than 10 minutes. The difficulty target adjusts automatically to target that 10-minute ideal. You can find more about the next upcoming difficulty retargeting at www.bitrawr.com/difficulty-estimator HashingHashing is an algorithmic function that allows calculations only in one direction. Any given input will always yield the same output, but it is not mathematically possible to determine input from the output. The Bitcoin network uses the SHA-256 algorithm. These hashes are used by miners to prove that they have successfully mined a block of transactions. It is the hash of their candidate block that must be less than the difficulty target. One specific item to note is that varying the input data even slightly causes an unpredictable variance in the output data, which makes Bitcoin mining a competition, based on randomness alone. For example, here are the two SHA-256 outputs for Bitcoin vs bitcoin:
NonceA nonce is a set of random data that miners put into specific sections of a candidate block of transactions in order to change the SHA-256 hash of the block. There is a specific area inside every Bitcoin block that is designed to hold this random data. Miners vary the nonce of a block they are working on in an attempt to find a block hash that is smaller than the difficulty target. Peer-to-PeerBitcoin transactions do not require any central intermediary. All other digital transactions–Venmo, ACH, even paper checks–require a third party to facilitate the transaction. Bitcoin transactions are sent peer-to-peer, meaning no third party is required–the only intermediary is the Bitcoin network itself.
For more information on Bitcoin, contact Andy Ott, Digital Banking Manager, at Frontier Bank. In addition to managing the bank’s computer systems, he provides education on Bitcoin. Prior to his role at Frontier Bank, Andy ran a Bitcoin ATM company in Wisconsin in 2018 & 2019. If you would like to learn more about this emerging technology, please reach out to schedule a call. Andy Ott |