Lesson 6: "Economic Incentives" What is the greatest invention in Bitcoin?

Why does this lesson matter?

Through the three lessons so far, we have learned how to achieve transactions without the need for a third party. We have learned that nodes are needed to make the blockchain work, but what emerges is the question of whether anyone will become a node. Traditionally, third parties such as financial institutions have taken on this role by collecting fees. Therefore, in this lesson, we will learn about economic incentives, which is said to be the greatest invention in Bitcoin.

What you can learn in this lesson

  • The mechanism that makes nodes want to join the network.
  • The mechanism for issuing new Bitcoins
  • The economic rationale for fraud prevention

Getting bitcoins for a successful PoW

Nodes that perform a PoW and form a new block can write down the information that they formed the block.

At this time, the node will receive a certain amount of bitcoins as a reward for conducting the PoW.

This reward mechanism is a clever trick to make nodes want to join the network.


Also, the bitcoins that are rewarded are newly issued, and this is the only way to issue new bitcoins.

Therefore, in essence, the value of a bitcoin is backed by the CPU time and power required to run the PoW.

The act of issuing new bitcoins through repeated PoWs is seen as if it were the act of mining for gold, which is why it was later given the name "mining.


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Bitcoin Transaction Fees

It is rare to hear that there are no fees for Bitcoin transactions, but the fees are very inexpensive, not completely free.

This small fee is always incurred when transferring bitcoins, and is received by the node.

This fee is also an incentive for nodes.


Since there is a limit to the number of bitcoins that can be issued, all of the bitcoins will eventually be issued.

After that, the only incentive for nodes will be transaction fees.

The idea is that at that point, the price of bitcoin will be completely free from inflation, so the transaction fee alone will be enough to incentivize nodes.


As a side note, I frequently see that the issuance limit for bitcoin is 21 million BTC, but this is incorrect.

As a minor detail, the Bitcoin issuance limit is 20,999,999.9769 BTC.


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Economic Rationale for Fraud Prevention

Bitcoin's reward mechanism is also an incentive for nodes to remain benevolent.

If a node were to commit fraud with malicious intent, and were to succeed in doing so, here are the actions it might take

  1. Falsify the history of past payments and take back the paid bitcoins.
  2. Monopolize newly issued bitcoins in the future.


However, upon successful completion of this fraud, the Bitcoin network will be considered to have collapsed.

Then the price of the bitcoins that were issued based on that system will plummet.

Therefore, it is more economically rational to continue the PoW successfully and increase the value of the Bitcoin network than to cheat.


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Lesson 6: "Economic Incentives" What is the greatest invention in Bitcoin?

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