Transactions and Coin Creation
A transaction is the transfer of coins from one user to
another, such as 0.5 Litecoin (LTC) from user 1 to user 2. In this example, user
1 initiated the transfer within their wallet, and specified the address for user
2 as the address to send to. Every transaction is recorded permanently and
publicly in a blockchain, which is typically
described as a public ledger. (Although the transaction is public, the
identities of sender and receiver are not.) The blockchain consists of, not
surprisingly, blocks, and is stored on many separate nodes (computers) across
the network. Each block contains a set of transactions and is
doubly linked, to the previous block and the next block (when it is created).
The creation of a block is called mining, and those that create the block are
called miners. Creating a block involves solving a mathematical problem as
defined when the coin was designed and created. Often this problem involves
finding a hash value (a value that represents all the data in the block) with
certain characteristics. Arriving at the correct
solution is an iterative process; different coins have different methods but all
involve heavy usage of resources: computational power or memory space, or a
combination of the two. The Bitcoin (BTC) network, for example, is designed to
have a block created (puzzle solved) once every ten minutes. To maintain this
rate, a difficulty level is adjusted every so often based on how many blocks
were created since the last adjustment time. CoinDesk has a
brief
article specific to Bitcoin where you can learn a bit more about mining than
this simplified explanation.
This newly created block contains pending transactions, which then become
part of the blockchain and thus the permanent record. It is during the creation
of a block that new cryptocoins are created. These new coins, called the block
reward or mining reward, are awarded to the miner that created the block. This
reward provides incentive for people to create new blocks - without new blocks
being created transactions would come to a halt. However, we previously
discussed that many cryptocurrencies are deflationary, and have a maximum amount
that will ever exist. On these networks the block reward eventually ends; in
Bitcoin the reward started at 50 coins and as of March 2017 is at 12.5,
continuing to halve at a
fixed rate until the maximum supply is achieved. With no reward, where is
the incentive to mine new blocks? It is costly to discover new blocks, and thus
there is another source of income for miners: transaction fees.
A fee is included with each transaction, paid by the sender, and is provided
to the miner creating the block. Unlike most fees which are based on transaction
amount (even though increased transaction values often have no impact on the
cost of a transaction), crypto coin fees are based on how much space within a
block a transaction takes up. On the Bitcoin network, the minimum fee is 0.00001
BTC per kilobyte (kB) of transaction data. For a transaction of very small
value, this could be a large percentage. For a large value transaction,
this is miniscule. However, the typical fee paid per kB can be much higher. The
reason for this is that many cryptocurrencies limit the size of a block; it is
1MB in Bitcoin. With many transactions and limited space, supply and demand
drives the price up.
It is important to understand that because transactions are linked through
history, and can be completely reconciled through the blockchain, multiple
transactions that you receive are not bundled together into one piece. The
software you are using may make it look that way; for example, you may have
received 0.1 BTC ten times, and thus have 1 complete Bitcoin. The software shows
you have one, and exactly one (1.00000000). However, you really have ten
separate transactions that make up the total. When you send that 1.0 BTC
onto the network, the transaction will be constructed showing each of those
previous ten transactions as the input and a single transaction (of 1.0 BTC) as
the output. This construction takes up space, and more space means a higher fee.
One can imagine the fee for hundreds of 0.00001 transactions being consolidated
for a send onto the network. You can read why this is important in the
Free Coins! section.
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