There are many different aspects that may prove difficult to understand. Unlike traditional money, cryptocurrencies are not issued by a bank or government.
Instead, the supply of these currencies is often generated through a process called "mining".
The Three Facets of Bitcoin Mining
Creating new bitcoins to be distributed on the network is done through mining. This process is completed by solving complex mathematics on the Bitcoin network.
The work associated with this concept is what powers the Proof-of-Work aspect of Bitcoin mining. It is a system in which those who solve mathematical equations are incentivized or rewarded.
Bitcoin is now over 11 years old. Over time, more and more people have joined the race to solve these mathematics. As more people join, more resources are required to find a solution to every network block, increasing the associated difficulty.
This evolution can be seen by looking at the Bitcoin mining difficulty chart. Today, it takes specialized hardware in order to "crack the code" successfully.
All of this work is not contributed free of charge. Those who partake in these operations are known as Bitcoin miners. They compete to solve every block's mathematics and receive the associated reward.
Given the current mining difficulty, it is often better for users to pool their contributions together. In doing so, they all increase the chance of solving mathematics and receive a proportional share of the Bitcoin block reward.
The Fixed Supply Factor
Another factor contributing to the evolution of block rewards is the fixed supply of Bitcoin. In total, there will never be more than 21 million BTC in circulation. This has been decided upon by the creator, Satoshi Nakamoto.
A fixed supply cap is very different from the current forms of money used globally. There is no limit on how much of a national currency can be in circulation at any given time. With Bitcoin and most other cryptocurrencies, there is a hard limit in place to prevent inflation.
Halving the Block Rewards
Because of this supply cap, the block reward from Bitcoin mining cannot stay the same forever. Satoshi Nakamoto has come up with a solution that reduces the reward over time. Every 210,000 blocks, the reward associated with solving the block's mathematics is cut in half.
When Bitcoin was first created, the block reward was 50 BTC. As such, the first million BTC were brought into circulation very quickly. Eleven years later, there are over 18.206 million BTC generated on the network. The remaining 2.794 million will be created between now and 2140.
As of today, the Bitcoin block rewards sits at 12.5 BTC. Considering how 6 network blocks are generated every hour, that means 75 BTC are brought in circulation every hour. That equates to 1,800 BTC per day. Soon, those will drop to 6.25 per block, 37.5 per hour, or 900 per day.
When the 2020 reward halving occurs, it marks the third event of this scale in Bitcoin history. Further reductions will occur until the 21 millionth BTC has been generated on the network. This deflationary curve has been outlined in Satoshi's whitepaper.
No Action Required by Users
To onlookers, the block reward halving may seem invasive. After all, it changes a core economic aspect of this ecosystem in a big way. In most cases, major changes introduced to Bitcoin will require users to upgrade their associated software. For block reward halving, that is not the case.
There are no changes made to the underpinning code. Instead, Satoshi ensured that these halvings occur automatically from Bitcoin's inception. The end-user, as well as service providers and miners, do not need to undertake any action to be "eligible" for the new reward structure.
Stay Tuned for Part 2!