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Author Topic: Where does the money come from when mining?  (Read 11422 times)
Grouver (BtcBalance)
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June 15, 2011, 08:31:24 PM
 #1

Dear BitCoin Community,


Iam very new to this whole thing.
I like the whole idea and even am mining a bit with my old pc.
I get the whole system except one thing..

Where does the money come from when mining?
Who pays for these useless calculations?
I mean at the end you simply get money from a other person when mining right?
Or is this simply money for free?  (if we don't look at the electricity bills ofcourse)

EDIT: Some other question just raise up into my mind.
Can Bitcoin collapse if 95% of all people suddenly leave cause Google made a announcement of some kind?

Thats all for now.


Thanks in advance.

-Grouver-

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vanfront
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June 15, 2011, 08:45:35 PM
 #2

Where does the money come from when mining?
They are generated when a specific mathematical equation is solved by the mining software. Since it can't cheat (=must use brute force approach) and since the system is well designed (=mining difficulty) not "BTC mining flood" can occur.

Who pays for these useless calculations?
You! And they aren't useless since they generate bitcoins for you.

I mean at the end you simply get money from a other person when mining right?
No. You get it from the system itself.

Or is this simply money for free?  (if we don't look at the electricity bills ofcourse)
No, because it costs at least the electricity.

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Grouver (BtcBalance)
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June 15, 2011, 09:07:54 PM
 #3

I mean at the end you simply get money from a other person when mining right?
Quote from: vanfront
No. You get it from the system itself.


So if iam understanding right this mining is only to generate new coins so they will that will get into your wallet (the bitcoin economy) at a X rate?
If the above is true then the following statement als must be true.

A static low amount of EURO/USD paid for the Electricity -> 1 BTC -> 15 EURO/ 18 USD  (rounded and based on the current exchange rate)

So at the end you are creating money since you started with a X low amount of USD/EUROS paid for the electricity wich you can turn into Bitcoins by mining them and wich also are more worth in USD/EURO or any other daily life currency then you started with/put in. And 1 BTC is not realy earned by doing some usefull computing calculations wich would be the explanation that you earn money by mining, right?
So where does the money come from that pays you for mining or even better said, pays you for the profit you create for your self? This cannot be the system since then as explained above you would be creating money out of thin air.
And creating money is not legaly possible, right? So at the end the only explanation for that you get money for mining is that somebody pays you the differential in real USD/EURO for mining/calculating nothing  (sorry) ?

So to rephrase my question. Where does the USD/EURO come from that pays your profit you get when mining?

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June 15, 2011, 09:17:48 PM
 #4

drug addicts and speculators. google "silk road"

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Rob P.
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June 15, 2011, 11:32:03 PM
 #5

So if iam understanding right this mining is only to generate new coins so they will that will get into your wallet (the bitcoin economy) at a X rate?

No, CURRENTLY mining serves two purposes:
1)  Expand the economy by mining bitcoins and putting them into the market (currently 50/block solved)
2)  Confirm Transactions

In the future, when all of the Bitcoins have been mined (around 2030 and 21,000,000 coins), mining will not generate new coins.  At that point mining will only be for confirming transactions (by adding them to the block chain).

Why will miners mine?  Because of the transaction fees, because the miner who adds a block to the block chain gets to keep all of the transaction fees for that transactions that were in that block.

If miners didn't exist, neither would Bitcoin.

So at the end you are creating money since you started with a X low amount of USD/EUROS paid for the electricity wich you can turn into Bitcoins by mining them and wich also are more worth in USD/EURO or any other daily life currency then you started with/put in. And 1 BTC is not realy earned by doing some usefull computing calculations wich would be the explanation that you earn money by mining, right?
So where does the money come from that pays you for mining or even better said, pays you for the profit you create for your self? This cannot be the system since then as explained above you would be creating money out of thin air.
And creating money is not legaly possible, right? So at the end the only explanation for that you get money for mining is that somebody pays you the differential in real USD/EURO for mining/calculating nothing  (sorry) ?

Miners don't create money, they "find" it.  Just like miners of gold don't make gold.  Resources are expended to mine for Bitcoins (electricity, hardware to mine (which wears out and has to be replaced), and time) just like they are expended for mining for minerals.

So to rephrase my question. Where does the USD/EURO come from that pays your profit you get when mining?

Miners are able to do whatever they want with the Bitcoins they receive and/or are paid.

Your question is one of economics and is a question for everyone who owns Bitcoins.  How do you realize the value of a Bitcoin?
The same way you realize the value of a Dollar/Euro.  You spend it on something else that has value to you.

So, miners can buy products, services, and entertainment with them.  Or on exchanges, they can buy other currencies (like Dollars and Euros).  Some just hold them, hoping they'll be more valuable in the future than they are today.

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Rob768
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June 15, 2011, 11:33:31 PM
 #6

It's a fiat currency just like the US dollar.  Backed by nothing.

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June 15, 2011, 11:39:15 PM
 #7

1. You dont get money from mining... you get Bitcoins..which you can then exchange for money, from an Exchange House like MtGox or you can exchange Bitcoins with other users for goods or services that they sell.

1.5. Money only appears after you give someone your Bitcoins and they give you currency.

2. The profit comes from the exchange rate the Exchange House will buy your Bitcoins for. Example: User A wants to buy 1 Bitcoin for 10 Euros. User B wants to buy 1 Bitcoin for 15 Euros. If you exchange(sell) your Bitcoin to User B you make 5 more Euros over User A and if you calculate for how much you sold the Bitcoin minus the electricity cost your computer used and other expoenses (internet,video card,purpose built hardware) ...the thing left over, thats your profit.

3. The Bitcoin itself is not a touchable Thing.. its an idea. That idea is signed with a mathematical hash and that hash is what people are trading around because it represents the time and effort it took to calculate that hash.  They are exchanging the value of that time and effort.

4. How much is your time and effort, to do something, worth?

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Rob P.
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June 15, 2011, 11:50:17 PM
 #8

What is the actual likelihood that all of these 21 million BTC will be found? It seems to me, and I am not a mathematician, that at some point the time and cost of mining will be greater than the value of the bitcoins left to be found. I don't feel too bad asking such a newbie question, this being the newbie forum, so: what happens then? Is there an "Official Plan"?

Bitcoins aren't actually "found".  They are paid to the miner who adds a block to the block chain.  Currently the miner who adds a block to the block chain pays him/herself 50 Bitcoins.  After there are 210,000 blocks on the block chain (we're in the 130,000s now) that fee goes down to 25 Bitcoins, every 210,000 blocks it halves again.  So, eventually the fee will be below 1 BTC for adding a block.

However, blocks have to be added to the block chain, otherwise transactions cannot be confirmed.  Without confirmed transactions, the entire system breaks down.

So, blocks will continue to be added.
Miners will continue to pay themselves, up to the full 21,000,000 coins.
Miners will continue to add blocks, even when all the coins are "found", because they will be paid by getting to keep all of the transaction fees that are on the transactions in the block (which is why there HAVE to be transaction fees, think of it like a sales tax paid to the miners).

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MoonShadow
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June 16, 2011, 12:37:29 AM
 #9


No, CURRENTLY mining serves two purposes:
1)  Expand the economy by mining bitcoins and putting them into the market (currently 50/block solved)
2)  Confirm Transactions

There is a third purpose, to secure the blockchain against a brute force attack.

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

- Carroll Quigley, CFR member, mentor to Bill Clinton, from 'Tragedy And Hope'
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June 16, 2011, 12:45:59 AM
 #10



So to rephrase my question. Where does the USD/EURO come from that pays your profit you get when mining?

From me, but as my employee, you only get half of the profits.  So I pay you $10 for each bitcoin you make.

How's that for a deal?

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

- Carroll Quigley, CFR member, mentor to Bill Clinton, from 'Tragedy And Hope'
Grouver (BtcBalance)
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June 16, 2011, 08:26:33 AM
 #11

So if iam understanding right this mining is only to generate new coins so they will that will get into your wallet (the bitcoin economy) at a X rate?

No, CURRENTLY mining serves two purposes:
1)  Expand the economy by mining bitcoins and putting them into the market (currently 50/block solved)
2)  Confirm Transactions

In the future, when all of the Bitcoins have been mined (around 2030 and 21,000,000 coins), mining will not generate new coins.  At that point mining will only be for confirming transactions (by adding them to the block chain).

Why will miners mine?  Because of the transaction fees, because the miner who adds a block to the block chain gets to keep all of the transaction fees for that transactions that were in that block.

If miners didn't exist, neither would Bitcoin.

So at the end you are creating money since you started with a X low amount of USD/EUROS paid for the electricity wich you can turn into Bitcoins by mining them and wich also are more worth in USD/EURO or any other daily life currency then you started with/put in. And 1 BTC is not realy earned by doing some usefull computing calculations wich would be the explanation that you earn money by mining, right?
So where does the money come from that pays you for mining or even better said, pays you for the profit you create for your self? This cannot be the system since then as explained above you would be creating money out of thin air.
And creating money is not legaly possible, right? So at the end the only explanation for that you get money for mining is that somebody pays you the differential in real USD/EURO for mining/calculating nothing  (sorry) ?

Miners don't create money, they "find" it.  Just like miners of gold don't make gold.  Resources are expended to mine for Bitcoins (electricity, hardware to mine (which wears out and has to be replaced), and time) just like they are expended for mining for minerals.

So to rephrase my question. Where does the USD/EURO come from that pays your profit you get when mining?

Miners are able to do whatever they want with the Bitcoins they receive and/or are paid.

Your question is one of economics and is a question for everyone who owns Bitcoins.  How do you realize the value of a Bitcoin?
The same way you realize the value of a Dollar/Euro.  You spend it on something else that has value to you.

So, miners can buy products, services, and entertainment with them.  Or on exchanges, they can buy other currencies (like Dollars and Euros).  Some just hold them, hoping they'll be more valuable in the future than they are today.

Thanks for your explanation this really helped.
I am only still struggling with this answer:

"Why will miners mine?  Because of the transaction fees, because the miner who adds a block to the block chain gets to keep all of the transaction fees for that transactions that were in that block."

Can you maybe explain this a little more detailed?

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June 16, 2011, 08:39:02 AM
 #12

How about asking another question: why is gold so valuable? What can you do with it? You can exchange it for money. But what can the person you exchanged it with do with his gold? Exchange it for some money too. That's it, that's all it's good for. Just like bitcoins.

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willphase
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June 16, 2011, 08:44:46 AM
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I am only still struggling with this answer:

"Why will miners mine?  Because of the transaction fees, because the miner who adds a block to the block chain gets to keep all of the transaction fees for that transactions that were in that block."

Can you maybe explain this a little more detailed?

Blocks contain transactions.  Blocks are distributed across the bitcoin network to every client in order to verify that a transaction hasn't happened twice (double spending).  This is the fundamental reason why bitcoin works.

When a block is successfully solved, the person who solved the block gets to add a magic generation transaction of 50BTC to their account, and also take all the transaction fees for any transactions included in their block.

The bounty for solving a block (currently 50BTC) will reduce every 4 years, as per design of the network, so some time next year it'll drop and people will only get 25BTC per block, and so on.  As this happens the profit from solving a block will move from the bounty to the transaction fees.  This is why miners will continue to mine in 2033 - when you are earning 0BTC from solving, but potentially a lot of BTC from including transactions that you have verified by solving the block.

Right now the bounty totally outweighs the transaction fees (50BTC vs approx 0.1BTC) but this will change as more transactions happen on the bitcoin network.

Will

Grouver (BtcBalance)
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June 16, 2011, 09:08:16 AM
 #14

I am only still struggling with this answer:

"Why will miners mine?  Because of the transaction fees, because the miner who adds a block to the block chain gets to keep all of the transaction fees for that transactions that were in that block."

Can you maybe explain this a little more detailed?

Blocks contain transactions.  Blocks are distributed across the bitcoin network to every client in order to verify that a transaction hasn't happened twice (double spending).  This is the fundamental reason why bitcoin works.

When a block is successfully solved, the person who solved the block gets to add a magic generation transaction of 50BTC to their account, and also take all the transaction fees for any transactions included in their block.

The bounty for solving a block (currently 50BTC) will reduce every 4 years, as per design of the network, so some time next year it'll drop and people will only get 25BTC per block, and so on.  As this happens the profit from solving a block will move from the bounty to the transaction fees.  This is why miners will continue to mine in 2033 - when you are earning 0BTC from solving, but potentially a lot of BTC from including transactions that you have verified by solving the block.

Right now the bounty totally outweighs the transaction fees (50BTC vs approx 0.1BTC) but this will change as more transactions happen on the bitcoin network.

Will

I am getting close and closer to my answer.
Thanks for replying.
I still do not understand the bounty part. Who pays the 50BTC bounty as the transaction fee currently is very low?
Also, "Blocks contain transactions."
Gold doesn't contain transactions, how can gold (to compare) already be sold (made into a transaction) when you just found it?

willphase
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June 16, 2011, 09:16:45 AM
 #15

I am getting close and closer to my answer.
Thanks for replying.
I still do not understand the bounty part. Who pays the 50BTC bounty as the transaction fee currently is very low?
Also, "Blocks contain transactions."
Gold doesn't contain transactions, how can gold (to compare) already be sold (made into a transaction) when you just found it?

The bounty is paid by the person finding the block being allowed to simply add a 50BTC transaction paying them to the block.  It's a reward for solving the block, and comes from nowhere except the work required to solve the block.  This is permitted by the network because every client is able to verify that, for the block which contains this transaction, 50BTC is the right amount to add... i.e. by consensus of the fact that everyone is using the same implementation.  When this drops to 25BTC next year, anyone putting a 50BTC free bounty transaction on any blocks they solve will simply get their block rejected.  These special 'generation' transactions, because they contain relatively large amounts of BTC, take 120 blocks to verify.  This is called 'maturing' your generation block.  At 6 blocks an hour, 120 blocks takes 20 hours - and this is why pools often have 'unverified' and 'verified' funds - 'unverified funds' are those funds related to a generation transaction that has not yet matured.

Blocks cannot be equated to gold or BTC.  If you need a real world analogy, blocks are like the ledgers that contain all the transactions of buying and selling gold and the amount that has been mined.  If all the gold that everyone owned was stolen and put in a huge vault, then it would be possible to go through all these ledgers and work out who owns what bit of gold.  This is what your bitcoin client does all the time - it starts with 0 BTC in your wallet, and then goes through every block and every transaction in that block to see if anyone has paid you BTC, and if so, adds it to your wallet (it determines this using public key cryptograpy), it also goes through and sees if you've paid anyone BTC and subtracts that.  Thus, a complete record of the ownership of every BTC in the network can be determined by simply parsing the block chain.

Will

Grouver (BtcBalance)
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June 16, 2011, 09:27:51 AM
 #16

The bounty is paid by the person finding the block being allowed to simply add a 50BTC transaction paying them to the block.  It's a reward for solving the block, and comes from nowhere except the work required to solve the block.  

So at the end your creating/finding EUROS/USD out of nothing wich pays the bounty?

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June 16, 2011, 09:30:44 AM
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So at the end your creating/finding EUROS/USD out of nothing wich pays the bounty?

well, in the end, the people willing to buy bitcoings for EUROS/USD are indirectly paying your bounty, for the electricity/time you put in mining the bitcoins.  BTC are only worth what people are willing to accept for them, be it goods, or government backed currency.  But yes, at the time you solve the block, the BTC are coming from nowhere except the work you put in.  There is no real world analogy for this.

Will

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June 16, 2011, 09:33:52 AM
 #18

Weird that no one has given the true answer:

Where does the 50 BTC come from when mining?

The answer is that it comes by devaluing all the previous Bitcoins by the tiniest amount.

It is exactly the same as the government printing money, it is inflation.  Being that it is predictable and controlled inflation to a set formula, we can assume that that inflation has already been priced in by the existing owners/purchasers of Bitcoins.

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willphase
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June 16, 2011, 09:37:51 AM
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Weird that no one has given the true answer:

Where does the 50 BTC come from when mining?

The answer is that it comes by devaluing all the previous Bitcoins by the tiniest amount.

It is exactly the same as the government printing money, it is inflation.  Being that it is predictable and controlled inflation to a set formula, we can assume that that inflation has already been priced in by the existing owners/purchasers of Bitcoins.


The 50BTC comes from the miner being permitted by the network to add a transaction of 50BTC with an address of a public key that the miner controls to the newly generated block.  You are correct that this devalues btc a little tiny bit, but the system has inbuilt deflation by reducing the amount of BTC you get for solving a block (currently 50, will reduce to 25 next year) so, over time, the whole currency will deflate rather than inflate.

Will

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June 16, 2011, 10:02:16 AM
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The 50BTC comes from the miner being permitted by the network to add a transaction of 50BTC with an address of a public key that the miner controls to the newly generated block.  You are correct that this devalues btc a little tiny bit, but the system has inbuilt deflation by reducing the amount of BTC you get for solving a block (currently 50, will reduce to 25 next year) so, over time, the whole currency will deflate rather than inflate.

Erm... no.

Decreasing inflation is not the same as deflation.

Bitcoin is inflationary, and will be until it stops being so.  It's not a problem though because it is predicted.

Excluding lost coins, Bitcoin will never be deflationary.

(I'm using the strict definitions of inflation and deflation: money supply).

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