The Bitcoin Standard: The Decentralized Alternative to Central Banking

by Saifedean Ammous

In its essence, proof‐of‐work involves network members competing to solve mathematical problems that are hard to solve but whose solution is easy to verify. All Bitcoin transactions verified in a ten‐minute interval are transcribed and grouped together into one block. Nodes compete to solve the PoW math problems for a block of transactions, and the first node to produce the correct solution broadcasts it to network members, who can very quickly verify its correctness. Once the validity of the transactions and PoW are verified by a majority of the network nodes, a set quantity of bitcoin is issued to reward the node that correctly solved the PoW. This is known as the block subsidy, and the process of generating the new coins has been referred to as mining, because it is the only way that the supply of coins is increased, in the same way that mining is the only way to increase the supply of gold. On top of the block subsidy, the node that correctly solved the PoW also gets the transaction fees included by senders. The sum of the transaction fees and the block subsidy is the block reward.

Process of validating block