In this 5th episode of our Bitcoin For Non-Technical People Series, I will be discussing the reasons why people would volunteer their computer hardware, software, resources, etc. to protect Bitcoin’s public ledger.
Bitcoin Transaction Fees
The next thing that I want to talk to you about is the bitcoin processing fee. Some people refer to it as the transaction fee.
I mentioned in a previous video that no one is going to sit there and use their computer, electricity, time and effort to process all the bitcoin transactions to make sure that you have sufficient funds (bitcoins) to send to me, and that I have enough bitcoins to send to John and keep going back in history to look in the “public ledger” to make sure that each person has the bitcoins before they can send it.
In the old days, the legacy banking system or the “1% bank system” was designed to only benefit the 1% of the population.
The legacy banking sysem likes to charge you a fee for every transaction you make and only the banks themselves are allowed to process the transactions and earn the fees.
In the bitcoin public ledger Satoshi did something that was very brilliant.
Satoshi wanted to make sure that no one can destroy the bitcoin public ledger system (aka, blockchain, protocol, system, network, etc.).
Not even the banks or the government can come in and shut down the bitcoin public ledger (blockchain).
Satoshi was very concerned that if the bitcoin public ledger (blockchain) works that the guys that are in power are going to come try and destroy it.
He was really concerned about maintaining the “survival” of the bitcoin public ledger (bitcoin).
Satoshi figured that if he tried to put the public ledger in one centralized location where only a small handful of people have control and management over the public ledger (blockchain) that there may be a problem.
No matter how honest the person (or group of persons) managing the public ledger is going to be, if the people from the 1% (on Wall Street) don’t like it, they’re going to come and destroy it because the people on Wall Street have more money and more power. Plus, they also have bigger guns.
So what Satoshi did was very, very brilliant.
Bitcoin Is Built On
Satoshi created the bitcoin public ledger (blockchain) and he/she announced that anybody can come and volunteer their computer and resources to process all the bitcoin transactions that occur in the network.
Therefore, if you want to volunteer your computer to come in and process my bitcoin transactions to make sure that I have the funds to send it to John and that John has the funds to send it to Obama, then you will be compensated for your time, efforts and computer resources.
In the legacy banking system, all financial transactions are processed through a centralized location that is owned by the bank owners. This is why they refer to it as a “central banking system” because everything is centralized and controlled by a small group of elite business people.
In America, our central banking system is called the Federal Reserve.
The term “federal” in Federal Reserve can be misleading because it is a private business and not a government agency like many people think it is.
It’s just a fancy name that is used so that it makes people think that it’s part of the government agency but it’s not.
The name Federal Reserve is no different than the name Federal Express, it’s not anything that has to do with anybody in the government.
It’s just a company that makes money by printing money for the smaller banks and issues money to the public.
The legacy banking system was purposely centralized so that it only benefits the 1% on Wall Street which are the Central Bank and affiliate banks underneath.
In the bitcoin financial system, it is completely different because it is a decentralized financial system.
This means that there is not one person, organization, government, or company that can control the entire bitcoin public ledger or system.
Bitcoin was designed to be controlled by the 99% of the population that do not work on Wall Street.
So everybody has a say so in the bitcoin public ledger.
If you are willing to volunteer your computer, electricity, hardware, software, etc. to process the bitcoin transactions, you get rewarded for that and that reward is similar to the bank transaction fees for sending money except in the bitcoin network it’s for processing bitcoin payments.
Initially when Satoshi invented the Bitcoin system back in 2009 he invited anyone who was willing to jump in, volunteer to process all the bitcoin transactions would be rewarded.
People who volunteered their computers to help process all the bitcoin transactions and build out the network would be rewarded 50 bitcoins.
By the way, BTC is the symbol for bitcoins. It’s the shortcut like in the US Dollar, the symbol for the US Dollar is USD and the symbol for the Japanese Yen is Yen.
So initially, Satoshi said hey, if you are willing to volunteer and come in and help process all these bitcoin payments and transactions that’s going on from people sending money back and forth and buying different stuff, you will be rewarded 50 bitcoins for your efforts, time, computer resources and to help compensate for your electricity and everything, what happens is that every 10 minutes, a new block that includes all the bitcoin transactions in the world was created and added to the public ledger (blockchain).
Basically, someone used their computer and actually went back in history and said hey, this guy has this much bitcoins, this guy does not have enough bitcoins and they compiled it and then submitted it to the entire network and everybody in the network reviewed it and verified it was correct.
If it is correct then that volunteer gets rewarded 50 bitcoins.
What Is The Difference
Between A Bitcoin
A Bitcoin Propagation?
Now, you might say okay, why does it take so long?
Why does it take 10 minutes to confirm these bitcoin transactions?
Well, it does not take exactly 10 minutes. It’s 10 minutes in theory.
In the real world, it takes roughly 8-10 minutes.
In the bitcoin world, it’s important to understand the difference between bitcoin “confirmation” and “propagation”.
After you make a bitcoin transaction, it gets propagated throughout the network instantly similar to the speed that you would send and receive an E-mail.
In other words, there are a bunch of people out there with computers, just sitting around doing nothing and all they’re doing is they’re waiting for bitcoin transactions to come through and process it.
These people with their computers are willing to volunteer their time and their computers to process the bitcoin payments and transactions that propagate through the network.
Out of these thousands and thousands of people around the world and you might even say at this point, by the time you see read this article, there might even be millions of people around the world who are volunteering their computers to process bitcoin transactions.
When the volunteers process these payments, whoever gets the next block correct will submit it to the rest of the bitcoin network for review and verification.
Other people in the bitcoin network can see it with their computers and their computers will go in and check it immediately to make sure that it’s correct before it gets added to the public ledger (blockchain).
If the volunteer finishes compiling and processing all the transactions for the block, the volunteer will get rewarded 50 bitcoins.
If your bitcoin transaction is in the new block of information which gets added to the bitcoin public ledger (blockchain), then it means your transaction has been “confirmed”.
Therefore, a bitcoin confirmation occurs when your transaction has been finalized and added to the public ledger (blockchain).
If it is not included in the public ledger, then it is just a “propagation”. Basically, a propagation is like a “pending” status because it is waiting to be confirmed and added to the public ledger (blockchain).
Why Do People
The 50 bitcoin reward can be worth quite a bit of money.
For example, in the fall of 2013, each bitcoin was worth over $1,200.
Depending on when you started to volunteer and process the bitcoin transactions, each Bitcoins could be worth $30, $40, $50, $100, etc.
Even if it’s $10 per bitcoin that’s still $500 for the volunteer’s time and effort to process all the transactions that everyone is making around the world.
Therefore, no longer are the banks getting the fees. Anyone can volunteer their computers and earn transaction fees.
By the way, the process of compiling, verifying, confirming and adding new blocks of transactions to the bitcoin public edger is called “bitcoin mining” and the people who volunteer their computers to do the processing are called “bitcoin miners”.
However, there are a couple of caveats to processing the bitcoin transactions.
First, every 10 minutes, only one of the many thousands (and possibly millions) of volunteers get that bitcoin reward. So it works on a lottery system.
This means that just because you volunteer your computer does not guarantee that you automatically receive the bitcoin reward.
You have to be the first person to “find” and compile the next block of transactions and add it to the public ledger.
The second caveat is that every 4 years, the reward for finding the next block gets cut in half.
Right now the reward is 25 bitcoins.
In another 4 years (2017) it drops down to 12 ½ bitcoins. It keeps getting halved and halved until it’s just a miniscule fraction of a bitcoin. So much that its negligible and we’re not even going to talk about it because it’s so small.
By doing this, by the year 2140, there will be a total of 21 million bitcoins created.
21 million bitcoins to ever be created!
If you keep cutting the bitcoin reward in half and half, it’s going to get smaller and smaller and smaller.
So we say 21 million but there might be just a little bit over 21 million. Don’t freak out on that, just go with the big number of 21 million because that’s easier to calculate and easier to understand.
I first heard about Bitcoins in 2012 when the reward was still 50 bitcoins.
However, by the time I actually bought my first bitcoin, the reward had already been cut in half to 25 bitcoins.
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Click here to watch part 6.