n the previous article we talked about traditional money transactions and the databases they are stored in. We also talked about the bitcoin blockchain—the place where bitcoin transactions data is stored. Every system or company maintains and records data in a ledger. They sell a service or a product to pay the bills. It is the database and how they maintain it that makes the company valuable in an era where Data is the new oil economy. An economy where the major market capitalized companies are all technology companies.
A transaction starts with the “SEND” action from the wallet. The transaction message propagates through the network from one node to another using the gossip protocol. Gossip protocol is the decentralized way of sharing or passing information, like how gossip spreads across social networks.
Each node checks the transaction for its signature validity and then broadcasts it to other nodes nearby except the one from which the node received the message. This is how the message quickly propagates to all nodes in the network. In a node, the transaction is stored in the temporary staging area called the Mempool, which is short for memory pool. The transaction record still needs to be written to the blockchain and is not in a confirmed state.
Once the transaction reaches the mempool, the next step is to write the transaction data to the blockchain. This is the task of the block producer. In the bitcoin protocol, the block producer is called a miner in the bitcoin protocol.
In a typical centralized system like a bank, there is no staging area like this blockchain mempool. The transactions are written into the database and without payment for such an action for the owner of the system.
Imagine when you click a like button on a Facebook photo shared by your friend. The total number of likes have increased and that is stored in their database attached to that picture and you did not pay facebook for doing such an action. They get paid when an advertiser wants to sell a product for people who liked that picture or based on some demographic criteria.
However, in a decentralized system, where every node is different or on its own, special nodes need to write this transaction into the database.
A node is a computer in the network running the Bitcoin protocol. Besides users who send and receive bitcoins, the miners and the full nodes are two central participants in the Bitcoin ecosystem. They both play a crucial role in maintaining the integrity, security and functionality of the system.
Full nodes are like a database or library with a copy of the system. Full nodes verify the legitimacy of transactions and blocks. Their contribution to the system is altruistic. There are no monetary rewards for these full nodes. They help maintain decentralization and security by ensuring the database is available to everyone and that there are many more nodes in the system.
A mining node, or miner, is a full node, but all full nodes are not miners. Miners are block producers. Producing a block is the process of writing transactions in a block or creating the block and adding it to the blockchain database. Miners receive protocol subsidies or rewards for producing a block. Miners spend more energy than a full node and hence pay higher energy costs. Miners work in overdrive mode to solve the puzzle and create a new block.
The bitcoin protocol is designed to incentivize the nodes who write the transaction to the system by giving them fees and rewards or subsidies.
The reason for this incentive is because nobody is willing to pay for this free public data otherwise. In centralized architectural systems, the central entity can sell access and get paid to maintain it because only they have access to this data. In blockchains, the data is written on the shared database and is accessible for free to anyone.
The rewards happen at the writing to database stage. If there was no reward for spending all the money to write this data into a shared ledger, the question would be: Why should anyone spend time and energy writing transactional data to the database and maintaining the database?
Google, Amazon, Banks, Facebook all sell ads and make their money because the advertisers do not have access to data to sell their products to the company’s customers. Hence, they do not charge to write data to their database. They are the only owners of the database and the only people with access and they sell that access to read their database.
In bitcoin protocol, these rewards come in the form of bitcoins and every node wants to be the node that writes the data into the ledger or blockchain to get those rewards. Only one of the nodes will end up being the one that gets paid for producing the block. But everyone who tries to be the block producer will spend a high amount of energy and hence costs. The costs are incurred for attempting to be the mining node that gets to write the transaction to the blockchain database.
The game theoretical incentives and costs make the system secure by making it prohibitively costly to attack the system.
Miners
Miners, nodes and the energy used together bring security to the network from external attacks. Every miner would want to get paid rewards and fees. Rewards come from being the node that writes the transaction data to the blockchain. Every miner out there is like each to their own and they are not centrally controlled. Hence, there must be some form of rules of agreement among them on how and who gets to write transactions to the blockchain, which is called the Consensus.
Consensus or agreement happens in bitcoin using the Nakamoto Consensus Algorithm, a Byzantine Fault Tolerant algorithm. This algorithm decides who among all the mining nodes gets to write to the blockchain and how they get rewards. The Nakamoto Consensus consists of a proof of work Sybil resistance mechanism and longest chain rule algorithm.
Consensus mechanisms or algorithms are how decentralized systems agree among themselves on the next state of the system and is a crucial piece of the system.
Imagine the decentralized system had three nodes A, B and C and each node was a miner based on having an email address and they would be chosen in a round robin fashion to write to the database and get paid the rewards and fees.
Then, each node would get a chance one out of three times when three blocks are produced. That is a fair system, but what if node A creates seven more email addresses? Creating an email address is free, and node A incurs no cost. Now, node A gets 8 out of 10 times the chance to be the miner and collect rewards despite being only one entity. A has practically cloned itself or has gamed the intent of the system since there was no cost involved in creating a separate email identity and, hence, gets paid more for doing the same amount of work.
This is called a Sybil attack based on the main character Sybil Dorset in the 1973 book Sybil by Flora Schreiber, who could clone herself or had multiple personalities. A single node can flood the network with multiple identities without significant cost and game the system.
We need each identity to be costly to forge to avoid this no-cost gaming of the system.
Sybil Resistance
The Sybil resistance identity mechanism in the Bitcoin blockchain is called Proof of Work (POW).
In POW systems, each identity must spend energy or use electricity to create hashes that solve a puzzle to become the winner. Only the winner gets paid the rewards for the blocks and fees associated with each transaction in a block. All the other competing non-winner miners have spent energy to get nothing.
Each miner must calculate and ensure that they do this solution optimally, or they will lose money in the long run. Essentially, miners cannot attack the system without any costs involved, which keeps this protocol safe and secure from Sybil attacks.
Imagine for every spam mail, the spammers had to pay ten dollars each for sending such a mail. Our email inboxes would not be flooded with spam. With zero costs to make an email address and send out spam emails, a spammer keeps doing it by creating new email addresses on Yahoo or Gmail, where primary email addresses are free to create.
POW is like a lottery system where miners increase the likelihood of rewards with more power they have. Statistically, with more power, they have more chances to solve the puzzle and secure rewards by creating blocks. They can produce hashes much faster with a more powerful machine.
The puzzle is solving for the hash in a brute-force manner to match a predetermined hash. It cannot be algorithmically solved but only by trial and error and validations. That is why, with more power, the miner can statistically solve the puzzle faster.
Longest Chain
Once the winning miner solves the puzzle, the miner creates the block and adds it to the ledger. The block contains the data where you send the bitcoin and is where the data is shown on who owns the bitcoin at that point in time, The miner uses the longest chain rule and adds the block to the longest chain, assuming that the longest chain is the truthful one. The longest chain is used because the longest one is considered the one where the most energy was spent or the most effort to build; hence, adding the block to that chain makes sense.
Suppose one node decides to spend all its energy and add its newly created node to a shorter chain. In that case, the next node might not get added to this shorter chain, and all this energy and costs go to waste. That is why everyone once they create a block would want to add it on the longer chain. The longest chain means the chain that has spent the most energy being created, and for the most part, it means the chain with the greatest number of blocks.
The longest chain is measured by a metric called chainwork, the total number of hashes expected or necessary to produce the chain. This is where the difficulty comes into the picture. The average time to create a block is around 10 minutes.
When mining becomes profitable, more people get involved investing capital to become miners. With more miners, the blocks get generated faster. The system will automatically increase the difficulty level and bring the block production time to within 10 minutes on average.
When miners leave due to high energy costs or low profitability, the difficulty will adjust downwards to make it easier to generate a block within 10 minutes.
Source: https://learnmeabitcoin.com/technical/blockchain/longest-chain/
Coinbase Rewards Transactions
Once the puzzle is solved and the block is added to the ledger, the first transaction in the block is the reward to the miner or the Coinbase transaction. This is the second type of transaction in the bitcoin ecosystem. It does not have an input. There is only one output. It is not created from previously unspent bitcoins. Hence no input. Rewards in the Coinbase transactions require 100 confirmations before they can be spent.
A confirmation means a block has been added to the top of the block. Miners must wait for 100 confirmations on top of their block to spend their Coinbase rewards.
For a user, a transaction or block is considered final with at least six confirmations, like six blocks, roughly an hour after the block is added. The more blocks or confirmations you have on your block, the more your transaction becomes secure and final. In the Ethereum blockchain, for a block to be considered final, we need 30 confirmations.
Besides this Coinbase reward, the miner can also get fees from the sender for every transaction in that block. The Coinbase subsidy or reward used to be 50 bitcoins when the bitcoin protocol started functioning in 2009; it halves every 210,000 blocks or roughly four years. The Coinbase reward was automatically reduced from 25 bitcoins in 2012 to 12.5 in 2016 and to 6.25 in 2020. The rewards get cut by half every 210,000 blocks. This process is called “halving” or “halvening”.
In April 2024, bitcoin mining rewards were reduced to 3.125 bitcoins per block. There are only 21 million bitcoins by design and they will be distributed per block, as explained above. The rewards keep decreasing every four years until the year 2140. After that, there will only be fees for miners as rewards and no subsidy from the protocol.
The assumption or game theory behind halving rewards is that as its use increases, the price of bitcoin will increase. Hence, only a smaller number of subsidies are required to bring more miners to the system to keep the system secure and safe. As demand for bitcoins and interest in the system grows, the existing coins will fetch a higher price.
All these complex technical breakthroughs working together in a game theoretical manner is how a bitcoin is sent from the sender to receiver. In this process it does not depend on one central entity. The data is distributed and the node writing this data could be anywhere. The code ensures that the trust is distributed in a manner that one person cannot tamper with the integrity of the system and cannot confiscate or discriminate against anyone in the system.
This is the marvel happening behind the bitcoin protocol that makes it possible to send this money 24x7x365 days a year to anyone anywhere in the world even when the central bank and its payment gateways are up or not. It is the only mechanism where no one or entity can kick you out of the system or confiscate your asset because of any form of discrimination. And this is the key philosophical reason you should understand bitcoin.
Let us now turn to one of the most compelling practical applications of Bitcoin: remittances.
India consistently ranks as the world’s largest recipient of remittances. According to the World Bank’s 2023 Migration and Development Brief, India received over $125 billion in remittances in 2023 alone. Yet, the average cost of sending this money remains steep—hovering around 6% to 8% globally, depending on the corridor and service provider. This means over $8 to $10 billion is lost annually in fees paid to intermediaries such as banks and money transfer operators. Moreover, traditional remittance systems often take 3 to 5 days to complete a transfer. Imagine 80,000 crores which could have been used for something else was paid to middlemen.
In contrast, Bitcoin offers a radically different model. A transfer of any amount—whether $100 or $100 million or 1 billion—can be executed for a negligible fee (often under $10) and confirmed on the blockchain within 10 to 20 minutes. This kind of speed and efficiency has profound implications, especially for low-income families who rely on cross-border payments to meet basic needs.
Globally, an estimated 1.4 billion adults remain unbanked as of the World Bank’s 2021 Global Findex Database. Many of these individuals are excluded not by choice but by circumstance—lacking formal identification, a fixed address, or access to nearby banking infrastructure. Yet mobile phone penetration is high even in the most underserved regions. Bitcoin allows anyone with a smartphone to store, receive, and send value without requiring approval from a centralized authority.
Moreover, history and scripture both reflect on the dangers of centralized control over wealth. In the Gospel of Matthew (22:15–22), the Pharisees attempt to entrap Jesus with the question: “Is it lawful to pay taxes to Caesar or not?” Jesus replies by asking whose image is on the coin. When they answer, “Caesar’s,” He responds: “Then render to Caesar the things that are Caesar’s, and to God the things that are God’s.”
The subtext is powerful: monetary systems belong to earthly rulers. But Bitcoin, being borderless, decentralized, and without an image of any king or nation, challenges this notion and redistributes the power of money back to the people.
Finally, consider those who have had their assets frozen or seized by authoritarian regimes or during geopolitical conflicts. Bitcoin acts as a form of sovereign wealth—a lifeline for dissidents, refugees, or anyone living under oppressive financial conditions.
In a world where financial systems are deeply unequal and often inaccessible, Bitcoin doesn’t just represent a new form of money—it represents access, inclusion, and, for many, freedom.
Nithin Eapen is a technologist and entrepreneur with a deep passion for finance, cryptocurrencies, prediction markets and technology. You can write to him at neapen@gmail.com
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