How Bitcoin Engineered and Maintains Scarcity

   Bitcoin, the world’s largest cryptocurrency by market capitalization, is nothing like Ethereum, the second largest crypto. The underlying difference is, in fact, one of the factors that influences the former’s greater value compared to the latter. Bitcoin’s creator, an anonymous figure named Satoshi Nakamoto, concretized a supply limit of 21 million coins. This was meant – and is still meant – to maintain Bitcoin scarcity.

In contrast, Ethereum has no hard cap, which means, at least in theory, that an unlimited number of Ethereum coins can be created. Today, however, is not the day we talk about what Ethereum’s lack of a maximum supply limit has meant. Instead, we’ll focus on Bitcoin’s hard cap, whose enforcement is as interesting as it is ingenious. So, how has Bitcoin engineered its scarcity and how does it maintain the scarcity?

What Enforces Bitcoin Scarcity and Supply Ceiling?

By design, only 21 million Bitcoins are to be mined, with the final Bitcoin expected to be minted in or around 2140, all factors held constant. But you’ll not find the 21-million hard cap anywhere in the many lines of code that operationalize Bitcoin and its blockchain. Instead, it’s the result of a complex matrix of interrelated components and activities. In this regard, Bitcoin scarcity is influenced by multiple factors, including:

●Bitcoin mining

●Reward system for miners

●Blocks

●Halving

1.Bitcoin Mining

Contrary to what the name might convey, Bitcoin mining does not directly mint new coins. Instead, mining is a computationally demanding process that requires powerful hardware to complete complex mathematical calculations that enable the Bitcoin network to confirm transactions. Of course, the process is much more complicated than this. To understand it, we introduce the concept of blocks and the reward system for miners.

2.Blocks and Reward System

When you transact using Bitcoin, that transaction is entered into a pool of unconfirmed transactions. Next, miners select your transaction and move it into a block containing transactions from multiple other users. (The selection is mostly based on the accompanying transaction fee; the higher the fee, the higher the chances of your transaction getting selected.)

The miners’ powerful hardware performs the aforementioned mathematical calculations, validating the transactions. Thereafter, using supporting software, the miners add the solved transactions, as a block, to their own version of the blockchain ledger, whereupon other miners verify that the entry is indeed correct. Once this verification is complete, the block is added to the public blockchain and becomes immutable. By design, a new Bitcoin block is added to the blockchain approximately every 10 minutes, meaning that every day, about 144 blocks are added.

In return, the miner earns a reward in the form of new Bitcoins. (They also earn existing Bitcoins from the transaction fees as shown in the image below.) It’s this reward system that mints new coins. The number of Bitcoins a miner receives depends on the phenomenon called halving.
Block and Transaction Fee Reward Before Fourth Halving

3.Halving
If the miners received a fixed number of coins ad infinitum, controlling the supply of Bitcoins would be impossible. So, this is not usually the case.

Instead, the number of new Bitcoins miners receive is reduced progressively but with a predictable regularity in a process called halving. Typically, halving occurs every time 210,000 blocks have been added to the blockchain. It so happens that this takes place once every four years.

Initially, after the launch of Bitcoin in January 2009, miners used to receive 50 BTC for every block their hardware added to the blockchain. But this figure reduced to 25 BTC following the first halving in November 2012 before dropping to 12.5 BTC in July 2016 (second halving) and then to 6.25 BTC in May 2020 (third halving).

The fourth halving happened in April 2024, reducing the reward to 3.125 new BTC. Naturally, we expect that there shall come a time when the reward will tend to zero BTC. At such a time, the supply limit will have been reached.

The shrinking reward enforces the supply cap: it limits the number of new BTC that enters circulation.

For instance, while 10.5 million BTC were minted between Bitcoin’s launch and the first halving, only 1,312,500 new BTC were minted between the third and the fourth halving. Yet the number of blocks added to the blockchain remained constant at 210,000.

How Many Bitcoins are in Circulation

The schedule of halving events and the resulting reward system incentivize miners to continue providing controls that guarantee Bitcoin scarcity. As a result, the number of Bitcoins in circulation will never exceed 21 million.

In fact, once this number is reached, miners will no longer receive new BTC coins as rewards but will continue earning from the transaction fees. The halving phenomenon has also slowed down the number of newly minted coins.

For instance, only 1,312,500 BTCs have been added in the last four years, compared to 10,500,000 coins added in the first four years and 5,250,000 minted in the subsequent four-year period. Today, and because of this slow-down, 19.69 million Bitcoins are in circulation. 

Conclusion

Satoshi Nakamoto wanted to limit the supply of the cryptocurrency. While multiple factors influence the value of BTC, Bitcoin scarcity is up there among them.

Accordingly, a system of checks and balances embedded in the source code and the coin’s design helps guarantee this scarcity. These include the scheduled halving events, complications associated with Bitcoin mining, the reward system for miners, and the concept of blocks.

Combined, these factors provide robust safeguards that enforce – and will continue to enforce – the supply ceiling, commonly referred to as the hard cap of Bitcoin. Unless something drastically changes, the hard cap remains 21 million Bitcoins.

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Bitcoin’s value is due, in part, to Bitcoin scarcity. Learn how this scarcity was engineered and is maintained through mining, halving, and an incentive system.