1. What are coinbase transactions
Not to be confused with the cryptocurrency exchange Coinbase, the term “coinbase transaction” refers to a specific type of transaction that occurs in each new blockchain block.
Coinbase transactions are an important part of the system that blockchains use to introduce new currencies that have never been put into circulation. The first coinbase transaction was generated by the pseudonymous creator of Bitcoin (BTC), Satoshi Nakamoto, while mining the first genesis block. Coinbase has reportedly been paid to the Bitcoin address “1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa” worth 50 BTC.
One of the biggest curiosities of the Bitcoin blockchain is that the said block has never been verified on the blockchain – something that has baffled many blockchain scientists and developers.
One theory is that this happened because the first coinbase transaction was encoded in the source code of the genesis block. And since the entire blockchain is built on this genesis block, the concept of confirmation was not applied to it.
Another theory suggests that Nakamoto designed it this way because if the origination block was not confirmed for any reason, a new blockchain would be built, making the original blockchain obsolete.
A coinbase transaction is also used to reward miners for maintaining the blockchain. They are paid a certain number of coins for each block they mine. This reward system creates an incentive for miners and helps keep the blockchain safe by preventing malicious behavior that could destabilize the network.
2. How Coinbase Transactions Work
Coinbase transactions have unique features including maturity, fork prevention, and customizable texts. They also have a different structure than other transactions.
On the Bitcoin blockchain, all the transactions made throughout the chain are combined to form one block. When a block is formed, it is immediately added to the blockchain. These blocks are immutable and tamper-resistant thanks to the near-perfect code of the Bitcoin blockchain. Each block must contain one or more transactions, the first of which is always called a coinbase transaction.
This is how a coinbase transaction works:
Block Creation: To earn the block reward after creating a new block, the miner must first create a transaction with Coinbase.
Inputs: A coinbase transaction has no inputs, unlike a typical transaction, which uses inputs from previous transactions. Instead, a coinbase transaction generates brand new coins out of thin air.
Exits: A coinbase transaction has one or more exits that specify the addresses to which the block reward will be sent. Miners have the option to distribute the block reward to other addresses.
Block reward: The block reward is currently BTC and is halved approximately every 210,000 blocks. This reward is paid to the miner who validates transactions and adds them to the blockchain.
Mining Fees: Miners can also include a mining fee in a coinbase transaction, which is paid by transaction makers to encourage miners to include their transactions in the next block.
A miner can include a coinbase transaction, along with other transactions, in a block they have mined and broadcast that block to the network after they create it. The block is then examined by other miners and if approved, it is placed on the blockchain and paid from the block reward plus any associated mining costs.
Some key features of coinbase transactions are discussed below.
3. What are Block Rewards and Bitcoin Halving
Block rewards are the rewards miners receive for mining new blocks and adding them to the blockchain. Bitcoin’s halving reduces the block reward by 50% approximately every four years.
Miners are responsible for creating blocks on proof-of-work (PoW) blockchains such as Bitcoin. In return, they are rewarded with BTC after successfully creating each block. The block reward depends on two things: the number of charges involved in each block’s transactions and the number of blocks of the genesis block.
During the early days of Bitcoin, the block reward was 50 BTC per block and this reward is included in the coinbase transaction. However, due to Bitcoin’s halving, the block reward is halved after every 210,000 blocks mined. Bitcoin halving takes place approximately every four years.
The block subsidy distributed by the coinbase transaction is 6.25 BTC per block (after the last halving). And since coinbase transactions create new coins, it is valid without any input, because the BTC it contains is newly created and not e