Incentive - Assessment 2

1. What occurs as nodes extend the chain of proof of work and are awarded coins?

   1. As the initial issuance is distributed the quantity of coins in reserve is depleted and over time the reward is reduced.

   2. New coins are created every time a block is found. Nodes agree how many coins they win between themselves.

   3. The coins are distributed by the winning node to other nodes on it’s team

   4. Awarded coins are distributed to the listening nodes who contributed their validated transactions to the winner’s block template.

2. Which analogy best describes Bitcoin’s coin distribution?

   1. It is akin to finding a pot of gold at the end of a rainbow.

   2. It is akin to a group of miners digging ore to find gold and adding it into a gold economy.

   3. It is akin to building the pyramids by stacking blocks.

   4. It is akin to the legislative process by which states print money.

3. How do nodes perform work that is analogously performed in mining?

   1. Nodes perform the work of ‘mining’ by digging through hash combinations looking for a particular combination that solves the block difficulty puzzle. This requires sorting and analyzing massive amounts of data, a process also known as data mining.

   2. Nodes perform the work of ‘mining’ by digging through hash combinations looking for a particular combination that solves the block difficulty puzzle. This exercise is costly in terms of computing power, and requires both energy and infrastructure similar to real world mining. Likewise hash providers are also incentivised to find efficiencies such as lower cost energy and more efficient machinery.

   3. Nodes perform the work of ‘mining’ by digging through hash combinations looking for a particular combination that solves the block difficulty puzzle. Is analogous to a gold prospector panning for gold in a stream by sifting through collected sediment looking for small pieces of gold.

   4. The work of ‘mining’ by digging through hash combinations looking for a particular combination that solves the block difficulty puzzle. This is analogous to the process of prospecting or searching large areas of land for valuable mineral deposit.

4. How are transaction fees generated and disbursed?

   1. The user generates a transaction fee by creating a transaction in which the combined value of the inputs is more than the value of the outputs. This tiny difference in value is aggregated by the nodes as they construct their block templates and then paid out to the node operator in the coinbase transaction.

   2. Nodes generate transaction fees by calculating the cost based on the transaction size and then requesting the user provide that fee directly to the node which will process that transaction

   3. Users generate transaction fees by finding inputs that have slightly more value than what is being requested for the payment. The residual value from the transaction serves as the fee which is kept by the node operator.

   4. Wallets generate transaction fees by calculating the average time a transaction is accepted into a block and how much that costs and then includes that into the transaction by requiring an equal value of inputs by the user.

5. By which rate does the block subsidy reduce and when will it reach zero?

   1. The block subsidy reduces by a quarter every 210,000 blocks approaching zero after 32 halvening events around the year 2140.

   2. The block subsidy reduces by half every 20,000 blocks approaching zero after 20 halvening events around the year 2022.

   3. The block subsidy reduces by a quarter every 2,000,000 blocks approaching zero after 200 halvening events around the year 2200.

   4. The block subsidy reduces by half every 210,000 blocks approaching zero after 32 halvening events around the year 2140.

6. How is the reduction in block subsidy an important part of Bitcoin’s incentive system?

   1. The reduction in the rate at which new Bitcoins enter the economy is an important aspect of the system of incentives that keeps nodes honest by minimizing the opportunity to conduct selfish mining.

   2. The reduction in the rate at which new Bitcoins enter the economy is an important aspect of the system of incentives that encourage network scaling as it incentivises miners to build a network that can accomodate large numbers of transactions with a view to using the fees paid as a means to replace the subsidy income.

   3. The reduction in the rate at which new Bitcoins enter the economy is an important aspect of Bitcoin’s incentives that make it into a digital store of value.

   4. The reduction in the rate at which new Bitcoins enter the economy is an important aspect of the system of incentives that prevent node operators from becoming too wealthy and powerful.