We use an easy-to-understand analogy to explain the relationship between digital currency “mining” and “accounting,” as well as why Bitcoin and Ethereum have different supply caps.

Okay, let’s use an easy-to-understand analogy to explain the relationship between digital currency “mining” and “accounting,” as well as why Bitcoin and Ethereum have different supply caps.

Mining and Accounting: A Public Participation Ledger Competition

Imagine the entire Bitcoin network as a massive, public, and transparent electronic ledger. Every Bitcoin transaction (such as Zhang San sending a Bitcoin to Li Si) that occurs anywhere in the world needs to be recorded onto this large ledger for the transaction to be considered successful.

But who records these transactions? If anyone could just write them down arbitrarily, it would become chaotic!

To solve this problem, the Bitcoin system has designed an ongoing “accounting competition.”

• Accounting (Bookkeeping): This involves bundling all transactions that have occurred in the past approximately 10 minutes into a “block” (which can be understood as a page of the ledger). This block not only includes transaction records but also contains a link to the previous “block” (the previous page of the ledger), linking one page after another to form an immutable chain, which is called “blockchain.”

• Mining: The core issue is: who has the right to record this page? The answer is: whoever first solves an extremely complex mathematical problem gets the accounting rights for that time. This solving process is形象地称为“mining”.

  • Why is it called “Mining”? Because this process requires a large amount of computing resources (mining machines) and energy (power), just like real-world mining requires equipment and labor.

  • What is the purpose of solving the problem? This mathematical problem itself has no practical meaning; its sole purpose is to increase the difficulty of accounting, ensuring that an average person (or a mining pool) can solve it approximately every 10 minutes. This guarantees stable ledger update speed and ensures system security. Anyone who wants to tamper with the ledger must have twice the computing power of the entire network, which is practically impossible economically.

Therefore, the relationship between mining and accounting can be summarized as:

“Mining” is the process of competing for “accounting rights,” while “Accounting” is the reward and responsibility after successfully “mining.”

Mining and Accounting: A Public Participation Ledger Competition

Successful “miners” who successfully mine a block will perform two tasks:

1. Package the latest transactions into a new block and connect it to the blockchain (completing the accounting).
2. Receive rewards granted by the system. This reward consists of two parts:
   • Block Reward: The system automatically generates a batch of newly created Bitcoins as a reward. This is the only way that new Bitcoin is created.
   • Transaction Fees: The fees paid by the payers of all transactions within the block.

Why Does Bitcoin Have a Cap, While Ethereum Doesn’t?

This involves fundamental differences in the design philosophy and objectives of these two cryptocurrencies.

Bitcoin: Digital Gold, Limited Supply

Bitcoin was designed from the outset to be a value storage tool like gold. Gold is valuable for one key reason: its scarcity – the amount on Earth is finite.

To mimic this scarcity, Satoshi Nakamoto, the creator of Bitcoin, established two immutable rules during design:

1. Limited Supply: The total supply of Bitcoin is permanently limited to 21 million coins. Not a fraction more, not a fraction less.

2. Halving Production: Approximately every four years (or with every 210,000 blocks mined), the block reward earned by miners will be reduced in half.

   • 2009 began at 50 BTC
   • 2012 halving to 25 BTC
   • 2016 halving to 12.5 BTC
   • 2020 halving to 6.25 BTC
   • 2024 halving to 3.125 BTC
   • …and so on, until approximately 2140, when the new reward will approach zero indefinitely.

This design gives Bitcoin deflationary characteristics. Over time, the output of new coins decreases, and if demand remains constant or increases, its value theoretically rises. This reinforces its positioning as “digital gold.” Once all bitcoins have been mined, miners’ income will depend entirely on transaction fees.

Ethereum: Decentralized Application Platform, More Flexible Supply Strategy

Ethereum’s goals differ from Bitcoin. It’s not just a digital currency; it’s a “world computer,” a platform designed to run smart contracts and decentralized applications (DApps).

You can imagine Ethereum as a decentralized “app store” and “operating system.” Within this system, you need to pay “gas fees” to run your programs or make transactions, and this gas is Ether (ETH).

To maintain this vast and complex system, Ethereum continuously incentivizes miners (now validators) to protect the network’s security. If a hard cap were set like Bitcoin’s, with no new coins being mined after it’s finished, whether transaction fees alone would be sufficient to guarantee the network’s long-term security is unknown.

Therefore, Ethereum chose a no-hard-cap strategy. However, this doesn’t mean it will experience unlimited inflation. Ethereum’s monetary policy has undergone several significant adjustments:

1. Early (Proof-of-Work PoW): Similar to Bitcoin, new coins were generated through mining, but there was no fixed total limit or set halving cycle. This resulted in a relatively high inflation rate.
2. London Upgrade (EIP-1559): Introduced an “burn fee” mechanism. A portion of the base fees paid by users for transactions would be directly “burned” (permanently removed from circulation) instead of going to miners. This meant that when the network was active with transactions, the amount of ETH burned could exceed the newly issued amount, leading to deflation.
3. The Merge (The Merge): Ethereum transitioned from “mining” (Proof-of-Work PoW) to “staking” (Proof-of-Stake PoS). No longer do miners expend electricity solving problems; instead, “validators” earn accounting rights and rewards by staking their own ETH. This shift significantly reduced the issuance rate of new ETH (over 90%).

In summary, here are Ethereum’s key characteristics:

• No Hard Cap: Provides flexibility for the network’s long-term security and development.
• Dynamic Supply: Through “burn mechanisms” and “staking rewards,” its total supply can be mildly inflationary or experience deflation during periods of high transaction activity. Its goal isn’t absolute scarcity, but rather to maintain sufficient security while ensuring ETH remains available as “fuel.”

Key Differences Overview

Key Differences Overview

Key Differences Overview

Key Differences Overview

Key Differences Overview

Hopefully, this straightforward explanation will help you understand their relationship and differences!