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Approximately every ten minutes, a new block is mined, and new bitcoins are created. This consistency and predictability in the monetary policy is part of the magic of Bitcoin. The Bitcoin system was designed so that it becomes progressively more difficult to “mine” bitcoins as more computing power is added to the network. This is known as the Difficulty Adjustment and is a global ‘difficulty’ parameter that adjusts once every 2,016 blocks (~2 weeks) based on the overall computational power of the network. It does not matter if 100 computers are mining or 100,000,000, the Bitcoin network will dynamically correct itself thanks to the Difficulty Adjustment so that, on average, a new block is produced every ten minutes.
Source: YCharts
This adaptive structure of the network allows for a very predictable supply schedule, including predetermined “halvenings.” In May 2020, Bitcoin underwent its 3rd halvening in which the issuance rate of new bitcoins gets reduced by 50% or halved. These will continue approximately every 4 years until all 21 million bitcoins have been created sometime around 2140. After that, the miners will no longer get new bitcoin but will sustain their operations through transaction fees for their work.
Miners select pending transactions from the mempool to construct blocks. A vital component within the Bitcoin ecosystem, the Bitcoin mempool accumulates unprocessed transactions that are pending confirmation and integration into a block on the blockchain. Miners undertake the responsibility of verifying and choosing transactions from the mempool, organizing them into blocks, and ultimately appending these blocks to the blockchain for processing. In return for their efforts, miners receive two forms of compensation:
- A fixed amount of newly minted bitcoins per block, currently 6.25 BTC, known as the block reward.
- Transaction fees associated with the processed transactions, which offer an additional income stream for miners.
The term "clogged mempool" refers to a situation where a significant number of unconfirmed transactions accumulate on the network. When transaction volume surges and more transactions are initiated than can fit within a block, a backlog forms in the mempool. As congestion worsens, users who desire faster transaction processing may choose to pay higher fees, resulting in a competitive environment where users outbid one another for expedited transaction confirmation.
Source: mempool.joenicke.de
Throughout Bitcoin's history, transaction fees have primarily remained low, averaging between $1 and $5 per transaction. However, there have been a few notable instances of fee spikes, typically during bull market phases (2017 and 2021).
Because miners are profit-driven, they are incentivized to select the transactions with the largest transaction fee, which gets paid to them if they are successful in mining the next block. In times of high demand/network congestion, bitcoin users can manually increase the transaction fees they are willing to pay in order to increase the likelihood of being included in the next block. This is known as a first-price auction or pay-as-bid mechanism. When the spender’s transaction makes it into a block, the miner collects the included fee as a reward. This highest-bidder system enables high-time preference Bitcoin users to outbid low-time preference spenders, ensuring that the most economically important transactions get confirmed first.
Source: COINMETRICS
