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In the world of cryptocurrencies there are several types of transactions, among which the Coinbase transaction stands out. This transaction is a fundamental component of the system of putting into circulation new coins that have never been spent. Such a special transaction takes place on all blockchains.
In this publication we will tell you all about how it works and what it is used for.
The first Coinbase transaction took place on the Bitcoin blockchain. This transaction did not represent a payment between two people but represented a special genesis block transaction. This transaction shaped the miners’ reward transactions. As a result, the miners‘ reward transactions are called coinbase transaction.
Thanks to these transactions the Bitcoin system started to work with cryptocurrencies making payments and exchanging value. This transaction was the origin of the currencies that we can use in the Bitcoin blockchain.
How do coinbase transactions work?
Generator transactions or coinbase transactions are of great importance in the creation of new cryptocurrencies. Each coinbase transaction is responsible for transmitting new coins to the miner that resolves each block. This means that the total value of each coinbase transaction is made up solely of new coins that have never circulated on the blockchain.
The operation of this type of transaction begins when a block is generated on the blockchain. Each new block contains a list of verified transactions in it. These transactions are generated by users of the coins on the blockchain. The first of all these transactions is the coinbase transaction. The value of that transaction will be equivalent to the mining reward for the block in question.
This means that, as the value of the coinbase transaction is linked to the value of the block reward, it is affected by factors such as the halving active at the time of the transaction in that cryptocurrency.
As we already know, halving is responsible for, in the case of Bitcoin, reducing the block reward by 50 percent every 210,000 blocks mined. Many cryptocurrencies such as Litecoin followed Bitcoin’s operating example by also acquiring halving and a specific reward system.
In the case of Bitcoin, the first block rewards started with a value of 50 BTC. After the first halving they dropped to 25 BTC, then to 12.5 BTC and so on. With that the coinbase transactions were also decreasing.
The fact that coinbase transactions are created by miners makes them have a curious feature. Since the miner is the one who builds the transaction there may be a small chance that it can be manipulated. To prevent this type of manipulation the reward contained in the coinbase transaction can only be spent after 100 confirmations.
This measure seeks to ensure that the block meets all the necessary conditions to become a valid block. This measure can also be applied in the event that the blockchain undergoes a fork protecting the coins in the blockchain.
What is contained in a coinbase transaction?
The structure of a coinbase transaction is at the heart of its importance. To begin with, the coinbase transaction has one entry. This entry is not associated with any other address and is called coinbase. The entry is responsible for generating the new cryptocurrencies within the blockchain.
Within the transaction there is also an output called coinbase transaction that outputs the coins. In this transaction the Bitcoin address (in the case of Bitcoin) of the miner who successfully mined the block is recorded. The coinbase transaction collects the reward with all the fees collected in each transaction included in the block. Thus the miner collects the reward he has generated as well as all the commissions for the verified transactions in that block.
The contained information is stored in the mined block. Approximately, the transaction occupies the space of 100 bytes of data, however, in addition to the used space there is another small space left over that miners can manage as they wish. In other words, in the small space left over the miner can infect any text he wants. To understand it better, in the genesis block Satoshi Nakamoto used the leftover space to write: “The Times 03 / Jan / 2009 Chancellor on the verge of the second bailout for banks” referring to the front page of the British newspaper The Times of that day.
With this feature, miners can add the information they want in each block, personalizing it. This way they send a message that will never be erased or altered by anyone, in addition to being guarded by the security of the blockchain.
How do I know the value of coinbase transactions?
The coinbase transactions allow to know the value they contain through a procedure. This procedure calculates the result without errors. We will see it below:
- First we must include the value of the inflows and outflows of each of the transactions of the mined block. In this way we will be able to calculate the total commissions that will be paid.
- For the second step, we must find the height of the block that is being mined. With this data we will be able to calculate the value of the reward to be applied, taking into account the halving active at that moment.
- As a third step, the miner performs the coinbase transaction to obtain the reward. This last transaction already includes the reward for the mined block and the commissions for each transaction that has been validated.
Through these simple steps the miner finally manages to receive the value of the coinbase transaction, however, remember that in order to make use of the reward the miner must wait for at least 100 confirmations of the block he has generated. This is known as Coinbase Madurity or Coinbase Transaction Maturity. This feature is included in the Bitcoin operating protocol so there is no way around it.
Therefore, when miners manage to generate a block, they will only be able to count on the reward after 100 confirmations. Coinbase Madurity is intended to protect mainly blockchains that undergo forking, however, it cannot be avoided on blockchains that have not undergone forking, as long as it is implemented in their operation.