What’s unique about the coinbase transaction is that it has no inputs. All other transactions have an input and output. The input will be the sender’s wallet address and the output will be the recipient’s address.
For most people in the cryptoverse, the term ‘coinbase transaction’ simply refers to a transaction made on the popular crypto exchange, Coinbase. However, the real meaning behind this term stems from a certain kind of transaction that helps Bitcoin miners get paid for their role in verifying and adding transactions to the Bitcoin blockchain. As such, a coinbase transaction is an extremely important part of the mining process, as it helps new BTC enter into circulation.
But what exactly is a coinbase transaction and how does it work? Tag along to find out.
Coinbase transactions: What are they?
To understand what coinbase transactions are, we must first understand the Bitcoin mining process. Miners compete to solve complex mathematical problems and earn the right to add the next block to the Bitcoin blockchain. Once a miner earns the right to add the next block, they validate several transactions, compile them into a block and add this block to the blockchain.
In the case of Bitcoin, each valid block can contain an average of 2,000 transactions. A coinbase transaction is the first of these 2,000 transactions. It is a unique transaction that miners use to divert the block reward they have earned to the wallet addresses they want the coins to flow into.
Also, when a user initiates a Bitcoin transaction, they can pay additional gas fees as an incentive for the miner to process the transaction quickly. All these transaction fees are also diverted to the wallet specified within the coinbase transaction.
How does a coinbase transaction work and what makes it unique?
Before entering into the race to add new blocks, a miner must create a coinbase transaction. This transaction will specify the wallet address that the block reward and mining fees will be sent to. The miner can also add multiple addresses and the rewards will be split among these wallets.
For instance, when Satoshi Nakamoto mined the first block of Bitcoin transactions, the coinbase transaction routed his 50 BTC block reward to the wallet address “1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa.” This was the first coinbase transaction ever recorded on the Bitcoin blockchain. Since then, the block reward has been halved several times, with miners currently receiving 6.25 BTC for a newly mined block of Bitcoin transactions.
What’s unique about the coinbase transaction is that it has no inputs. All other transactions have an input and output. The input will be the sender’s wallet address and the output will be the recipient’s address. However, since the block reward is a set of newly minted BTC, there is no input.
Coinbase transactions also have a maturity period. This means that the rewards and mining fees collected through these transactions cannot be spent immediately. Instead, these tokens will only be released for spending once the block in question has received 100 confirmations. Strangely enough, the first-ever coinbase transaction, the one created by Satoshi Nakamoto in the Genesis Block, has no confirmations at all. Some suggest that this was done deliberately.
Back then, Bitcoin was not nearly as popular as it is today and it could have taken a while before the Genesis Block received 100 confirmations. Moreover, if the genesis block were to remain unconfirmed for some reason, it could have resulted in a new blockchain being built, making the original blockchain obsolete. Therefore, some experts believe that Satoshi Nakamoto deliberately coded out the coinbase maturity condition from the Genesis Block.
Coinbase transactions are integral to the Bitcoin mining process. Without this transaction, new Bitcoin cannot enter circulation and miners will not receive their mining rewards. And it’s not just Bitcoin, several other proof-of-work blockchains also use coinbase transactions in their mining process. In fact, the term is so important to blockchain systems that, the leading crypto exchange, Coinbase, was named after this kind of transaction.