Many folks out there are wanting to learn how bitcoin mining works.
Powerful computers are used to mine bitcoins by solving complex computational mathematics problems. The problems are so complex that they’re impossible to be solved by hand and are complex enough to tax even the most powerful computers.
Bitcoin mining has two results. The computer network produces new bitcoin every time it solves these complex math problems (just like gold mines create gold). Second, bitcoin miners ensure that the bitcoin payment network is trustworthy and secure by verifying its transactions through computational math.
A bitcoin transaction is when someone sends bitcoin somewhere. Banks, point-of-sale systems, and paper receipts document payments made in stores or online. Bitcoin miners do the same thing by adding transactions to a public record called a blockchain. Nodes then generate a record of those blocks so that future transactions may be verified.
A bitcoin miner’s job includes verifying the accuracy of transactions added to the blockchain when adding a new block of transactions. Mining bitcoins, in particular, ensures that bitcoins are not duplicated, a characteristic unique to digital currencies called “double-spending.” counterfeiting always exists in the world of printed money. However, in most cases, once you spend $20 at the store, the bill is in the clerk’s hands. With digital currency, however, it’s different.
Because digital information can be reproduced relatively quickly, a spender could create a duplicate of their bitcoin, and subsequently, send it to someone else while still holding the original.
Rewarding Bitcoin Miners
There could be as many as 300,000 purchases and sales in a single day, making it difficult for miners to verify them all. The miners receive bitcoin for their efforts whenever a new block of transactions is added to the blockchain.
The “block reward,” or the amount of new bitcoin released with each mined block, is halved every 210,000 blocks (roughly every 4 years). It was 50 in 2009. In 2013, it was 25, in 2018, it was 12, and in May of 2020, it was halved to 6.25.
Until approximately 2140, this system will be in place. At that point, miners will receive fees from the network for processing transactions. The fees ensure that miners still have the incentive to continue mining and for the network to continue operating. Once the halvings are completed, the fees are supposed to remain low so that miners can continue working.
This halving reduces the number of coins created each year and, therefore, lowers their supply. It can have implications for investors, especially when other assets with low supply — like gold — are in high demand. After the amount of bitcoins in circulation is halved, the currency will have a limit of 21 million, making it a finite currency that may grow in value over time.
Verifying Bitcoin Transactions
Verifying transactions is how bitcoin miners earn bitcoin, but two things must take place to earn it. First, they must verify one megabyte (MB) of transactions, which can theoretically be as small as one transaction but are often several thousand, depending on how much data each transaction contains.
Second, in order to join a block of transactions to blockchains, these miners must solve a complicated computational math problem known as “proof of work.” They are trying to produce a 64-digit hexadecimal number that is less than the target hash. Miner computers generate hashes at various rates, like megahashes per second (MH/s), gigahashes per second (GH/s), or terahashes per second (TH/s), guessing all possible 64-digit numbers until they arrive at a solution. Basically, it’s a gamble.
A computer has a 1 in 16 trillion chance of producing a hash that is less than the target depending on the difficulty level of the most recent block as of August 2020. In comparison, there is a 44,500 times higher chance of winning a Powerball jackpot with a single ticket than picking the correct hash on a single attempt. Mines computer systems produce plenty of hash options, but they are incredibly energy-intensive and require complicated computing operations.
The difficulty level is adjusted every 2016 blocks, or roughly every 2 weeks, to maintain a constant mining rate. In other words, when many miners are competing for a solution, the problem becomes more complicated. On the other hand, the difficulty of mining increases if computational power is removed from the network.
Bitcoin Mining Analogy
Let’s say I tell three friends that I am thinking of a number between 1 and 100, and I write that number on a piece of paper and seal it in an envelope. It doesn’t matter what number I think of, just that it has to be less than or equal to any number, my friends guess. The number of guesses is unlimited.
Let’s imagine the number 19 is on my mind. Friend A loses if he or she guesses 21 because 21 is greater than 19. If Friend B guesses 16 and Friend C guesses 12, they have theoretically arrived at viable answers since 16<19 and 12<19. There is no extra credit for Friend B, even though B’s answer was closer to the target of 19.
Imagine that instead of asking three friends, I invite you to guess what number I’m thinking of, and your guess must not be within the range of 1 – 100. Instead, I’m asking millions of potential miners, and I’m thinking of a 64-digit hexadecimal number. It’s clear by now that guessing the correct answer is going to be extremely difficult.
Bitcoin miners must come up with the right hash and be the first to do so.
The ability of your computer to process hashes quickly is almost entirely responsible for determining how fast you arrive at the right answer before another miner. The bitcoin mining process was competitively conducted on standard desktop computers just a decade ago. Over time, however, miners began to use graphics cards commonly used for gaming to dominate the industry.
When it started
Bitcoin miners began using computers designed specifically for mining cryptocurrency as efficiently as possible in 2013, known as Application-Specific Integrated Circuits (ASICs). Despite their hefty price tag, they are superior to other Bitcoin mining machines in terms of efficiency.
The current mining of bitcoins is so competitive that only the latest ASICs can generate a profit. Desktop computers, GPUs, and older ASIC models generate more energy costs than revenue. It is rare for one computer to compete with hundreds of other computers, or mining pools, as they are known.
In a mining pool, miners pool their computing power and split the bitcoins they mine among themselves. In contrast to individual miners, pools mine disproportionately more blocks. Mining pools and companies have historically dominated the computing power behind bitcoin.