It is apparent that bitcoin and blockchain go hand in hand when it comes to distributing and providing cryptocurrency to those who are savvy with this digital system. However, within this seemingly straightforward concept, there is much more to it than the standard ‘point A to point B’ operation. In fact, there is a fantastically convoluted yet engaging process that enhances the performance of blockchain technology.
That particular process is called ‘bitcoin mining.’ The name itself illustrates a sense of complexity, combining the concept of “bitcoin” with the strenuous task of “mining.” Indeed, it is a delicate process to do and is equally as delicate to learn, but it is interesting nonetheless.
What is bitcoin mining?
This peer-to-peer procedure is conducted with the use of computers that solve a series of mathematical problems that are incredibly complex. So complex, that the typical odds of solving them are relatively slim (more on this point later).
When a problem is solved, a bitcoin is produced. In doing so, miners make the network reliable in regards to the bitcoin payment and it verifies transaction information. This system adds data to bitcoin’s registry of past transactions. It is this ledger that is what is commonly referred to as the blockchain, where the ‘blocks’ are secured by the miners.
Bitcoin mining is the primary method of releasing cryptocurrency into circulation and is what brings additional bitcoins into existence. It is a system that was designed to be reliant on resources and is run with great intensity so that the amount of mined blocks maintain a steady pace in its creation, thereby controlling the monetary supply at a reasonable rate.
To put simply, without bitcoin mining, blocks for the blockchain would cease to exist. Or at the very least, the distribution would be needlessly chaotic.
How it works
For miners to earn bitcoin from validating the transactions, two things must happen:
- Verify one megabyte worth of transactions, which – depending on the data – can range from one transaction to over a thousand. This step is not particularly hard.
- This, however, is the trickier step. To add a block to the blockchain, the miner has to be the first to solve an aforementioned complex mathematical problem (which is considered to be the ‘proof of work’). What this procedure is doing is formulating a 64-digit hexadecimal number – a ‘hash’ – that is either equal to or less than the target hash.
Currently, the level of difficulty of recent blocks is over 7 trillion, thus making the odds of solving the problems slim, as previously mentioned.
With each new block that is received during the mining process, bitcoin nodes verify the ‘proof of work.’ Bitcoin uses this function to be on the lookout for any trace of double-spending and protects itself from it.
Double-spending is when a bitcoin user unlawfully spends the same amount of money more than once. This is not an issue with physical currency (ex. once you spend a $20 bill, you cannot reuse it), but with digital currency, there is a possibility that the holder could make a copy of a digital token and send it to others while they are still in possession of the original. The ‘proof of work’ helps prevent this and ensures the secure and reliable reputation bitcoin has built up over the years.
Before moving on to the next section in explaining bitcoin mining, allow me to take a moment to explain what exactly a hexadecimal number is. As stated already, it is a 64-digit long figure, but it does not just consist of numbers; it also contains letters. In hexadecimal terms, unlike the conventional decimal, each digit has 16 possibilities. Due to our numerical system having only 10 digits to choose from (0-9), letter will often get placed in the number.
Bitcoin Mining Difficulty
Something that is used to measure the difficulty of finding a new block is the ‘bitcoin mining network difficulty’. It additionally provides a comparison to the easiest level it can be. It recalculates with every 2,016 blocks to a value that the previous 2,016 would have generated in two weeks based on if everyone had been mining at this difficulty. This supplies one block every 10 minutes.
Over time as more miners join in on the process, the rate of block creations will go up. As previously mentioned, this results in the difficulty increasing, hence the steady pace in block creation and an organized system.
A good set of resources that also measure difficulty are these Bitcoin Difficulty charts, which not only provide a Bitcoin Hashrate vs. Difficulty chart, but also a Bitcoin Block Generation Time vs. Difficulty chart. Both measure a difficulty rate within the previous two months and are colour-coded for convenience. The Bitcoin Block Generation Time vs. Difficulty chart offers a general estimation of what the next difficulties will be based on past rates.
Bitcoin mining is not always an independent endeavour. Mining pools were created in response to certain users finding it difficult to have enough ‘hashrate’ to solve a problem and earn the payout reward. This is a system where communities of individual miners contribute to the formation of a block, and afterwards, the payout reward is split up amongst them.
The reward for building and finalizing a block garners a miner over $100,00, going by a block’s worth (in this specific case, the worth would currently be about 12.5 bitcoin). At the time of this writing, there have been roughly 17,510,363 blocks mined.
Miners are essentially getting paid for working as auditors, verifying past bitcoin transactions. Satoshi Nakamoto – the man behind the creation of bitcoin – created this system. Overall, it keeps users honest, the information distributed
In order to do any bitcoin mining, like with any other operation whether it be digital or physical, the user is going to need the right equipment. The two ideal tools that the miner can use are either a GPU (Graphics Processing Unit) miner or an ASIC (Application-Specific Integrated Circuit). The price of these devices range from about $500 to tens of thousands of dollars.
Other miners, most notably Ethereum miners, buy individual graphic cards. This method is a less costly way to integrate multiple mining operations together.
For a long time, miners used to perform these activities with desktop computers, but throughout the gradual progression of this technology, they discovered a more effective tool in the graphics cards that were primarily used for video games. From there, GPUs took off and ASICs came along not too long after, serving as a computer that would be used exclusively for efficient mining.
ELI5 (“Explain It Like I’m Five”)
Investopedia editor, Euny Hong, made a helpful analogy pertaining to this topic called ELI5, meaning “Explain It Like I’m Five”:
“Let’s say I’m thinking of the number 19. If Friend A guesses 21, they lose because 21>19. If Friend B guesses 16 and Friend C guesses 12, then they’ve both theoretically arrived at viable answers, because 16<19 and 12<19. There is no “extra credit” for Friend B, even though B’s answer was closer to the target answer of 19.
“If B and C both answer simultaneously, then the ELI5 analogy breaks down.
“In Bitcoin terms, simultaneous answers occur frequently, but at the end of the day there can only be one winning answer. When multiple simultaneous answers are presented that are equal to or less than the target number, the Bitcoin network will decide by a simple majority–51%–which miner to honour. Typically, it is the miner who has done the most work, i.e. verifies the most transactions. The losing block then becomes an ‘orphan block.’
“Now imagine that I pose the “guess what number I’m thinking of” question, but I’m not asking just three friends, and I’m not thinking of a number between 1 and 100. Rather, I’m asking millions of would-be miners and I’m thinking of a 64-digit hexadecimal number. Now you see that it’s going to be extremely hard to guess the right answer.”
If it has not become obvious after analyzing all the layers of complexity, blockchain mining is not an easy task. Not only is the core of this process purely intensive guesswork, it also runs on a ‘first come, first serve’ rule. When the miner is trying to solve the mathematical problem provided – that being trying to concoct a brand new hexadecimal number – they have to be sure that they are the first to bring it into fruition.
If you want to get creative with how you explain the system, it can be easily described as “cutthroat.” It may not be as aggressive as that name leads one to believe, but it is, in fact, an intense game of luck.
Like with other operations in the cryptocurrency field, anyone can participate in bitcoin mining,