The title sounds like a Nancy Drew novel, but it’s true- Many, if not all, are still puzzled by the science behind Bitcoin mining. Why is it needed? What does it do?
Have no fear, for we’re here to explain.
Think of Bitcoin mining as digging through a digital rubble of rocks to extract bitcoins, and you will arrive at the reason for this particular use of nomenclature.
Simply put, Bitcoin mining is a computational process that serves two purposes:
Firstly, it compiles blocks of verified transactions to the blockchain in order to secure a tamper-proof public ledger. This ensures a consensus around the Bitcoin network, and prevents a user from double-spending their bitcoins if they’ve already spent them elsewhere.
Secondly, mining is also a smart way of generating new subsidy bitcoins. Unlike governmental or financial institutions dictating the printing and distribution of fiat money, bitcoins are issued under a coded algorithm. ‘Miners’, i.e. the people on the Bitcoin network who validate blocks, use a special software to compete with one another in solving complex mathematical puzzles. The first one to do so is issued the transaction fee, AND also a set number of bitcoins as a monetary reward. This is termed as the ‘block reward’, and is halved roughly every 210,000 blocks. So, starting at 50 bitcoin per block mined back in 2009, the block reward has been halved to 12.5 bitcoins as of this year. Block rewards don’t only disseminate new coins, but also incentivizes the concept of mining to encourage more people to mine on the Bitcoin blockchain. The more the miners, the more secure the blockchain.
Blocks are validated by confirming the ‘Proof of Work’ (PoW). This is a piece of data that ensures that authenticating the new block took significant effort in terms of computing hardware, energy consumption and time.
In technical terms, this involves a computationally intensive hit-and-trial method of finding a number (called a nonce) that when combined with the data in the block and passed through a hash function (a process that converts data into a set string of 64 characters), produces a value within the parameters set by the program. The average mining time for finding a particular block has been established as 10 minutes per block. Increasing or decreasing the time it takes for solving these math problems to mine a block, the program automatically readjusts the mining difficulty to ensure a steady and controlled supply of bitcoins.
In the early days of Bitcoin, anyone with a simple computing setup such as a CPU could partake in mining. But, soon it was discovered that GPU units used in gaming fared much better and faster in finding those tricky and elusive nonces. However, as efficient as they were, GPU consumed a lot of energy and required powerful ventilation systems to cope up with the excessive heat being generated. This saw the transition to the production of commercial mining hardware such as the Field-Programmable Gate Array (FPGA) chips (faster, but still require huge amounts of power) and Application Specific Integrated Circuits (ASICs) (as of now, the best way to mine bitcoins).
The rising popularity of Bitcoin as seen more and more miners joining the network which subsequently increases the mining difficulty for individuals. To mitigate this, miners work in ‘pools’ i.e. combine their hardware power towards finding a block. The block reward is then distributed amongst the miners proportional to computing power they provide.
Unfortunately, the increase in difficulty has led to a creation of a monopoly between those with specialized and expensive mining rigs, keeping the average Joe out of the loop. This goes against Bitcoin ideology.
Therefore, the idea of ‘cloud mining’ is gaining much attention. Cloud mining refers to mining bitcoins remotely. Users purchase mining capacity of hardware (also called as cloud mining contracts), and can earn bitcoins without the hassles that come with traditional mining. However, this entails lower profits and an often risk of scams.
To reiterate, mining is a process that keeps the network stable and secure, all the while issuing a certain number of coins. Although many argue mining to be a pointless puzzle that thousands of computers try to solve, in addition to having an electricity usage that is insanely huge, it does make it expensive to fake data and tamper with it- Thus, making the Bitcoin blockchain exceptionally secure.
For more information on how to get started with Bitcoin mining, follow the link below!