What is Bitcoin Mining?

You’ve probably heard that cryptocurrency /  Bitcoin mining is the way Bitcoin is created, but what does that mean? Bitcoin mining is so called because it resembles the mining of other commodities: it requires exertion (albeit in the form computational power) and it slowly makes new currency available at a rate that resembles the rate at which commodities like gold are mined from the ground.

Bitcoin is the most famous cryptocurrency, but not the only one. Cryptocurrencies are a subset of alternative currencies, or specifically of digital currencies. Bitcoin became the first decentralized cryptocurrency in 2009. Since then, numerous cryptocurrencies have been created. These are frequently called altcoins, as a blend of bitcoin alternative.

Bitcoin and its derivatives use decentralized controls opposed to electronic money or centralized banking systems. The decentralized control is related to the use of bitcoin’s blockchain transaction database in the role of a distributed ledger.

Who can participate in Bitcoin mining?

Anyone with access to the internet and the right hardware (as described  below) can join in mining. However, I believe that cryptocurrency-mining software is something you really don’t want on your own computer, unless of course you a computer savvy and can afford the appropriate hardware.

Bitcoin mining requires specialised resources

In the initial days of Bitcoin, mining was done with CPUs from standard desktop computers.  However, Graphics cards, or graphics processing units (GPUs), are more effective at mining than CPUs.  Therefore, GPUs became dominant as Bitcoin gained popularity. 

Later, hardware known as an ASIC, which stands for Application-Specific Integrated Circuit, was designed and is now used explicitly for mining bitcoin.  The first prototypes were released in 2013 and have been upgraded substantially since then, with more efficient designs coming on to the market.

Cryptocurrency mining is competitive and nowadays can only be done profitably with the most up-to-date ASICs.  When using CPUs, GPUs, or even the original ASICs, the cost of energy consumption is higher than the revenue generated.

Bitcoin mining has two purposes

Bitcoin mining is a decentralise computational process that serves TWO purposes:

1. Confirms transactions in a trustful manner when sufficient computational power (effort) is devoted to a block

Bitcoin mining is the process of adding transaction records to Bitcoin's public ledger of past transactions or blockchain. This ledger of past transactions is called the block chain as it is a chain of blocks. The block chain serves to confirm transactions to the rest of the network as having taken place. Bitcoin nodes use the block chain to distinguish legitimate Bitcoin transactions from attempts to re-spend coins that have already been spent elsewhere.

2. Creates (Issues) new Bitcoin in each block

With paper money, a government decides when to print and distribute money. Bitcoin doesn't have a central government, so new units of Bitcoin and other digital currencies are generated by “mining.” Basically, this is a computationally intensive task, and it involves a lot of processing power.

How does Bitcoin mining work?

As discussed above, Bitcoin mining is the process by which transactions are verified and added to the public ledger, known as the block chain, but it is also the means through which new bitcoin are released.

Basically, computers used in mining are rewarded for solving difficult maths problems. The computer’s processing power is used to verify transactions, so all that number-crunching is required for the cryptocurrency to work.

Bitcoin mining essentially helps to keep the Bitcoin network secure by approving transactions. Mining is an important and integral part of Bitcoin that ensures fairness while keeping the Bitcoin network stable, safe and secure.

How hard are the puzzles involved in mining? 

Bitcoin mining is intentionally designed to be resource-intensive and difficult so that the number of blocks found each day by miners remains steady.

The difficulty associated with mining depends on how much effort or power is being put into mining across the network.  The difficulty of the mining can be adjusted, and is adjusted by the protocol every 2016 blocks, or roughly every 2 weeks.  The difficulty adjusts itself with the goal of keeping the rate of block discovery constant. 

Therefore, if more computational power is utilised in mining, then the difficulty will adjust upwards to make mining harder.  And if computational power is taken off the network, the opposite happens.  The difficulty adjusts downward to make mining easier.

Proof of Work

Individual blocks must contain a proof of work to be considered valid. This proof of work is verified by other Bitcoin nodes each time they receive a block.

A proof or work is a piece of data which was difficult, i.e. costly or time-consuming, to produce and must satisfy certain requirements. Producing a proof of work can be a random process with low probability, so that a lot of trial and error is required on average before a valid proof of work is generated.

Hashcash

Bitcoin uses the hashcash proof-of-work function as the Bitcoin mining core. All bitcoin miners whether CPU, GPU, FPGA or ASICs are expending their effort creating hashcash proofs-of-work which act as a vote in the blockchain evolution and validate the blockchain transaction log.

The Computationally-Difficult Problem

Bitcoin mining a block is difficult because the SHA-256 hash of a block's header must be lower than or equal to the target for the block to be accepted by the network.

This problem can be simplified for explanation purposes: The hash of a block must start with a certain number of zeros. The probability of calculating a hash that starts with many zeros is very low, therefore many attempts must be made. In order to generate a new hash each round, a nonce is incremented. 

The Bitcoin Network Difficulty Metric

The Bitcoin Network Difficulty Metric is the measure of how difficult it is to find a new block compared to the easiest it can ever be. It is recalculated every 2016 blocks to a value such that the previous 2016 blocks would have been generated in exactly two weeks had everyone been mining at this difficulty. This will yield, on average, one block every ten minutes.

As more miners join, the rate of block creation will go up. As the rate of block generation goes up, the difficulty rises to compensate which will push the rate of block creation back down. Any blocks released by malicious miners that do not meet the required difficulty target will simply be rejected by everyone on the network and thus will be worthless.

The Block Reward

Obviously for people to become miners there must be some type of incentive. With Bitcoin, miners use special software to solve maths problems and are issued a certain number of bitcoins in exchange. This is called a block reward and is a smart way to issue the cryptocurrency and, also creates an incentive for more people to mine.

These block rewards are made up of both the transaction fees associated with the transactions compiled in the block, as well as newly released bitcoin.

Basically, the mining process involves compiling recent transactions into blocks and trying to resolve a computationally difficult puzzle.  The miner who first solves the puzzle becomes the person who can place the next block on the block chain and claim the rewards. 

When a block is discovered, the discoverer awards themselves a certain number of bitcoins, which is agreed-upon by everyone in the network. Currently this bounty is 25 bitcoins but this value will halve every 210,000 blocks.

As stated above, the amount of new bitcoin released with each mined block is called the block reward.  The block reward is halved every 210,000 blocks, or roughly every 4 years.  The block reward started at 50 in 2009, was 25 in 2014, and will continue to decrease.  This diminishing block reward will result in a total release of bitcoin that approaches 21 million.  

Additionally, the miner is awarded the fees paid by users sending transactions. The fee is an incentive for the miner to include the transaction in their block. In the future, as the number of new bitcoins miners create in each block decreases, the fees will make up a much more important percentage of mining income.

Is Bitcoin mining profitable?

As I said before, Cryptocurrency mining requires specialised resources and cryptocurrency-mining soft-ware is something you really don’t want to install on your home computer. 

The reason for this is that mining programs tap into your computer's hardware resources and put them to work mining Bitcoin, or other types of cryptocurrencies. And even though your hardware is used to generate money for the mining company, you don't receive any of it. They get all the money from putting your hardware to work.

And in fact, your desktop computer or laptop at home, isn’t powerful enough to profitably mine   cryptocurrencies. To mine profitably requires specialized mining rigs with specific hardware and a cheap electricity source.

It is very difficult to put your computer to work mining Bitcoin for your own profit. In fact, you would probably lose money. This is because you would run up a huge power bill as your computer draws more power, and you’d make back less in rewards than it would cost you in power.

But the problem isn’t just a financial one. Cryptocurrency mining software kicks in when your computer is at a low-power state, putting those idle resources to work. So, instead of using a small amount of power and running cool, your computer will run full-blast when you’re not using it, with fans kicking into action to dissipate all that heat. Too much heat can damage your computer, especially if your hardware is dusty and not well ventilated.

Another problem occurs if the software isn’t programmed properly because it may continue running even while you’re using your computer, slowing tasks down to ensure computer is running at full speed on the mining.

Summary

The primary purpose of bitcoin mining is to allow Bitcoin nodes to reach a secure, tamper-resistant consensus. Mining is also the mechanism used to introduce Bitcoins into the system: Miners are paid any transaction fees as well as a "subsidy" of newly created coins.

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