What Is Bitcoin Mining?
Chances are you hear the phrase “bitcoin mining” and your mind begins to wander to the Western fantasy of pickaxes, dirt, and hanging it rich. because it turns out, that analogy isn’t too far off.
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Bitcoin mining is performed by high-powered computers that solve advanced machine math issues; these problems are so complex that they can’t be solved by hand and are complicated enough to tax even implausibly powerful computers.
KEY TAKEAWAYS
- Bitcoin mining is the process of making a brand new bitcoin by cracking a computational puzzle.
- Bitcoin mining is important to keep up the ledger of transactions upon that bitcoin is based.
- Miners became terribly refined over the last many years using complex machinery to speed up mining operations.
The result of bitcoin mining is twofold. First, when computers solve these complex math problems on the bitcoin network, they produce new bitcoin (not unlike when a mining operation extracts gold from the ground). And second, by solving computational math problems, bitcoin miners make the bitcoin payment network trustworthy and secure by verifying its transaction information.
When someone sends bitcoin anywhere, it’s called a transaction. Transactions made in-store or online are documented by banks, point-of-sale systems, and physical receipts. Bitcoin miners achieve a similar thing by clumping transactions along in “blocks” and adding them to a public record known as the “blockchain.” Nodes then maintain records of these blocks so they can be verified within the future.
When bitcoin miners add a brand new block of transactions to the blockchain, a part of their job is to make sure that those transactions are accurate. In particular, bitcoin miners ensure that bitcoin is not being duplicated, a unique quirk of digital currencies called “double-spending.” With printed currencies, counterfeiting is usually an issue. however generally, once you pay $20 at the store, that bill is in the clerk’s hands. With digital currency, however, it’s a different story.
Digital information can be reproduced relatively easily, so with Bitcoin and other digital currencies, there is a risk that a spender can make a copy of their bitcoin and send it to another party while still holding onto the original.
How Miners earn their living
With around 300,000 purchases and sales occurring daily, verifying each of those transactions can be a lot of work for miners. As compensation for their efforts, miners are awarded bitcoin whenever they add a new block of transactions to the blockchain.
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 four years). In 2009, it was 50. In 2013, it was 25, in 2018 it was 12.5, and in May of 2020, it was halved to 6.25.
This system can continue till around 2140. At that point, miners are going to be rewarded with fees for process transactions that network users will pay. These fees make sure that miners still have the inducement to mine and keep the network going. the thought is that competition for these fees will cause them to stay low when halvings are finished.
These halvings cut back the speed at that new coins are created and, thus, lower the available supply. this could cause some implications for investors, as alternative assets with low supply—like gold—can have high demand and push costs higher. At this rate of halving, the total variety of bitcoins in circulation will reach a limit of twenty-one million, creating the currency entirely finite and probably additional valuable over time.
Verifying Bitcoin Transactions
In order for bitcoin miners to truly earn bitcoin from verifying transactions, 2 things have to occur. First, they have to verify one megabyte (MB) worth of transactions, which might, in theory, be as tiny as one transaction however are more often several thousand, counting on what proportion of information every transaction stores.
Second, in order to add a block of transactions to the blockchain, miners must solve a complex computational math problem, also called a “proof of work.” What they’re actually doing is trying to come up with a 64-digit hexadecimal number, called a “hash,” that is less than or equal to the target hash. Basically, a miner’s computer spits out hashes at different rates—MEGA Hashes per second (MH/s), GIGA-Hashes per second (GH/s), or TERA-Hashes per second (TH/s)—depending on the unit, guessing all possible 64-digit numbers until they arrive at a solution. In other words, it’s a gamble.
The difficulty level of the most recent block as of August 2020 is more than sixteen trillion. That is, the possibility of a computer producing a hash below the target is one in 16 trillion. to place that in perspective, you’re about 44,500 times more possible to win the Powerball jackpot with one lottery price ticket than you are to choose the right hash on a single try. Fortunately, mining computer systems spit out several hash possibilities. Nonetheless, mining for bitcoin needs huge amounts of energy and complex computing operations.
The difficulty level is adjusted every 2016 blocks, or roughly every 2 weeks, with the goal of keeping rates of mining constant.4
That is, a lot of miners there are competitive for a solution, the tougher the problem will become. the opposite is also true. If computational power is taken off of the network, the difficulty adjusts downward to make mining easier.