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Guide: What is Bitcoin Mining?

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The advent of blockchain technology and cryptocurrencies has created a spur amongst the technology enthusiasts. Opening the gates for creating highly diverse ecosystems, applications, and new earning opportunities, Bitcoin mining has always been in the spotlight of the crypto world. What is it and how does it work? We will see in this guidepost.

Overview

Think of Bitcoin like any other precious metal (like gold, silver, etc.). The only difference is that Bitcoin is a virtual entity. However, like any other precious metal, it requires mining before it finds its application. Just like gold is not created but mined, Bitcoin is also mined. To those new to the concept of crypto ‘mining,’ it is nothing but a way to ‘mint’ new cryptocoins into a blockchain network.

The total supply of Bitcoins has been capped at 21 million. That means, there can never be more than 21 million Bitcoins on the Earth. And, 17 million Bitcoins have already been mined. In fact, experts project that the remaining 4 million coins will be completely mined by 2140.

Bitcoin Mining in a Nutshell

By mining cryptocurrencies, we mean the computational power, time & effort that a miner invests to ‘Mine’ a particular coin. This computing/processing power is pooled by ‘miners’ (who are otherwise individuals operating powerful computers). These miners operate a single or multiple powerful processors (known as ‘mining rigs’) that work on the network to solve complex transactional problems.

As the mines keep solving these transactions and stack it over each other, new blocks are created and placed in the ‘Blockchain of the network.’ For each complete and solved ‘block,’ a certain amount of Bitcoins (or any other mineable currency) are released into the ecosystem. This is Bitcoin mining in a nutshell.

Purpose of Bitcoin Mining

Bitcoin mining serves two crucial purposes required to keep the network up and running. First, it confirms the transactions taking place on the platform in a trustful and secure manner. Second, it mints or issues new Bitcoins as the new blocks continue to emerge.

Utilization of Mining Power

Mining power, or the computational/processing power finds its utilization for several tasks. Primarily, the transactions over the network need to be verified. Therefore, transactions simply imply the exchange of information between two parties over the network. Once the transactions are verified, they have to be bundled into a block. The next thing is inserting this bundle into the most recent block as a ‘Hash.’ The mining rig then solves the ‘Proof-of-work’ problem.

Once miners solve the proof-of-work, they broadcast the solution to the whole network and add a new block to the blockchain. With each new block, there is a release of a pre-decided amount of Bitcoins on to the network.

Proof-of-Work Explained

Proof-of-work is the basic protocol for Bitcoin. A blockchain network can have different protocols as per its utility. Proof-of-work simply signifies a method/algorithm that determines the effort put in to create a piece of data. This protocol reflects that a ‘block’ was difficult and time-intensive to create (As it requires processing, energy, and time). Proof-of-work allows for the creation of a group/bundle of ‘Trustless transactions.’ Trustless transactions are those that do not require a third party to handle the transactions. Rather, the involved parties can directly carry out the transactions which are recorded over a distributed ledger of the blockchain. This becomes possible only with the Proof-of-work protocol.

This protocol ensures that transactions are legitimate and that there are no instances of ‘Double spends.’ It also makes sure that the miners compete with each other to mine the blocks as fast as they can to earn maximum rewards.

How do Miners Mine?

Bitcoin miners can mine in two ways. First, by setting up their own mining rig with super-fast processors. Second, they can do so via ‘Cloud mining.’

Mining Rigs

Mining rigs are computer systems that use their power to solve complex bitcoin transactions. Many miners across the world prefer to use their own custom mine setup as per varying profitability, feasibility, and maintenance of the machines. Miners can deploy their machines full-time or part-time for mining at their convenience.

Typically, miners deploy GPU-based processors with processing power in the order of Mega Hashes/second to Tera Hashes/second. These dedicated systems come with integrated cooling systems, and are for Bitcoin mining specifically.

Cloud Mining

Cloud mining, (also Cloud hashing), is another method of Bitcoin mining without native hardware requirements. A miner can purchase the ‘mining capacity’ of the hardware from data centers located in different places. Cloud mining enables people to earn Bitcoins without managing the hardware, software, and technicalities involved in setting up a Bitcoin rig.

How do Miners Earn?

Bitcoin mining requires effort and enormous resources. Hence, to keep the currency in circulation and the network protected against DDoS attacks, miners are rewarded with Bitcoin in return of their time & resources. The basic unit of mining Bitcoins is ‘Block.’ Presently, the reward for solving a block is 12.5 Bitcoins. Thus, if a single miner or a pool of miners solve a block, they get 12.5 Bitcoins.

Also, to keep the competition tough, and for inflation adjustments, the general practice is to halve the reward value every 4 years. Therefore, the reward for Bitcoin mining will reduce to 6.25 Bitcoins in 2020. Apart from this, miners also get a percentage of Bitcoin transactions by the users across the world.

Bitcoin Mining Difficulty

Bitcoin mining difficulty signifies the relative difficulty for solving a block. This is ensured with the SHA-256 Mathematical algorithm. Without going into the details of this algorithm, just understand that it determines the ‘Target’ value for the block which has to match the hash of the block’s header. For every 2016 blocks mined, the difficulty level goes up. Therefore, it translates into the increased competition and limited Bitcoin rewards.

So, this was Bitcoin mining basics in a nutshell. You can even mine other cryptocurrencies with dedicated resources. Happy mining!

 

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