What is Bitcoin Mining & How it works
Bitcoin mining is the backbone of the Bitcoin network. Bitcoin miners verify and secure the network to process every Bitcoin transaction.
What is Bitcoin Mining
Bitcoin is an open network running independently of a central authority. It allows users to send and receive the Bitcoin cryptocurrency peer-to-peer. Anyone on the network can participate as a user or validator of transactions.
Miners Verify Transactions and Secure the Network, Making it Trustworthy
The Bitcoin ledger is distributed, blocks of data are linked cryptographically, encrypted and registered on the computers of every peer. The rules of the Bitcoin network enforce how it agrees on how transactions take place and the validity of transactions. This consensus mechanism, called “proof-of-work,” relies on miners to validate transactions on the network.
There’s a built-in incentive mechanism to reward network participants (i.e. miners) who race to complete transactions by expensing physical energy. The mining process involves solving mathematical puzzles with hashing power, which increasingly requires a large sum of computational power and energy.
New Bitcoins are Created Through “Mining”
Unlike fiat currencies, which can be printed at the discretion of central banks, the supply of Bitcoin is algorithmically fixed. There will only be 21 million Bitcoins that will be printed.
Bitcoin miners expend computing power to solve complex mathematical tasks in order to register and secure transactions. A reward is granted to the first miner who solves each block’s problem. Transactions are batched into that block of data and get sent to the network and become part of the network’s history of transactions. The speed at which a miner completes a computing operation is called the hash rate. A higher hash rate increases the miner’s chances of getting the next block and receiving the reward.
Economics
The cost of mining is considerable because it requires powerful hardware and substantial amounts of electricity to run the processors. Every 10 minutes, a block of Bitcoin is solved by miners. Miners are granted with Bitcoin reward which is added to the circulating supply every 10 minutes. How new Bitcoins are distributed is referred to as the block reward. Currently, the block mining reward is 12.5 Bitcoins. The Bitcoin block mining reward halves every 210,000 blocks (or 4 years), meaning the coin reward will decrease by half.
The next halving event is on May 20, 2020, when the coin reward will decrease from 12.5 to 6.25 coins. This predetermined event will occur every four years until the last Bitcoin is mined (i.e. 21 million). Smaller block rewards are only one factor that impacts the earning potential of miners. Other economic factors include Bitcoin’s market price, difficulty level and market competition, as well as the cost of electricity and capital equipment. The difficulty level determines how relatively hard it is to mine for the next Bitcoin. For instance, if the value of Bitcoin rises relative-to-cost of electricity and hardware, that will help offset the reduction in Bitcoin block rewards.
Choosing Mining Hardware Affect Performance And Profitability
The current state of mining is highly competitive, requiring specialized dedicated hardware called ASIC miners. Previously, miners were done with graphic cards, which then evolved to ASICs (i.e. Application-Specific Integrated Circuits) due to better hashing power. A few factors to consider when purchasing a Bitcoin miner are:
- Power consumption or amount of electricity it consumes, as measured in Watts;
- Hash rate or the ability of the miner to solve mathematical tasks, as measured in terahashes per second;
- Energy efficiency (i.e. achieving a high hash rate at lower energy levels).
Several manufacturers have become dominant in supplying miners that rank high in those performance metrics above, including BitMain with AntMiners and Ebang with EBIT miners.
Originally published at https://overblock.io on August 13, 2019.
