Just a few years ago no one had ever even heard of it. Now, Bitcoin is quite frequently close to being the news of the day in the business section of every news portal. Usually due to its high price fluctuations and the stories of people it has made into millionaires (or broke, after a bubble burst).
But for an average Joe, it’s still a complete unknown.What is Bitcoin mining and what does “Bitcoin mining” stand for? Mining Bitcoins is a process which validates transactions in the Bitcoin network with the use of hardware connected to it. To measure the speed of the mining operation the network uses hashes per second.
To be more specific, the process itself is done by running SHA256 double round hash verification process but that probably doesn’t tell you much if you are a beginner.Because this “validation” process requires a lot of energy users are compensated in Bitcoin by the network, which comes from two sources.
Some are newly created Bitcoins, which just joined the network (their number is restricted and it’s becoming harder to mine new coins) and from fees that each user pays when he sends Bitcoins from his wallet to other users.Of course, the more powerful the hardware you have and the more power you can contribute to the network, the greater share in each obtained Bitcoin block you will receive, which is a fair exchange.
Why have transactions to be validated?Every transaction is recorded in the Bitcoin’s public ledger – a block chain. This is used to verify that the transactions actually took place, inform the network of transactions which have just taken place and helps to distinguish between legitimate Bitcoin transactions and those which pretend to be genuine.
Thanks to that, it’s impossible to re-send your Bitcoins – or, simply speaking – to send the same Bitcoins twice from your wallet before they get back to it in the form of a transaction.Why are so many resources required?The creator of Bitcoin network has intentionally designed it to be resource intensive and to increase in difficulty.
After each specified number of blocks mined, the difficulty level increases and it becomes more and more difficult to mine the next Bitcoin - all the way to around a hundred years from now when the last Bitcoin in the network will be available to the public (ie. it will be mined out).
Thanks to that, Bitcoin works as a decentralized currency in which users are required to make sure all transactions are genuine, providing security to the whole network, and helping introduce new Bitcoins to the system. In fact, this makes Bitcoin quite similar to other commodities which are mined out of the ground - the only difference is that it’s completely virtual.
In fact, even its difficulty can be compared to the running out of resources such as oil or iron. As they run out in previously known spots people are pushed towards finding new ways of getting to resources which are even deeper on the ground and more difficult to get to.
How does Bitcoin Mining Difficulty work?Bitcoin network difficulty tells the users how much more difficult it is to mine a new block today compared to conditions in which it would be the easiest. The difficulty keeps changing – every 2,016 blocks it gets adjusted to a level in which the previous 2,016 blocks would have taken two weeks to mine if everyone has been connected to the network and mining simultaneously (which would give 1 block (25 bitcoins) around every 10 minutes).
Because new miners keep joining blocks get created faster. This leads to rising difficulty as the network has to compensate for the lower rate. Of course, one would think whether it’s possible to cheat the system and try to mine blocks at a different difficulty.
Luckily, the network will reject anyone who mines without meeting the required difficulty in the verification process.Another problem that increases the difficulty of mining new Bitcoins are the hash blocks. Because the block has to start with a certain number of zeros the difficulty increases because calculating such hash requires a lot of attempts due to a very low probability.
This problem is related with proof of workSatisfying network requirements – the proof of workIn the Bitcoin network, a proof of work consists of data which was either costly or took a lot of time to produce because of requirements it had to satisfy. The process of checking data has to be very simple and yet bullet-proof.
For example, generating a random process with a very low probability can be used (just as mentioned above) to make sure a lot of processes take part in the generation of a genuine proof of work.Calculating the block and the block rewardCurrently, solving the block rewards users who calculated it with 25 Bitcoins (this is estimated to half in 2017 as the number of Bitcoins awarded per block solved halves every 210,000 blocks). One of the biggest misconceptions about Bitcoin is that calculating a block is a process.
It can be compared to gambling.It doesn’t matter whether you mine for one hour or 24 hours, your chances of solving it are the same all the time. This is because you either solve it or not there’s no “solving in progress”.
Of course, there are calculators available online but they provide you with a pure estimate as the final average of time per block cannot be calculated.Although the number of Bitcoins is finite, there’s an infinite number of blocks (because transactions are made all the time and Bitcoins awarded for solving blocks consist in part of the fees too).
Even when blocks will be awarding just one Bitcoin, it still may prove itself profitable because at that time the price of one Bitcoin will probably be very high (unless it turns out to be just a fad).The process of mining Bitcoins may seem to be very complicated but in reality, it’s very simple.
People who use their hardware to solve “problems” in the network and help verify transactions are awarded a pay in the form of Bitcoins which come from the fees and from Bitcoins which got just introduced to the system.
Written on 17 Nov 2015.