What is Bitcoin Mining?

Mining is one of the two core components that secure the Bitcoin blockchain. Miners build the blockchain, discover new blocks, and join them to the previous blocks. The other component is the nodes that keep track of the history of all transactions and verify new transactions.

Miners spend resources to create new blocks that house transactions, and the network rewards miners for their efforts in newly minted bitcoin. Compared to the common connotation of mining, Bitcoin mining is the process in which specialized computers confirm transactions on Bitcoin’s blockchain. Miners process these transactions through the SHA-256 hashing algorithm, a cryptographic function that the United States National Security Agency (NSA) invented. This algorithm secures transactions and is the backbone of the mining process. Miners all over the world run hundreds of thousands of computers to generate hundreds of trillions of hashes. Transactions become confirmed when a miner is able to generate a valid hash that results in a new block being found. When a miner finds a new block that is accepted by the entire Bitcoin network, it is rewarded in newly minted bitcoin, and transactions awaiting confirmation are placed into the newest block and added to the blockchain.

Miners commit electricity, time, and resources via a Proof-of-Work mechanism to secure the network. Since there are so many miners and so much energy being used to mine bitcoin, an attack would be practically impossible and has no incentive.

What Do Bitcoin Miners Do?

1.Confirm Transactions

Solving the energy-intensive math problem results in finding a new block to add to the chain of existing blocks. When bitcoin is sent from one address to another, a transaction broadcasts to the entire network that waits to be confirmed. Transactions that are unconfirmed sit in a mempool. When a new block is found, as many transactions that can fit are placed into the block, which nodes accept.

Bitcoin blocks have limited capacity, which means only a certain number of transactions can be confirmed per block. Each subsequent block that is found and added to the blockchain afterwards is considered as an additional confirmation of these transactions. Most exchanges and services that accept Bitcoin usually require up to six confirmations before they consider a Bitcoin transaction to be secure.

2.Secure the Network

The energy that miners spend to solve the intense math problems to find new blocks is measured in hashpower, a measure of how secure the Bitcoin network is at any given moment. In order to attack bitcoin, one would need to spend a transaction twice, therefore making the first transaction worthless and corroding the value and reputation of Bitcoin as an immutable payment network. When transactions are sorted into a block that is accepted by the entire network, it prevents a user from spending the same bitcoin twice because the first Bitcoin transaction was recorded by every participant in the network. This solves the “double spend” dilemma, which has stymied many cryptographers in previous attempts to create a secure decentralized payment system. In order to double spend a transaction, an attacker would need to obtain a majority of the hashpower of the network, and proceed to roll back all blocks that were confirmed after the transaction trying to be double spent—a virtually impossible task.

3.Release New Coins

One of Bitcoin’s best attributes is its fixed monetary policy tied to mining. At any point in time, it is definitively known how many bitcoin have been created, and how many are left to be minted until all have been released. There will only be just under 21 million bitcoin minted into existence.

Satoshi Nakamoto designed Bitcoin to be released at a predictable rate, thanks to what is called the block reward mechanism. Every 210,000 blocks, the reward for finding a new block decreases by half. The first set of 210,000 blocks awarded the miner 50 BTC per block, the next set awarded 25 BTC per block, and the current set of 210,000 blocks rewards miners 6.25 BTC per block. An inflation schedule provides a visual representation of the issuance process. The last bitcoin could be mined sometime around 2130.

Bitcoin issuance chart

How Can I Start Mining Bitcoin?

Bitcoin mining is an industry that has evolved from a hobby that required the most basic computer resources to a multi-billion dollar industry that now requires cutting-edge technology in order to generate any meaningful revenue. Before the introduction of ASICs (Application-Specific Integrated Circuit), around 2013, the average computer was able to mine profitably.

The difficulty level, a fluctuating metric that dictates how much energy miners need to spend in order to try and find the next block, has consistently increased over time and is now at levels where only the most efficient miners can generate returns. Efficiency, in this regard, takes into consideration not only how expensive the mining rigs are, but also the electricity rate for the miner.

Individual mining rigs now cost at least several thousand dollars, which puts profitable Bitcoin mining out of reach for most people.

Assuming that one is able to acquire a Bitcoin mining rig and source inexpensive electricity, the best way to ensure that an individual mining rig will generate returns is by connecting it to a mining pool.

What Are Bitcoin Mining Pools?

The Bitcoin network aims to find a new block about every 10 minutes, which means that one lucky miner receives a reward over a fairly consistent period of time. A miner might spend a long time before finding a new block, if ever. This is why mining pools are effective.

Mining pools combine the computational resources of many miners and distribute the rewards that these miners earn evenly, based on the amount of resources each miner contributed. One of the most advantageous features of mining pools is the more reliable stream of revenue they provide. People who invest large amounts of money into Bitcoin mining sometimes do not pool. However, their operation is large enough to find new blocks independently where they collect the entire reward and pay no mining pool fees.

What Are Bitcoin Mining Farms?

Bitcoin mining farms are large arrays of miners that are usually stored in warehouses. Establishing a mining farm often requires a large investment, as well as the ability to source cheap electricity, and is more difficult to do today as Bitcoin adoption has risen.

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