Mining Bitcoins

Mining is the process by which the bitcoin blockchain is maintained as an accurate, secure, auditable and publicly viewable ledger.

Bitcoin (unlike the government or fiat banking system) is not designed to be centralised with any single person or entity in charge, so instead the bitcoin mining process works by creating a distributed or decentralised cryptographic consensus.

Bitcoin Mining
Bitcoin mining

The purpose of bitcoin mining is to verify transactions in a trustful manner and bundle them into blocks to be added to the chain. This ledger of transactions is known as the blockchain. Mining also brings new bitcoins into circulation by solving computationally intensive problems, known as proof of work.

Mining is called such because it requires exertion and energy as it slowly makes new currency available, at a rate which resembles how other commodities like gold are mined from the ground. In this context, mining can be measured as an opportunity cost (or alternative) to normal money creation and minting.

Proof of Work

Proof of work is a method that is difficult to produce, but easy to verify and is used by bitcoin to prevent double spending. The difficulty is the cost of the processing power required by the network and the risk to the miner is undertaking this cost (or difficulty) which is translated as computer hardware, energy and time. Bitcoin uses the hashcash proof of work mechanism and searches vast amounts of data in search of a hash (which maps arbitrary sized data to a bit string of fixed size). The SHA-256 hashing algorithm is used which results in a 256 number from any input and if the miner has a valid proof of work, they can broadcast their block to the network. Once this is verified, it is accepted by other miners as the next block in the chain. Producing proof of work can be a random process with low probability, so on average a lot of trial and error is required before a valid proof of work is generated.

Mining Difficulty

Mining difficulty is a measure of how difficult it is to find a hash below the target value (the 256-bit number) during the proof of work. The target value is recalculated every 2,016 blocks (or approximately every two weeks).

Bitcoin Mining Pool

Mining difficulty works cyclically, in that the more miners who join the network the more the block creation rate increases. This in turn causes mining difficulty to increase, consequently causing block creation rate to decrease.

Bitcoin is intentionally designed to be resource intensive so the number of blocks found by miners each day, remains steady over time. Individual blocks must contain a valid proof of work, which are verified by other bitcoin nodes once they receive a block. Any blocks released by malicious miners that do not meet the required difficulty target will be rejected by the network.

The Mining Reward

The reward for miners is new bitcoin generated with each block mined (as well as fees for network transactions). When the first block was mined in 2009, it generated 50 coins per block. The amount of coins generated halves every four years with the total supply set at 21 million. This means mining is expected to stop in 2140 and by June 2017, around 80% of these coins were in existence.

Mining Pools

A tremendous amount of hashrate has come online over recent years, which has made it difficult for individual miners to receive a block reward. To compensate for this, mining pools have been created which increase the likelihood of remuneration for the individual miner. Any reward is split by the pool according to the contributed processing power.
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