In this second article, we will delve deeper in the mechanism behind Bitcoin. Yes, the network is powered by blockchain technology, but a very specific one in this case: proof of work. The product of this mechanism is what we refer to when we talk about mining bitcoin.
How does MINING work?
Mining is a byproduct of publishing on the blockchain. It is the way new Bitcoins are created. Miners publish blocks on the blockchain. As a reward for publishing blocks, they get to keep Bitcoins. (50 for the first 4 years, halving every four years, now 12.5) Miners also get transaction fees. As such, there is a race to find a “conforming hash” every 10 minutes.
PSA Don’t do it (unless you have cash, time, and an underutilized electrical engineering skill).
Incredibly competitive
High upfront investment
Difficulty is increasing rapidly
Now requires specialized hardware (ASIC chip).
Effectively, Bitcoins are created every 10 minutes (on average). In that time, miners try to solve a proof-of-work problem. The first one to solve the specific problem publishes a “block” on the “blockchain” including all transactions from the last 10 minutes. In 2008, the reward for publishing a block was 50 Bitcoins, 25 in 2012, and now is 12.5 Bitcoins. With the constant halving, there is a maximum of 21 million Bitcoins to be in circulation.
NOTE: How Bitcoins are NOT Created:
You can’t pay to create extra coins, they can only be mined •
There is no central bank to make them •
The developers can’t add extra Bitcoins. Other users would “rebel” and refuse the new version of the software
Miners can’t mine extra or faster in response to market forces.
So why does Bitcoin need miners? The network depends on miners to store and broadcast the blockchain. They are also responsible to validate new transactions and also vote (by hash power) on consensus, for all of which they are rewarded with new coins.
Essentially, you can reduce to 6 steps the process of mining Bitcoins.
Join the network and “listen” for transactions
Validate all proposed transactions
“Listen” for new blocks and maintain the blockchain
When a block is proposed, validate it
Assemble a new valid block
Find a “nonce” to make your block valid
Hope everybody accepts your new block
Collect profits
Points 1, 2 and 3 are relatively easy. The hard part lies in steps 4 and 5.
Some words to clarify. “Listen” in this context involves miners being attentive to information on the network and “picking up” meaningful activity, i.e. transactions. A “nonce” refers to different unique values that a miner tests for suitability in order to solve the cryptographic problem to validate new transactions.
Hashing is applying an algorithm to find a short number (digest) of a block of data. Every time you apply a hash to a dataset, you get the same hash number. Additionally, hashes are one-way. If you have the data, you can find the hash. But, if you have the hash, you can’t figure out the data. This means that hashes are useful for verifying data.
So why is mining hard? Because of the increasing difficulty of solving the cryptographic problem to validate new blocks of transactions. This mining difficulty is what determines the time required to validate blocks using a specific hashing algorithm.
For most blockchains, this algorithm is SHA256, a cryptographic hash function. SHA stands for Secure Hashing Algorithm. Cryptographic hash functions are mathematical operations run on digital data; by comparing the computed "hash" (the output from execution of the algorithm) to a known and expected hash value, a person can determine the data's integrity. A one-way hash can be generated from any piece of data, but the data cannot be generated from the hash. For Bitcoin, SHA256 serves as the Proof-of-Work algorithm used in mining to validate new blocks.
What does this look in PRACTICE?
Mining Bitcoin is done in one of two ways: professionally or casually. Both involve relatively the same steps, differing mainly in their magnitude.
Get Bitcoin mining hardware
ASIC (Application Specific Integrated Circuit) are specialized computers that are highly efficient at solving computational problems.
Select a mining pool
Note that depending on the size of the combined computational power, solo mining might be a viable option (block discovery on your own)
By joining a mining pool you share your hash rate with the pool. Once the pool finds a block you get a payout based on the percent of hash rate contributed to the pool.
Get Bitcoin mining software
This is how you ‘hook’ yourself up to the mining pool, you need to use software to ‘point’ your hashrate to the pool
Get Bitcoin payouts depending on the block difficulty and global hash rate
Issuance on the bitcoin network is regulated by difficulty, an algorithm adjusting the complexity of the Proof-of-Work problem in accordance with the block solving timeframe (i.e. 10 minutes)
Rewards on the system are therefore a function of the difficulty and cost to mine relative to the block rewards. These are designed to half every 210,000 blocks to ensure the network’s scarcity and maximum supply of 21 million Bitcoins.
Next up, we will discuss how this rewards system has led to the stellar growth of the crypto mining industry. Beyond the promises of a 'digital gold rush' this burgeoning sector is not only at the frontier of finance, but also technology as a result of the ever increasing difficulty of ensuring the blockchain network.
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