How Does Bitcoin Mining Work?

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What Is Bitcoin Mining?

Bitcoin mining is that the process by which new bitcoins are entered into circulation, but it’s also a critical component of the upkeep and development of the blockchain ledger. it’s performed using very sophisticated computers that solve extremely complex computational math problems.

Cryptocurrency mining is painstaking, costly, and only sporadically rewarding. Nonetheless, mining features a magnetic appeal for several investors curious about cryptocurrency due to the very fact that miners are rewarded for his or her work with crypto tokens. this might be because entrepreneurial types see mining as pennies from heaven, like California gold prospectors in 1849. And if you’re technologically inclined, why not do it?

However, before you invest the time and equipment, read this explainer to ascertain whether mining is basically for you. we’ll focus totally on Bitcoin (throughout, we’ll use “Bitcoin” when pertaining to the network or the cryptocurrency as an idea , and “bitcoin” when we’re pertaining to a quantity of individual tokens).

KEY TAKEAWAYS
By mining, you’ll earn cryptocurrency without having to place down money for it.
Bitcoin miners receive Bitcoin as a gift for completing “blocks” of verified transactions which are added to the blockchain.
Mining rewards are paid to the miner who discovers an answer to a posh hashing puzzle first, and therefore the probability that a participant are going to be the one to get the answer is said to the portion of the entire mining power on the network.
You need either a GPU (graphics processing unit) or an application-specific microcircuit (ASIC) so as to line up a mining rig.
A New Gold Rush
The primary draw for several mining is that the prospect of being rewarded with Bitcoin. That said, you certainly do not have to be a miner to have cryptocurrency tokens. you’ll also buy cryptocurrencies using fiat currency; you’ll trade it on an exchange like Bitstamp using another crypto (as an example, using Ethereum or NEO to shop for Bitcoin); you even can earn it by shopping, publishing blog posts on platforms that pay users in cryptocurrency, or maybe found out interest-earning crypto accounts. An example of a crypto blog platform is Steemit, which is quite like Medium except that users can reward bloggers by paying them during a proprietary cryptocurrency called STEEM. STEEM can then be traded elsewhere for Bitcoin.

The Bitcoin reward that miners receive is an incentive that motivates people to help within the primary purpose of mining: to legitimize and monitor Bitcoin transactions, ensuring their validity. Because these responsibilities are spread among many users everywhere the planet , Bitcoin may be a “decentralized” cryptocurrency, or one that doesn’t believe any central authority sort of a financial institution or government to oversee its regulation.

How To Mine Bitcoins

Miners are becoming purchased their work as auditors. they’re doing the work of verifying the legitimacy of Bitcoin transactions. This convention is supposed to stay Bitcoin users honest and was conceived by bitcoin’s founder, Satoshi Nakamoto. By verifying transactions, miners are helping to stop the “double-spending problem.”

Double spending may be a scenario during which a bitcoin owner illicitly spends an equivalent bitcoin twice. With physical currency, this is not an issue: once you hand someone a $20 bill to shop for a bottle of vodka, you not have it, so there is no danger you’ll use that very same $20 bill to shop for lotto tickets nearby . While there’s the likelihood of counterfeit cash being made, it’s not precisely the same as literally spending an equivalent dollar twice. With digital currency, however, because the Investopedia dictionary explains, “there may be a risk that the holder could make a replica of the digital token and send it to a merchant or another party while retaining the first .”

Let’s say you had one legitimate $20 bill and one counterfeit of that very same $20. If you were to undertake to spend both the important bill and therefore the fake one, someone that took the difficulty of watching both of the bills’ serial numbers would see that they were an equivalent number, and thus one among them had to be false. What a Bitcoin miner does is analogous to that—they check transactions to form sure that users haven’t illegitimately tried to spend an equivalent bitcoin twice. this is not an ideal analogy—we’ll explain in additional detail below.

Once miners have verified 1 MB (megabyte) worth of bitcoin transactions, referred to as a “block,” those miners are eligible to be rewarded with a quantity of bitcoin (more about the bitcoin reward below as well). The 1 MB limit was set by Satoshi Nakamoto, and may be a matter of controversy, as some miners believe the block size should be increased to accommodate more data, which might effectively mean that the bitcoin network could process and verify transactions more quickly.

Note that verifying 1 MB worth of transactions makes a coin miner eligible to earn bitcoin—not everyone who verifies transactions will get paid out.

1MB of transactions can theoretically be as small together transaction (though this is often not in the least common) or several thousand. It depends on what proportion data the transactions take up.

“So in any case that employment of verifying transactions, i’d still not get any bitcoin for it?”

That is correct.

To earn bitcoins, you would like to satisfy two conditions. One may be a matter of effort; one may be a matter of luck.

1) you’ve got to verify ~1MB worth of transactions. this is often the straightforward part.

2) you’ve got to be the primary miner to reach the proper answer, or closest answer, to a numeric problem. This process is additionally referred to as proof of labor .

“What does one mean, ‘the right answer to a numeric problem’?”
The good news: No advanced math or computation is involved. you’ll have heard that miners are solving difficult mathematical problems—that’s not exactly true. What they’re actually doing is trying to be the primary miner to return up with a 64-digit hexadecimal number (a “hash”) that’s but or adequate to the target hash. It’s basically guesswork.

The bad news: It’s guesswork, but with the entire number of possible guesses for every of those problems being on the order of trillions, it’s incredibly arduous work. so as to unravel a drag first, miners need tons of computing power. To mine successfully, you would like to possess a high “hash rate,” which is measured in terms of megahashes per second (MH/s), gigahashes per second (GH/s), and terahashes per second (TH/s).

That is an excellent many hashes.

If you would like to estimate what proportion bitcoin you’ll mine together with your mining rig’s hash rate, the location Cryptocompare offers a helpful calculator.

Mining and Bitcoin Circulation
In addition to lining the pockets of miners and supporting the bitcoin ecosystem, mining serves another vital purpose: it’s the sole thanks to release new cryptocurrency into circulation. In other words, miners are basically “minting” currency. for instance , as of Nov. 2020, there have been around 18.5 million bitcoins in circulation.1 apart from the coins minted via the genesis block (the very first block, which was created by founder Satoshi Nakamoto), every single one among those Bitcoin came into being due to miners. within the absence of miners, Bitcoin as a network would still exist and be usable, but there would never be any additional bitcoin. there’ll eventually come a time when Bitcoin mining ends; per the Bitcoin Protocol, the entire number of bitcoins are going to be capped at 21 million.2 However, because the speed of bitcoin “mined” is reduced over time, the ultimate bitcoin won’t be circulated until round the year 2140. This doesn’t mean that transactions will cease to be verified. Miners will still verify transactions and can be paid in fees for doing so so as to stay the integrity of Bitcoin’s network.

Aside from the short-term Bitcoin payoff, being a coin miner can offer you “voting” power when changes are proposed within the Bitcoin network protocol. In other words, miners have a degree of influence on the decision-making process on such matters as forking.

How Much a Miner Earns

The rewards for bitcoin mining are reduced by half every four years. When bitcoin was first mined in 2009, mining one block would earn you 50 BTC. In 2012, this was halved to 25 BTC. By 2016, this was halved again to 12.5 BTC. On May 11, 2020, the reward halved again to six .25 BTC. In November of 2020, the worth of Bitcoin was about $17,900 per Bitcoin, which suggests you’d earn $111,875 (6.25 x 17,900) for completing a block.3 Not a nasty incentive to unravel that complex hash problem detailed above, it’d seem.

If you would like to stay track of precisely when these halvings will occur, you’ll consult the Bitcoin Clock, which updates this information in real-time. Interestingly, the market value of bitcoin has, throughout its history, attended correspond closely to the reduction of latest coins entered into circulation. This lowering rate of inflation increased scarcity and historically the worth has risen with it.

If you’re curious about seeing what percentage blocks are mined so far , there are several sites, including Blockchain.info, which will offer you that information in real-time.

What Do i want To Mine Bitcoins?

Although early in Bitcoin’s history individuals may are ready to compete for blocks with a daily at-home computer, this is often not the case. the rationale for this is often that the problem of mining Bitcoin changes over time. so as to make sure the graceful functioning of the blockchain and its ability to process and verify transactions, the Bitcoin network aims to possess one block produced every 10 minutes approximately . However, if there are a million mining rigs competing to unravel the hash problem, they’ll likely reach an answer faster than a scenario during which 10 mining rigs are performing on an equivalent problem. For that reason, Bitcoin is meant to guage and adjust the problem of mining every 2,016 blocks, or roughly every fortnight . When there’s more computing power collectively working to mine for Bitcoin, the problem level of mining increases so as to stay block production at a stable rate. Less computing power means the problem level decreases. to urge a way of just what proportion computing power is involved, when Bitcoin launched in 2009 the initial difficulty level was one. As of Nov. 2019, it’s quite 13 trillion.

All of this is often to mention that, so as to mine competitively, miners must now invest in powerful computer equipment sort of a GPU (graphics processing unit) or, more realistically, an application-specific microcircuit (ASIC). These can run from $500 to the tens of thousands. Some miners—particularly Ethereum miners—buy individual graphics cards (GPUs) as a low-cost thanks to cobble up mining operations. The photo below may be a makeshift, home-made mining machine. The graphics cards are those rectangular blocks with whirring fans. Note the sandwich twist-ties holding the graphics cards to the metal pole. this is often probably not the foremost efficient thanks to mine, and as you’ll guess, many miners are in it the maximum amount for the fun and challenge as for the cash .

The “Explain It Like I’m Five” Version
The ins and outs of bitcoin mining are often difficult to know as is. Consider this illustrative example of how the hash problem works: I tell three friends that I’m thinking of variety between one and 100, and that i write that number on a bit of paper and seal it in an envelope. My friends do not have to guess the precise number; they only need to be the primary person to guess any number that’s but or adequate to the amount i’m thinking of. And there’s no limit to what percentage guesses they get.

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