Today, I will be discussing, in all its entirety, Bitcoin Mining.
Bitcoin mining is an energy-intensive process of introducing new Bitcoins into the Bitcoin ecosystem.
I say energy-intensive because a lot of work and cost is put into the production of a block of Bitcoin.
This work of introducing new Bitcoins is done by miners who are rewarded for their efforts with a certain amount of Bitcoin.
At the end of this post, you will have understood all that Bitcoin mining entails – what it is, how it works, the algorithm used, and the hardware. You will also get to know if it is still profitable or not.
So, put on your mining boots let’s go mine some Bitcoins!
And oh…Tuck in a pen and writing pad too; we will be doing some learning in the process.
Bitcoin Mining Overview
In today’s post, listed below are the subheadings I will cover:
- Definition of Terms
- What is Bitcoin Mining?
- Why is Bitcoin Mining and Miners So Important?
- What Will Happen When 21M Bitcoins Are Mined?
- Frequently Asked Questions(FAQ)
- Conclusion
A click on any subheading takes you to its details.
Bonne lecture!
Definition of Terms
Before I start up with the discussion of today, I will be explaining some terms that I will use so we can all flow together.
I will do my best to break it down in very simple layman’s terms. They include:
1. Mining
Mining is a process through which transactions for various forms of cryptocurrencies are verified.
Miners compile transactions into a block and subsequently add it to the Blockchain, a digital ledger.
It is just like Central Bank printing new notes to add to the notes in circulation.
The generation of ‘minable’ cryptocurrencies, such as Bitcoin, occurs through this process. Bitcoin, Ethereum, etc.
Satoshi Nakamoto, Bitcoin’s enigmatic founder, initiated the very first mining operation on January 3rd, 2009.
2. Blockchain
A blockchain is a decentralized public ledger that contains every single piece of data about its coin. Each piece of data is added to the blockchain by connecting one block after another.
It’s like an open-access account book, an Excel sheet with all transaction details. They just have to connect to the internet to access it.
Every transaction is recorded in a row, and its details cannot be tampered with.
You can read more about this here.
3. Block
Blocks, like files in the blockchain, store transactions similar to pages in an account book or an Excel sheet.
These Blocks form a linear sequence over time. Miners process new transactions, adding them to the end of the chain.
As blocks go deeper into the blockchain, changing or removing them becomes increasingly difficult, resulting in irreversible cryptocurrency transactions.
The Bitcoin blockchain adds a 1MB block every 10 minutes.
4. Miners
A miner is one who verifies transactions and adds a new block to a cryptocurrency blockchain. They receive a reward of a certain amount of coins for doing this.
It also refers to a device that is used to do this.
From the example I gave about the Central Bank, they are the ones/machines that actually print the new notes.
5. Node
A node is any computer that is connected to a network e.g the Bitcoin network. It has the function of validating transactions on the network before they are verified by the miners.
It can be:
- a full node(one that contains a complete copy of the blockchain)
- a light node(one that contains a portion of the blockchain)
- a super node(one that has the function of connecting full nodes to each other ensuring each full node has the correct copy of the blockchain)
- a mining node (one that confirms the blocks to be added to the blockchain through mining)
6. Block reward
The block reward is the new coins that are awarded by the blockchain network to miners for each block they mine successfully.
For Bitcoin, the block reward halves every 210,000 blocks, approximately every 4 years. This leads to a decreasing number of Bitcoins awarded as block rewards.
7. Consensus mechanism
Consensus Mechanism achieves agreement on a single network state among multiple agent systems in blockchain and computer systems.
In a layman term, it is the way that an agreement is reached in a network.
It ensures nodes synchronize and agree on valid transactions added to the blockchain. We have different types of consensus mechanisms which work on various principles. They include Proof of Work, Proof of Stake, Proof of Importance, Proof of Authority, Proof of Capacity, etc.
8. Mining difficulty
Mining difficulty is a measure of how difficult it is to solve the complex cryptographic puzzle to be able to add a new block to a blockchain.
Let’s say Bitcoin mining is like lifting a bucket that has stones stacked inside within a given time(say 5 minutes).
If you are able to lift it before 5 mins, more stones are added to the bucket and if it takes you more than 5 mins to do that, some stones will be removed from the bucket.
And, of course, you are wondering: what if it takes exactly 5 mins? In such a case, the time and the number of stones in the bucket remain the same.
The difficulty of mining in Bitcoin increases or decreases after every 2016 block. So after the 2016 blocks, the difficulty adjusts depending on how hard or easy it is to find the 2016 blocks.
9. Hash rate
A hash rate is the speed at which a mining machine operates.
A hash rate is measured in Megahashes per second (MH/s), Gigahashes per second (GH/s), or Terahashes per second (TH/s).
10. Target hash
A target hash is a number that a hashed block header must be less than or equal to be eligible for a new block award.
Now, cryptos rely on the use of blockchains that contain transaction history. This history is “hashed” or “encoded” into a series of numbers and letters.
Hashing/Encoding involves you taking a string of data of any length and running it through an algorithm to produce an end result.
The end result will always be the same length, regardless of how big or small the data is.
Anyone using hashing knows better to remember the hash rather than the data itself.
Each block will contain the hash of the previous block header.
This simply implies that in solving the mathematical equation, whatever answer you come up with should be equal or less than the hash of the previous block.
11. Double spending
Double spending is simply the risk of spending a coin twice. I will give an illustration to help you understand better.
Kate (who has 0.001BTC) buys chocolate from Jerry. Kate’s 0.001BTC will be sent to Jerry. The miners will record that 0.001BTC was subtracted from Kate’s wallet address and sent to Jerry’s wallet address.
The record of this transaction is distributed to all the thousands of Bitcoin nodes around the world (anyone can set up a node, you can set up a node in your house). This record makes up the blockchain.
So it will be impossible for Kate to manufacture and spend an already spent 0.001BTC. Even if she has a Bitcoin node and alters the record in her own node to show that she still has the 0.001BTC, it will be invalid.
This is because the record of this transaction is present in thousands of other Bitcoin nodes to prove that she does not have that Bitcoin.
With these terms explained, we can now begin the discussion of the day.
What is Bitcoin Mining?
In a group discussion with some friends on Bitcoin and other cryptocurrencies, one of them asked this question: How are bitcoins created or produced? Are they printed like normal paper currencies?’.
We all had a good laugh and then I explained the process.
Bitcoin Mining is simply a process by which transactions are verified. These verified transactions will result in a block being added to the blockchain. It is referred to as the Blockchain because it is a chain of blocks.
Confirming transactions creates new Bitcoins, rewarding miners and releasing coins into the network.
Bitcoin mining is quite a competitive business because new miners are always coming in with new strategies that could displace the old ones.
In the early Bitcoin years, solo mining was the order of the day. Solo mining involves individuals mining Bitcoins using their phones or laptops.
But as mining difficulty rose, miners resolved to what is known as Pool mining. Here, miners pool computational power together to mine on the Bitcoin network.
At the end of the day, the block reward received is shared according to the amount of computational power contributed by individual miners.
Nowadays, people indulge in Cloud mining where you purchase an amount of hashrate from mining companies and they will, in turn, pay you mining output after deducting their charges.
How Bitcoin Mining Works
When a transaction is sent through the Bitcoin network, nodes validate the transaction after it is broadcasted. At this point, the transaction is unconfirmed though valid
The miners, first of all, gather all the unconfirmed transactions into a block and get to work trying to get the new block into the blockchain.
They use their supercomputers to solve mathematical equations. This simply means that you have to be the first miner to generate a 64-digit hexadecimal number that is equal to or less than the target hash.
A miner needs a lot of computing power to actually beat other competitors (miners).
The first miner to solve the equation correctly adds the new block to the blockchain and receives a reward.
At this point, the transaction has one confirmation. Over time, more blocks added on top increase the transaction confirmations.
The higher the number of confirmations for a particular transaction, the lower the risk of double-spending that particular Bitcoin.
Consensus Mechanism
Bitcoin mining uses the Proof of Work Consensus Mechanism.
The Proof of Work Consensus Mechanism requires a participant node to prove that the work done and submitted by them qualifies them to add a new block to the blockchain.
This mechanism requires high energy consumption and a longer processing time.
Bitcoin mining uses SHA 256 (Secure Hash Algorithm 256) as its mining algorithm.
Mining Difficulty
Mining difficulty on Bitcoin’s network is simply the measure of how hard it is to find a hash below the given target hash.
This mining difficulty changes after every 2016 blocks automatically. At the rate of one block every 10 minutes and an average of 144 blocks per day, 2016 blocks would take exactly two weeks to find.
This adjustment is dependent on several factors like:
- the global block difficulty (which forces valid blocks to have a hash below this target)
- the number of miners(The more the miners, the more difficult the mathematical equation becomes and the lesser the number of miners, the simpler the mathematical equation becomes)
- the combined hash power
- the total time it takes to discover the next 2016 blocks
From coinwarz.com, the mining difficulty is at 14.7764T currently (as of 15th Jan. 2020 when this post was written).
Mining Hardware
In the early years of Bitcoin’s birth {2008 – 2010}, one could easily mine bitcoins with a simple mobile phone, laptop, or desktop computer.
There were stories of early miners who were able to mine thousands of Bitcoins with laptops and desktop computers.
But as mining gained publicity, the number of miners increased and so did the difficulty involved in mining Bitcoin.
Since mining difficulty increased, miners needed more powerful hardware to accommodate for this change.
This brought about the era of Central Processing Units(CPUs), Graphics Processing Units(GPUs), Field Programmable Gate Arrays(FPGAs), and Application-Specific Integrated Circuits(ASICs) hardware.
But nowadays, most Bitcoin mining is performed on dedicated Bitcoin mining hardware ASICs. The processing speed of one ASIC is greater than the processing speed of 10 supercomputers combined.
Mining tools are relatively expensive although their price varies according to their capacity. They could cost about $500 to tens of thousands.
Examples include Antminer S9, Antminer K4, Dragonmint 16T, etc.
You can use a profitability calculator to determine your estimated cost of return on your mining hardware.
Remember to take electricity costs into account. Most mining hardware appears profitable until electricity costs are accounted for.
Block Reward
Any miner that adds a block to the Bitcoin network receives a block reward in BTC.
This reward halves after 210,000 blocks which( approximately) is every 4 years to maintain the value of Bitcoin. This halving continues until Bitcoin reaches its maximum of 21 million coins sometime around the year 2140.
When Bitcoin was created, the block reward was 50BTC. Sometime in 2012, it halved to 25BTC and then 12.5BTC in 2016.
As of when this post was written(15th Jan. 2020), the reward is still 12.5BTC counting down to the next halving (6.25BTC) speculated to happen in May 2020.
This implies that every 10 minutes, 12.5 new coins are introduced into the ecosystem.
Note: Presently, the number of Bitcoins that are mined every 10 minutes is 12.5BTC. It cannot be more than 12.5BTC irrespective of the number of miners; whether 100 or 1 million.
But what’s going to happen when all the Bitcoins are mined? Will the Bitcoin network shut down?
Read about that below.
Read more: Bitcoin At A Glance – All You Need To Know About The #1 Cryptocurrency
Why is Bitcoin Mining and Miners So Important?
Bitcoin mining performs a very important and integral role in the Bitcoin network. This is because the ecosystem would not survive at all without mining.
These functions include:
Confirming and verifying Bitcoin transactions
This is the first and primary function of every miner in the world. They confirm and verify that transactions made are correct and valid. This makes sure that Bitcoin users are not trying to cheat the system i.e commit double-spending. These transactions are then bundled together into a transaction block.
Solving the Proof of Work equation
After transactions are bundled into transaction blocks, miners then compete with each other to solve the PoW equation. This, as I have explained before, involves logical, complicated, and complex guesses requiring a lot of energy and computational power.
Adding new transaction blocks to the blockchain
When a lucky miner solves the PoW equation, the result is broadcast to the entire network. All other miners have to verify that this guess is correct. After this verification, the valid transaction is then added permanently to the blockchain.
Introduction of new Bitcoins into the system
This is probably the most common function of Bitcoin miners. After solving the PoW equation and adding the block to the blockchain, the lucky miner earns the block reward. This serves as a way of introducing new Bitcoins to the system and adding to the overall Bitcoin money supply.
Safeguard and secure the Bitcoin network
Miners are also responsible for securing and safeguarding the Bitcoin network from hacks. This has made the Bitcoin network very near impossible to hack. The network is currently the safest in the world gathering the processing power of over 500 supercomputers. Although there have been hacks of various Bitcoin wallets and exchanges, the Bitcoin network itself has remained secured since its inception.
What Will Happen When 21M Bitcoins Are Mined?
Bitcoin is limited in supply. However, unlike gold, the amount of Bitcoin that is left to be mined is known.
Bitcoin has a total of 21M coins to be mined and so far, more than 18M coins have been mined leaving less than 3M coins unmined.
The question now is: What happens when all the 21 million bitcoins are mined? How will miners earn since we need them to verify our transactions?
There is no direct answer to this question.
When all Bitcoins are mined, many miners may be discouraged from mining and give up mining. This might lead to the centralization of Bitcoin control to the miners that stick behind.
Another thing that could happen is that there might be an increase in the Bitcoin transaction charges.
This will keep miners in business but increased transaction charges might make users look for an alternative cryptocurrency with cheaper transaction charges.
Anyways, we do not need to worry about that now. By the year 2140, all Bitcoins will be mined; over 100 years from now.
Anything is possible – mining chips in various devices could keep Bitcoin transaction costs low.
Guess we will just have to wait it out.
I answered some of the commonly asked questions about Bitcoin mining in the next section.
Scroll down to read.
Frequently Asked Questions(FAQs)
Yes, it is possible for a miner to verify transactions and end up earning nothing. There are two criteria for a miner to be qualified to earn Bitcoins:
– Firstly, you have to verify a transaction worth 1 MB.
– Secondly, you have to be the first miner to get the correct solution to the PoW equation and thus add the new block.
If a miner fails to meet these criteria, he loses out even after spending resources to verify a transaction.
Yes, you can but honestly speaking, it is not worth it.
Believe me when I say it is a total waste of your time as you will end up gaining so little or nothing at all.
The hardware for Bitcoin mining is ASIC which is faster than 10 supercomputers.
Notice it said ‘supercomputers’ not just ordinary computers.
I will liken it to a tortoise choosing to race with a cheetah. This gives you a lil’ idea of what you are up against when setting out to mine Bitcoin with your phone or laptop.
The process can even damage your device.
You can do this by joining a mining pool.
A mining pool creates an environment where numerous miners come together and combine their hash power to maximize their chances of getting the correct target hash.
At the end of the day, miners in a mining pool share their profits accordingly.
You could also maximize your chances by getting a fast mining rig.
Is Bitcoin Mining Profitable?
At the initial stage when Bitcoin was first mined, miners actually earned a lot when they mine one block.
But not anymore because the reward earned per block halves every 4 years.
Joining a mining pool and signing a cloud mining contract are ways people mine these days earning meagre output.
I will add that you should check out the so-called mining companies very well to avoid scam sites parading themselves as the real deal.
The process can even damage your device.
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Conclusion
Here is the last part of today’s discussion…You can pull those boots now and stretch your feet.
So far, it has been a jolly ride! I explained Bitcoin mining – its modus operandi and why mining and miners are important.
Now, I want to know what your thoughts are on Bitcoin mining.
In your opinion, do you think Bitcoin mining will still be profitable after the block reward stops?
Have you mined BTC before and what was your experience?
Or perhaps you have other questions to ask?
Let me know ASAP in the comments section below.
And those share buttons right below are still very much functional…You can click on them to confirm.
I also handpicked these reviews for your reading pleasure:
144 blocks per day and 6.25 bitcoin per block are mined on average.
Please I want to start mining bitcoins, so what are the necessary instruments that I need??
Hello Favour,
The truth is that Bitcoin mining and the equipment needed are really expensive.
But if you can afford it, you can go ahead and buy your own ASIC or you can cooperate with cloud mining companies to start up.