Bitcoins have been the talk of the town these days, but understanding how the cryptocurrency works has been a real challenge for most people. No one can blame them because there’s a whole lot of numbers and maths involved, making it a complex subject to comprehend.
As you probably know, Bitcoin is basically a digital currency, and just like other currencies, it needs checks and balances, verification and validation. Normally, if it were just the normal currency these tasks would be performed by banks and central governments.
The main difference with Bitcoin as a digital currency is that it’s decentralized, meaning that it’s not regulated by a central government. So, how then can we attest that the transactions are validated and verified? How do we know they are even accurate? The simple answer is MINING!
What’s Bitcoin Mining and how does it Work?
In order to help you understand what mining is and how it works, let’s take a step back and see how Bitcoin transactions are conducted.
Well, when sending or receiving Bitcoins, the transactions are recorded and stored as unique data. A certain group of transactions performed on a set time period are stored in blocks known as the “Blockchain”. Now this is where the job of miners comes in – their work is to secure this data on the Blockchain, a process that involves turning each of the transactions into a certain coded sequence called a hash.
Since it’s a sequence, each hash is determined directly by the previous one on that block, thereby linking all transactions together. If a single character in a given Bitcoin address is changed, then it will result in a different hash altogether, and every active miner will spot the altered transaction immediately. This is why Blockchain technology is considered very safe.
Bitcoin mining has to be done with a special program and a computer as only these can solve the complicated mathematical problems. Approximately, all miners will try solving a block with the latest transaction data every 10 minutes, using hash functions.
Besides helping verify and validate transaction, mining serves another vital purpose: it releases new Bitcoins into circulation! In simple words, a miner basically “mints” the cryptocurrency. However, a time will come when this mining will end. According to the Bitcoin protocol, only 21 million Bitcoins can be mined, and we are already past 2/3 of this number. Once the last one is mined, miners will be earning from transaction fees.
What are Hash Functions and how are they Useful to Bitcoin?
Bitcoin miners across the globe compete to try and identify an input for a specific hash value. And even though the difficulty of the puzzle is often measurable, they can’t be cheated on. Now if you are one of the first to succeed, you get rewarded with a certain number of Bitcoins. Don’t get this wrong though; as a winner you don’t technically make the bitcoin – what happens is that the Blockchain algorithm coding is set up in a way that it rewards you for the mining and helping verifying the Blockchain.
Who is a Bitcoin Miner?
During the early days, Bitcoin miners used to be just cryptography enthusiast; they were people only interested in this project, using their spare PCs to verify and validate Blockchain and get rewarded with some Bitcoin units. That time the value of Bitcoin was low and the speed of solving Bitcoin was somewhat easy and consistent. However, now that the value of the digital currency has shot up significantly and competition has increased, validating the blocks has become more and more difficult. This means that more miners have to work together in order to solve the blocks, splitting the earnings among themselves. Some people have gone to an extent of investing in quality hardware and warehouses to join the network.
Since mining consumes a lot of power, the main concern for miners is the energy cost and hash rate. Unlike the past where you could only use a PC with certain graphic card, things have changed, and you have to deploy high-grade bitcoin mining rigs. These are specifically configured to give you a balance between the energy consumption and hash rate, making the venture profitable in the long run.
When Bitcoin mining started in 2009, one block mined gave a reward of a whooping 50BTC. Three years down the line (2012), the reward was halved to around 25BTC. In 2016 it was halved again to 12.5BTC, and it continues to drop with time. It is expected that by 2020 or thereby, the reward would have gone down to around 6.25 BTC.
What kind of Hardware is used in Bitcoin Mining?
Just as we mentioned, mining bitcoins has evolved from the humble days of using a PC to the modern era of sophisticated hardware and software. Application-specific integrated circuit (ASIC) miners are used together with other programs to make mining a reality these days. In order to reach a hash rate that’s profitable, you might want to invest around $200 – $1000 for a single unit. Popular hardware includes Antminer and Avalon, both of which churn out about 12 terahashes/second.
Bitcoin transactions work in a rather complicated way. And since Bitcoin is a fully decentralized digital currency without central authority, the transactions have to be verified and validated in some way. This is where Bitcoin mining comes in. As you have seen, miners are tasked in securing data on the Blockchain and get rewarded for it. The mining process involves solving mathematical problems for a certain block, turning each of the transactions into a coded sequence known as a hash. Frankly, without the work of the miners, Bitcoin transactions would not be accurate or verifiable. In fact, there would be no proof of the transaction ever taking place!