What is Bitcoin mining? [Everything you need to know]
What comes to your mind when you hear the word “mining”? A bunch of people covered in sweat and mud, digging now so that they can get midnight success by stumbling into chunks of gold.
There is not much difference between bitcoin and gold mining except that bitcoin mining is modernized, and the reason “Bitcoin Miners” sweat is because of heat released from the mining devices. And the electricity bill they have to pay (You will get this joke after you have gone through the article). Now, let’s dive into the world of Bitcoin Mining!!
Before diving into Bitcoin Mining, I hope you are aware of bitcoin and how it functions. If not, check out our previous articles on bitcoin-
Bitcoin Mining and Gold Mining
For a high-level insight, we will compare bitcoin mining with classic gold mining. In the case of gold mining, people equipped with gold-digging and filtering equipment, dig day and night to find grains of gold which are then filtered to extract the precious and pure gold.
They compete against other gold miners to find the best quality and large quantity of gold. They may even collaborate with other miners to fasten their mining process so that they can discover and mine more gold.
The same applies to bitcoin mining also. A Bitcoin Miner uses substantial computational power(Same as the gold-digging equipment) to solve a complicated mathematical puzzle called proof of work.
The goal is not only to solve the puzzle but also to solve it as fast as possible. So, there is some serious competition going on among the miners.
Bitcoin miners may collaborate with other miners to pool in their computational power and form “mining pools” or “mining rigs”. In the end, if miners can solve the puzzle, they are rewarded with a certain number of Bitcoins along with the transaction fees( at the time of writing this article, the mining reward was 12.5 bitcoins, which is equivalent to $118,200!!!).
Who Are Bitcoin Miners?
Bitcoin Miners are the nodes present in the bitcoin network who own enormous computational power. Before the transactions are picked by miners, they rest in a temporary place called mempool.
Miners then verify whether the transaction is a valid one or not. This way, miners maintain the integrity of the bitcoin network from problems like double-spending.
The number of transactions in a block may vary from hundreds to thousands.
How Bitcoin Mining Works?
Now that you know about bitcoin miners let’s talk about the mathematical puzzle they try to solve. The mathematical puzzle is to guess a 64-bit hexadecimal number (called a hash), which is lower than a target hash.
You must be thinking, “How hard is it to guess a hash ?”. The probability of finding the right is one in 13.69 trillion!! Now you know, why it involves power computers that calculate thousands of hash per second(called hash rate). The hash rate can vary from Gigahashes to Terahashes per second.
In the early days of bitcoin, one can mine bitcoin using their PC. With the increase in competition, miners switched to GPU units to mine bitcoin.
Bitcoin Mining Difficulty
Now, a specialized device called ASIC (Application-Specific Integrated Circuit) is popularly used to mine bitcoin. They are small USB shaped device which has an integrated circuit to solve the mathematical puzzle.
In the case of bitcoin, the time needed to mine a block is roughly 10 minutes. The difficulty level is varied from time to time (every two weeks) to make the mining time fixed at 10 minutes. The way difficulty is set through adjusting the target hash.
If the mining time (time taken to mine a block) decreases, the difficulty level is increased and vice versa. In the end, transactions are selected by the miners that would help them solve the mathematical puzzle; as a result, they will be able to form the block.
So, what if two miners form a block at the same time? In that case, one with the longest chain i.e., the one with the highest computational power, will be allowed to form the block. The block that wasn’t allowed into the bitcoin network is called an orphan block.
So, the overall mining process involves-
- Nodes transact over the Bitcoin Network.
- The transactions are stored in the mempool.
- Miners pick up transactions that have higher transaction fees.
- Based on that, a hash is calculated, which is lower than the targeted hash.
- The miner, who solves the puzzle fastest gets to form the block in the blockchain.
Importance Of Miners
- Maintains the integrity of the blockchain network and provide security.
- Responsible for minting new bitcoins. Hence, the circulation of bitcoin won’t stop. But with the decrease in mining reward, it is esteemed that by 2040, the minting of new bitcoin would stop.
- Keeps the network active and running 24*7.
Cost Of Bitcoin Mining
- A massive amount of electricity. The computational devices require a lot and a continuous supply of power to operate. As a result, sometimes, the cost of electricity may exceed the mining reward.
- Heating of equipment. The mining equipment releases a lot of heat. So, they need proper cooling and temperature regulation to operate.