Ever wondered that the internet could be a virtual coalfield from where to mine the bitcoin gold? But what is bitcoin mining?
Let’s find out!
The word bitcoin in layperson’s terms refers to “virtual currency,” and creating this virtual currency every time is “Bitcoin Mining.” People involved in this process of bitcoin mining are miners.
Miners perform this activity of so-called virtual mining by solving a complex computational puzzle, which “creates a new bitcoin.”
Bitcoin mining is the base of bitcoin transactions. It is like a ledger that records all the bitcoin operations. Miners are becoming more and more sophisticated, using complex machinery to speed up the mining process.
How does bitcoin mining work?
Bitcoin mining refers to solving too tricky mathematical problems/puzzles.
But who performs it?
Well, these problems are so complex that it is impossible to solve these manually. Hence high-power computers work on these- new bitcoin forms by solving a complex mathematical puzzle successfully.
The outcome of this process of puzzle-solving has dual benefits.
First, new bitcoins form after every complex mathematical puzzle solution in the bitcoin network. Secondly, by solving this, a miner makes the bitcoin payment network more secure by verifying its transactional information.
What is a bitcoin transaction?
It refers to sending and receiving bitcoins as a Bitcoin transaction. It records just like bank transactions in passbooks. It stores online transaction logs in net banking. In the same way, bitcoin miners clump these bitcoin transactions together, which then forms the “Block.” It then adds these blocks to the public record called the “Blockchain.” Bitcoin trading platforms like Bitcoin Super split are getting famous too for straightforward transactions.
What is a blockchain?
Blockchain is a database. However, the pattern of data storage is unique. Blockchain stores data in a block form. It makes blocks out of a set of data. Data that comes in enters a new block every time, and once that block fills, it chains to the previous block. This entire process thus creates a chain of data arranged in chronological order.
Regarding bitcoin, it is this blockchain database that makes it possible to create a decentralized platform. No single group or individual has control over it. This decentralized blockchain is irreversible, and hence it records bitcoin transactions permanently so anyone can view it.
What coin miners do?
Miners perform the work of auditors. They verify the previous bitcoin transactions. The aim of verifying previous Bitcoin transactions is to prevent a “double spending problem.”
“Double spending” implies a circumstance wherein the bitcoin owner breezes up spending the equal bitcoin twice. Since bitcoin is a digital currency, unlike physical cards or cash, there is always a risk that the holder of bitcoin can make a copy of the digital token and send it to another party while it keeps the original.
Let’s take an example. Alice placed an order for spectacles and gave an advance payment of 5000 bucks. They gave her a receipt of this payment by the shopkeeper. Now she made a duplicate copy of this receipt.
She produced this receipt two different times, two different salespersons, at the shop, and took two spectacles at the receipt of one. Now someone has to verify these records of receipt and tally it with the number of times they produced it at the same outlet.
The bitcoin miners follow the same analogy while verifying the duplicate bitcoin transaction. They check the transaction logs to ensure that users have not tried to spend the same bitcoin twice.
How does this mining process make the bitcoin miners earn?
The next obvious question would be if bitcoin mining is verifying double-spending problems, how do miners earn?
Well, it rewards miners with a quantity of bitcoin once they verify a certain amount of data.
Regarding bitcoin, the amount of data set is 1Megabyte (Mb) worth of bitcoin transactions. Anonymous creator Satoshi Nakamoto set this 1MB limit for bitcoin. Why they kept 1 Mb is still a controversial topic.
1Mb of transactions may be as small as one transaction or several thousand transactions. It relies upon how much information the exchange takes up.
However, verifying 1Mb worth of data makes a coin miner only eligible to earn bitcoin- however, it does not guarantee a payout.
How to get a guaranteed reward for every verification (“Winning the block”)
The miners must fulfill two conditions to “win the block.”
The first condition is a matter of effort. It means the effort that goes into 1 Mb data verification.
The second condition and most important condition is a matter of luck. The miner needs to ensure that they are the first miner to arrive at the right answer to a numeric problem.
This process is proof of work.
What is proof of work?
Proof of work is a system that involves a workable amount of effort to discourage inappropriate usage of computing power.
Proof of work forms the basis of bitcoin mining. As discussed previously, it records bitcoin transactions in the blockchain. It thus acts as a distributed ledger containing a sequential block of every bitcoin transaction. It allows such that no user can spend any of the holdings twice. Miners detect tampering in this practice through hashes.
What are hashes?
A hash is an algorithm used to generate a fixed-length output. It is essential to blockchain management in bitcoin or cryptocurrency.
Hashes are of a fixed length. It is nearly impossible to guess the exact length of the hash if someone was trying to crack the blockchain. It develops a hash based on the information present in the block header.
Miners compensate if they are the first to create a hash that meets a specific set of requirements called the “Target Hash.”
What is a Target Hash?
A target hash is a 256-bit number. The cryptocurrency miners compete to randomly “win the block” reward for their mining work. In bitcoin mining, a target hash is a numeric value that a hashed block header must be less than or equal to for a new block for a miner’s reward.
The bitcoin network adjusts the difficulty of mining by raising or lowering the target-hash. This is to reserve an average ten-minute interval between new blocks.
If the hash meets the target, then it adds the block to the blockchain. Because the target hash could be a vast number, the miner may have to test many values before success. A successful miner has to wait for the next block. Therefore, the miner who finds the hash solution is like a winner of a lottery.
The target-hash adjusts periodically. The hash function used to generate the new target has a specific property designed. They make blockchain (and its cryptocurrency) secure. It is fast enough so as not to take too long to return a hash for an input. It also determines the input’s difficulty, especially for large numbers. It changes the input result to a very different hash output.
What bitcoin miners exactly do is this, i.e., they try to be the first miners to develop a hash that is less than or equal to the target hash. It is purely a guess.
Why is bitcoin mining essential?
Not only does bitcoin mining fill in the pockets of miners, but it also supports the bitcoin ecosystem by releasing new cryptocurrency into circulation. Miners actually “mint bitcoin currency.” In the absence of miners, bitcoin as a network would still exist and be usable, but there would be no additional bitcoin. Eventually, there will be a time when bitcoin ends. Hence bitcoin mining is essential for the existence and growth of bitcoins.
How much a miner earns?
In 2009, mining one block would earn a miner 50 bitcoins.
In 2012, it halved this to 25 bitcoins.
By 2016, it halved this to 12.5 bitcoins.
In November 2019, the cost of a bitcoin was about $9,300 per bitcoin. It implies that a digger would acquire $116,250 (12.5 x $9,300) for finishing a block.
On May 11, 2020, the reward halved again to 6.25 bitcoins.
Miners must invest in powerful equipment like a Graphical Processing Unit (GPU), or more realistically, an application-specific integrated circuit (ASIC) since the difficulty of mining bitcoin changes.
Is Bitcoin Mining profitable?
Several factors determine whether bitcoin mining is a profitable venture. These include the cost of electricity to power the computer system, the availability, and the computer system’s price. It also includes the difficulty in providing the services. The last factor for determining profitability is the price of bitcoin as compared against standard hard currency.
To answer whether bitcoin mining is beneficial, utilize a web-based productivity calculator to run a money-saving analysis. Plugin different numbers and find out the breakeven point after which mining is profitable. Decide whether you are eager to spread out the underlying capital for the equipment. Gauge the future estimation of bitcoin and the degree of effort. When both bitcoin prices and mining difficulty decline, it usually shows fewer miners and more ease in receiving bitcoins. When bitcoin prices and mining difficulty rise, expect the opposite – more miners competing for fewer bitcoins.