What Is Bitcoin Mining?

What Is Bitcoin Mining?

Mining is one of the two core components that secure the Bitcoin blockchain. In a simple way, it can be looked at as the process that actually builds the blockchain by discovering new blocks and joining them to the previous ones. The other component is the nodes that keep track of the history of all transactions and verify new transactions.

Learn more about Bitcoin nodes.

Miners spend resources to create new blocks for transactions to be placed into, and are rewarded for their efforts in newly minted bitcoin. Different from the regular connotation of mining, Bitcoin mining is the process in which specialized computers confirm transactions on Bitcoin’s blockchain. These transactions are processed by miners through the SHA-256 hashing algorithm, a cryptographic function invented by the NSA. This algorithm is used to secure transactions and is the backbone of the mining process. Essentially, miners all over the world are running hundreds of thousands of computers to generate hundreds of trillions hashes. Transactions are confirmed when a miner is able to generate a valid hash that results in a new block being “found.” When a miner finds a new block that is accepted by the entire Bitcoin network, it is rewarded in newly minted bitcoin, and transactions waiting to be confirmed are placed into this new block and added to the blockchain.

These miners commit a lot of electricity, time, and resources to mine Bitcoin; this Proof-of-Work mechanism keeps the network secure and adds to Bitcoin’s value. Since there are so many miners and so much energy being used to mine bitcoin, an attack would be basically impossible.

What Do Bitcoin Miners Do?

1. Confirm Transactions

Solving the energy-intensive math problem described above results in a new block being found that is added to the chain of existing blocks. When bitcoin is sent from one address to another, a transaction is created that is broadcast to the entire network and waits to be confirmed. Transactions that are “unconfirmed” sit in what’s called a mempool. When a new block is found, as many transactions that can fit are placed into the block, the new block becomes accepted by nodes all around the world that verify this, and the transactions within it are confirmed.

Bitcoin blocks have limited capacity, which means only a certain number of transactions can be confirmed per block. Each subsequent block that is found and added to the blockchain afterwards is considered as an additional confirmation of these transactions. Most exchanges and services that accept Bitcoin usually require up to 6 confirmations before they consider a Bitcoin transaction to be “secure.”

2. Secure the Network

The energy that miners spend to solve the intense math problems to find new blocks is measured in hashpower. Hashpower, as a result, is also a measure of how secure the Bitcoin network is at any given moment.

In order to attack bitcoin, one would need to spend a transaction twice, therefore making the first transaction worthless and corroding the value and reputation of Bitcoin as an immutable payment network. When transactions are sorted into a block that is accepted by the entire network, it prevents a user from spending the same bitcoin twice because the first Bitcoin transaction has now been recorded by every participant in the network. This solves the “double spend” problem, which has stymied many cryptographers in previous attempts to create a secure decentralized payment system.

In order to double spend a transaction, an attacker would need to obtain a majority of the hashpower of the network, and proceed to roll back all blocks that were confirmed after the transaction which is trying to be double spent—a virtually impossible task.

3. Release New Coins

One of Bitcoin’s best attributes is its fixed monetary policy, which directly relates to mining; mining is the process in which new coins are released. At any point in time, it is definitively known how many bitcoin have been created, and how many are left to be minted until all have been released. There will only be just under 21 million bitcoin minted into existence, ever.

Satoshi Nakamoto designed Bitcoin to be released at a predictable rate, thanks to what is called the block reward mechanism. Every 210,000 blocks, the reward for finding a new block decreases by half. The first set of 210,000 blocks awarded the miner of a block 50 BTC; the next set awarded 25 BTC per block; and the current set of 210,000 blocks will reward miners 6.25 BTC per block. An inflation schedule provides a visual representation of the issuance process. The last bitcoin could be mined sometime around 2130.

A graph of Bitcoin’s inflation rate and total supply over time. The issuance schedule of new bitcoin is precisely regulated by Bitcoin’s source code.

How Can I Start Mining Bitcoin?

Bitcoin mining is an industry that has evolved from a hobby that required the most basic computer resources to a multi-billion dollar industry that now requires cutting-edge technology in order to generate any meaningful revenue. Before the introduction of ASICs, around 2013, the average computer was able to mine profitably.

The difficulty level, a fluctuating metric that dictates how much energy miners need to spend in order to try and find the next block, has consistently increased over time and is now at levels where only the most efficient miners can generate returns. Efficiency, in this regard, takes into consideration not only how expensive the mining rigs are, but also the electricity rate for the miner as well.

Mining rigs are often too expensive and not profitable for individuals.
Individual mining rigs now cost at least several thousand dollars, which puts profitable Bitcoin mining out of reach for most people.

Assuming that one is able to get their hands on a Bitcoin mining rig and source some cheap (enough) electricity, the best way to ensure that an individual mining rig will generate some sort of returns is by connecting it to a mining pool.

What Are Bitcoin Mining Pools?

The Bitcoin network aims to find a new block about every 10 minutes, which means that one lucky miner receives a reward over a fairly consistent period of time. It is not difficult to imagine that one particular miner might go a very long time before finding a new block, if ever. This is why mining pools were created.

Mining pools combine the computational resources of many miners and distribute the rewards that these miners earn evenly, based on the amount of resources each miner contributed. One of the most advantageous features of mining pools is the more reliable stream of revenue they provide. People who invest large amounts of money into Bitcoin mining sometimes don’t use mining pools, however, because their operation is large enough for them to find new blocks independently where they collect the entire reward and pay no mining pool fees.

What Are Bitcoin Mining Farms?

Bitcoin mining farms are comprised of large arrays of miners that are usually housed in warehouses. Setting up a mining farm often requires a very large investment as well as the ability to source cheap electricity, and is much more difficult to do today than it was many years ago.

Learn more about what will happen after all Bitcoin have been mined.