What is Bitcoin Mining?
Bitcoin mining means a process through which transactions are verified and afterwards added to the distributed public register (blockchain); during this process new bitcoins are being released to the circulating supply. Transactions verification is carried out by solving complex mathematical problems by computers (miners). This process was defined in the Bitcoin protocol by its creator Satoshi Nakamoto and remains unchanged. The members of the Bitcoin network who take part in mining are called miners.
How to become a miner?
Not all network participants mine the cryptocurrency. Somehow anyone with the internet access, enough knowledge and the hardware required can become a miner.
What is blockchain?
Blockchain is a distributed public ledger that contains information about all operations conducted in the Bitcoin network. The information is stored in blocks, and the miner, who closes a new block and adds it to blockchain, gains a reward in the form of BTC coins.
A bit of numbers:
- The reward for mining is halved every 210,000 blocks mined
- The initial reward was 50 BTC
- It takes about ten minutes to mine one block
- It takes around four years to mine 210,000 blocks
- 21 million is the total supply of bitcoins
How the mining reward changed in time
In 2018, a block reward amounts to 12.5 BTC. After May 23, 2020, it will be halved to 6.25 BTC. The last bitcoin is expected to be mined in 2140. There are over 80% of the total amount of bitcoins in circulation in 2018, and over 99% will be mined by 2036.
What does a block consist of?
Each block has a clear structure: a header and a payload. The header consists of the hash of the previous ("parent") block and the hash of the transactions of the current block, as well as some service information (the date and time the block was created, and its version).
Forming a Blockchain
Hashes of previous blocks are used to verify new blocks for authenticity. Thus, payments in the Bitcoin system are confirmed every ten minutes, as soon as a new block is found. Not all transactions are confirmed at once but only those that miners select from the memory pool. As an example, miners would often choose transactions with the higher fee as the commission is paid to miners for their work. A sender often has an option to set the transaction fee himself to fasten the operation.
What are a hash value and a hash function?
A hash, or a hash value, is the result obtained after computer processing of a data string. The input string of any length is processed by a mathematical hash function to an output of a fixed length and makes it so that it is impossible to obtain its original data from a final result.
A hash function is a complex mathematical function that encrypts a data string with a certain algorithm (SHA256 for Bitcoin). With the help of this algorithm, the very same data string can be processed and transformed into an infinite number of different hashes.
Bitcoin Transaction Algorithm
The goal of a miner is to find a correct hash, which will be recorded into the next block. For this purpose, the miner installs a special open-source software on his computer. This software is a program that calculates a correct hash for the block, which will further be added to blockchain. If successful, other computers (nodes) within the Bitcoin network receive and check the data. If the received hash sum is correct, a new block is added to blockchain.
The Bitcoin protocol provides that a correct hash value is to be found every ten minutes. This parameter has remained unchanged since the very beginning of Bitcoin and depends neither on the number of participants in the network nor on their hash rate.
What is a hash rate?
A hash rate is the speed at which a miner processes information. The speed corresponds to the number of hashes found per second. The higher the hash rate of a network member is, the higher the probability that he will find the correct hash value and receive a reward. This is how the Proof-of-Work concept works, a principle that allows to fairly distribute a reward among network members.
The number of nodes has increased thousands of times since Bitcoin was invented, the capacity of the produced equipment has also risen significantly. If the protocol did not specify the rule stating that a new block can be mined once in ten minutes, the blocks would be closed much faster because of the high hash rates of participants. However, this is impossible due to changes in the Bitcoin difficulty.
Graph of the hashtate change in the Bitcoin network from September 2017 to September 2018 from Blockchain.com
What is Bitcoin Difficulty?
Bitcoin Difficulty is a parameter used to control the speed of finding of new blocks. The system automatically checks the network hash rate after the next 2016 blocks are found. If the hash rate changes significantly, the Bitcoin difficulty changes as well. For instance, if a new participant with a high hash rate joins the network, they can find new blocks faster, thereby increasing the overall network hash rate. In this case, the system regulates the speed by increasing the Bitcoin difficulty to ensure the emission of new bitcoins remains equal across time.
Does it make sense to become a miner?
The current hash rate of the network requires a lot of resources to successfully mine new blocks. The chance that an ordinary user with an ordinary, even powerful, PC, will ever find a block is close to zero. Therefore, there are two ways to get bitcoins:
- organize a personal mining farm by uniting a large number of devices and thus obtaining a high hash rate;
- join a mining pool.
The first option is very expensive but more profitable, while the second one is much more cost-efficient.
What is a mining pool?
This is a group of mining devices that combine their power to increase the chance of finding of a new block. Hash rates of all computers connected to the pool sum up, thus the probability of finding of a correct hash is higher. A reward for finding a new block is distributed among all participants according to a certain system set by a pool, that considers mostly hash rate of a participant along with the time he spent mining and other minor factors.