Frequently Asked Questions about Bitcoin Mining
We recently put together a blog post discussing some of the most frequently asked questions related to Bitcoin transactions. That post is packed full of helpful information for people new to Bitcoin and cryptocurrency. In fact, it went over so well that we decided to follow up with a second post targeting Bitcoin mining. Hopefully you will find it just as informative.
Needless to say that mining is at the core of what makes the Bitcoin network work. In fact, it is the foundation of every successful cryptocurrency project. Without mining there would be no cryptocurrency. Without miners investing in the necessary computer hardware, you would not be able to buy and sell bitcoins on the open market.
Are you new to Bitcoin? If so, you are about to learn the basics of one of the most fundamental of all cryptocurrency principles. You're about to learn more about the engine that pulls the entire Bitcoin train down a never-ending cryptocurrency track.
What is Bitcoin Mining?
Cryptocurrency mining, in general, is the process of releasing new coins into circulation by building data blocks. Mining is necessary in order to protect the integrity of Bitcoin's blockchain ledger. Bitcoin's original creator built mining into the system in order to keep the network decentralized while still maintaining the integrity of its records.
The best way to understand mining is to think of it as a reward system. You have a job, right? Assuming you do, you get paid by your employer for the work you do. Bitcoin miners get paid for the work they do as well. Their work involves maintaining the Bitcoin network. Their reward is Bitcoin (BTC).
How does Bitcoin Mining work?
The question of how mining works is where this gets more complicated. Remember that mining is more or less earning a reward for doing work. The work Bitcoin miners do relates to verifying transactions, creating records, and building blocks.
Bitcoin is a decentralized system. That means there is no single entity in control of it. On the surface, this model creates a problem inasmuch as there is no central authority responsible for keeping records. That is where mining comes into play. At the core of everything Bitcoin miners do are individual records of individual transactions.
Miners are represented on the Bitcoin network as computers. Those computers are also known as nodes. There are thousands of them scattered across the cybersphere. Every node on the network has its own copy of Bitcoin's ledger - the electronic document that stores all the transaction records. Bitcoin's ledger is similar to a company's accounting ledger.
Whenever a Bitcoin transaction occurs, a record of that transaction is sent across the network. Every node gets the information and then sets out to verify that the transaction is actually legitimate. Once all the nodes agree to the legitimacy of the transaction, consensus is reached, and the transaction is entered into the ledger as a permanent record.
Multiple ledger entries are combined to create blocks of information that are added to the end of the chain. Nodes are only rewarded with BTC after successfully completing a block. Moreover, they compete to see who can do it first. Only one node is rewarded for each block. The one that finishes first gets the reward. That is mining in a nutshell.
Why is it called mining?
It might seem to you that the term 'mining' is not really appropriate for describing what miners actually do. But it makes a lot of sense when you stop and think about how Bitcoin is structured. The original Bitcoin code created 21 million coins in total. There are no more. There are no fewer. Yet not all 21 million are in circulation.
Bitcoin's creator opted to slowly release new coins into circulation in order to maintain value. He chose mining as the mechanism for doing so. Mining is so designated because computer nodes are working to obtain coins that are already there. It is like digging in a mine for gold or silver.
Mining silver starts with mining ore. You dig up tons and tons of rock and run it through heavy machinery capable of breaking apart the stone and releasing the silver. You typically have to process a lot of ore to get a little bit of silver. Bitcoin mining works the same way. Miners have to do a lot of work to earn the desired reward.
How is consensus achieved?
Bitcoin miners must reach a consensus before new blocks can be added to the chain. This consensus is reached through some sort of consensus algorithm. Bitcoin uses a proof-of-work algorithm. It is a computer algorithm that requires nodes to prove the legitimacy of their work through some sort of task.
Bitcoin's algorithm requires nodes to solve a complicated mathematical puzzle involving transaction data and hashes. There is only one correct answer. As such, a new block can only be added to the chain once all the nodes arrive at the same answer. Still, only the first node to get it right gets the reward.
At this point, we should mention that other cryptocurrency platforms use other algorithms. There is proof-of-stake, an algorithm that relies on the age of a node and the amount of coins it already holds to validate transactions. Proof-of-stake is the consensus algorithm that powers Ethereum.
Another popular consensus algorithm is known as proof-of-authority. It achieves consensus by requiring valid certificates of authority be held by every node on the network. Proof-of-space, proof-of-weight, and proof-of-activity are three more.
Can anyone become a Bitcoin Miner?
This next question is one we hear a lot. Unfortunately, the answer is not always well received. The truth is that anyone who wants to become a Bitcoin miner technically can. The Bitcoin code does not prevent certain people from mining based on geographic location, technical ability, or anything else. However, there is one caveat: the cost.
As wonderful as Bitcoin might be, it is not perfect. It has some inherent weaknesses including a lack of scalability. This one particular issue has resulted in an untenable situation in which mining gets exponentially more difficult with every coin mined.
The longer Bitcoin's blockchain grows, the more effort is required to build the next block in the chain. Building new blocks requires ever more computing power and electricity. As a result, mining is becoming more expensive as it becomes more difficult. It costs more money with each passing day.
Mining today is no longer a matter of buying a moderately priced PC online and connecting to your home network. There just isn't enough raw computing power in an off-the-shelf PC. No, you need a high-powered machine to even think about keeping up with the big boys. If you want a realistic chance of earning significant rewards, you need a lot of machines capable of crunching unimaginable amounts of data.
How does mining protect the Bitcoin network?
This post began with the supposition that there would be no Bitcoin without mining. That is true. Mining is the foundation on which Bitcoin exists. As such, mining also protects the network. It does so on many levels.
First, mining protects the integrity of Bitcoin's ledger. Remember that the ledger is a running record of Bitcoin transactions taking place around the world. The ledger is the official record of who owns what at any given point in time. As you can imagine, that ledger needs to be protected against hacking and honest mistakes alike.
Mining offers that protection through its distributed ledger and consensus policies. Having multiple copies of the ledger residing on computer nodes solves the potential problems of having just one copy. Requiring consensus in order to modify the ledger protects the ledger's integrity by forcing computer nodes to agree before new records can be added.
Bitcoin mining also protects the network against a central authority taking control. To have any hope of gaining control, a mining entity would have to gain at least 51% of all mining capacity. Although that is technically possible, it is financially impractical. The resources necessary to gain 51% control would be astronomical. There wouldn't be enough reward to make it worthwhile.
Finally, mining also protects the Bitcoin network by protecting the value of the coins. To understand how, consider what Bitcoin might have been had all 21 million coins been released back in 2009. Having that many coins in circulation all at once would have made them so easy to get that their value would have been limited.
Furthermore, having all the coins in circulation would eliminate any incentive to protect the blockchain. One entity with enough resources could gradually acquire every single coin. But even that wouldn't be smart because the coins would then be worthless.
Mining results in coins being released into circulation gradually. This gives miners incentive to build blocks and maintain records. It gives investors an incentive to put money into the system. All of this works together to give BTC real monetary value.
And now you know a bit more about Bitcoin mining. The entire Bitcoin network owes a lot to the mining principal. If it were not for mining, there would be no Bitcoin.