Bitcoin Mining

What is 'Bitcoin Mining'

Bitcoins are generated by competitive and decentralized process called “mining”. It is a peer-to-peer computer process used to secure and verify Bitcoin transactions - payments from one user to another on a decentralized network. Each group of transactions is called a block. When a block of transactions is created, miners work to solve the cryptographic problem that would allow the block to be added to the Bitcoin Blockchain serving to confirm transactions to the rest of the network as having taken place. To do so, miners take the information in the block, and apply a mathematical formula to it. This formula turns the information from the block into a short, random sequence of numbers and letters. This is known as a cryptographic hash. A hash of each block must satisfy a constraint: the hash treated as a big integer number should be less or equal to the current network difficulty target.

This process involves individuals which are rewarded by the network for their services. Bitcoin miners are processing transactions and securing the network using specialized hardware and are collecting new bitcoins and transaction fees in exchange.

Breaking down 'Bitcoin Mining'

The Bitcoin protocol is designed in such a way that new bitcoins are created at a fixed rate. This makes Bitcoin mining a very competitive business. When more miners join the network, it becomes increasingly difficult to make a profit and miners must seek efficiency to cut their operating costs.

Bitcoins are created at a decreasing and predictable rate. The number of new bitcoins created each year is automatically halved over time until Bitcoin issuance halts completely with a total of 21 million bitcoins in existence. At this point, Bitcoin miners will probably be supported exclusively by numerous small transaction fees.

How difficult are cryptographic problems solved by miners? Well, that depends on how much effort is being put into mining across the network. The difficulty adjusts itself with the aim of keeping the rate of block discovery constant. Thus if more computational power is employed in mining, then the difficulty will adjust upwards to make mining harder. And if computational power is taken off of the network, the opposite happens. The difficulty adjusts downward to make mining easier.

In the earliest days of Bitcoin, mining was possible to be done with CPUs from basic personal computers. Graphics cards, or graphics processing units (GPUs), are more effective at mining than CPUs and as Bitcoin skyrocketed its’ popularity, GPUs became dominant. Eventually, hardware known as an ASIC, which stands for Application-Specific Integrated Circuit, was designed specifically for mining bitcoin. The first ones were released in 2013 and have been improved since then, with more efficient designs coming to market. Mining is competitive and today can only be done profitably with the latest ASICs. When using CPUs, GPUs, or even the older ASICs, the cost of energy consumption is greater than the revenue generated.

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2022-12-08 • Updated

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