What is Bitcoin Mining? The Complete Guide – Bitcoin Magazine

What is bitcoin mining?

Bitcoin mining is the pillar that keeps the Bitcoin system upright, functioning, and thriving. It is based on a type of governance mechanism called a distributed proof-of-work (PoW), designed to incentivize participation and facilitate Bitcoin’s network growth, security, and decentralization.

Bitcoin issuance is identified as mining because it recalls mining gold and other minerals, even though there’s no digging deep underground or in caves. In short, bitcoin mining can be explained as the process that enters new bitcoin into circulation and adds new transactions to the Bitcoin timechain (also called a blockchain).

These two apparently simple performances are possible due to a robust system of computation operating in conformity with the rigorous Bitcoin protocol and governance to create the solid, decentralized, and innovative monetary system we know today.

This article explains how such a technological and economic structure works while trying to debunk misconceptions around its energy consumption with accurate data and solid reasoning. Don’t forget to scroll through the FAQ section to explore the highlights of Bitcoin mining.

The solution to transaction fraud

Bitcoin mining creates new blocks and adds them to the ledger adhering to predefined rules. The network’s participant nodes must agree that users, identified publicly by cryptographic addresses, are the legitimate owners of bitcoin balances.

Miners perform a coordination function for the Bitcoin network that, in traditional payment systems, is executed by a trusted intermediary, like a bank or any other financial institution.

To eliminate the reliance on a trusted third party, Bitcoin needs to prevent funds from being double-spent or spent by anyone other than its owner.

The use of digital signatures, a cryptographic invention of the 1970s, prevents unauthorized users from spending other people’s money. A private-public key pair is a strong proof of ownership that allows only the private key holder to spend or move bitcoins.

However, digital signatures alone do not ensure that the bitcoin received as payment have not also been spent somewhere else (the double-spending problem).

To resolve this issue, Satoshi used Adam Back’s hash-based PoW to allow transactions to be ordered chronologically into blocks and the network to achieve agreement on the ledger’s current state by pursuing the longest chain of blocks.

This mechanism secures the blockchain from attacks since transactions only become reversible if a malicious actor redoes all the preceding blocks’ PoW. Given that new blocks are constantly added to the chain, it is virtually impossible for such actors to catch up.

How does bitcoin mining work

Mining requires a massive effort translated into an enormous amount of computation using systems similar to data centers. Application-specific integrated circuit (ASIC) computers are employed to provide the computational power to miners, who compete to be the first to append the next block to the blockchain, issuing new coins and making the cryptocurrency’s network trustworthy.

Mining creates trust by ensuring that transactions are confirmed only when enough computational power has been committed to the block that contains them. The more blocks are generated in the chain, the more trust is created.

Miners add a variable amount of transactions which are bundled in a block. There’s no set number of transactions included in a block because it depends on their stored data so that each block can contain from one single transaction to several thousand. The amount of bitcoin to be issued is fixed and diminishes with time through the halvening (aka halving) event occurring every four years.

Why mine Bitcoin

Just like gold or any other mineral requires hard physical work to be mined and entered into circulation, Bitcoin requires hard computational work to be issued . This computational effort is a necessary step to ensure its security.

Why and how? Being digital data in the timechain, Bitcoin is exposed to copying, counterfeiting, and double-spending. The computational hard work required to mine Bitcoin is so costly and resource-intensive that malicious actors have a better incentive to spend such resources to mine Bitcoin rather than trying to compromise it.

Moreover, mining is the necessary process required to issue new bitcoin. If mining ceased, there would still be millions of bitcoin in circulation, and the network would still be functioning. However, the financial incentive rewarded to miners enables fulfilling a system that would otherwise appear as an unfinished business.

A little history of bitcoin mining

Bitcoin relies on the peer-to-peer network of tens of thousands of nodes (computers) to function, the mining and user nodes. These nodes are the foundation of a payment network that moves trillions of dollars worldwide each year without coordination from a central entity.

When Satoshi Nakamoto launched Bitcoin in 2009, there was little dissimilarity between running a Bitcoin node and mining bitcoins. Therefore, node operators and miners were identified as the same actors in the network since many users who ran nodes on their computers could also mine bitcoin profitably on those same processors.

Bitcoin mining was a sort of a DIY job, distant from the mining industry it has grown into in more recent years, flourishing alongside the price of bitcoin and the incentive to mine.

One of the most significant differences between Bitcoin and most other cryptocurrencies is the absence of pre-mined bitcoins (coins issued before the project’s launch). Indeed, Satoshi launched the network before mining bitcoin so that he could not have any advantage over anyone who wanted to participate in the system.

Once the network was launched on Jan. 3, 2009, he mined the first block, identified as the Genesis block or block 0, containing 50 bitcoins. As the only miner on the Bitcoin network at the time, Satoshi created blocks using an average personal computer.

From CPU to ASIC mining

The Bitcoin network’s hardware experienced rapid technological evolution in only ten years. The mining equipment required to generate new bitcoin and add new transactions on the blockchain plays a fundamental role in the network’s success because it determines whether or not it is profitable for miners to run such a business.

In the early life of Bitcoin, node operators and miners performed very similar operations using similar hardware called central processing units (CPUs). The genesis block was almost certainly mined by a computer using its CPU.

CPUs control how computers’ commands are processed and executed, and due to the lack of miners’ competition during Bitcoin’s early days, the little computational power required to create new blocks and earn mining rewards could be easily performed on CPU devices.

Source: Glassnode

Once bitcoin started to gain value in 2011, hitting $1 first and then $30 per coin, competition to mine bitcoin became more intense, and graphics processing unit (GPU) mining was adopted. Initially built for gaming applications, GPUs are designed for doing many mathematical calculations simultaneously and are much faster than CPUs.

In 2012, field programmable gate arrays (FPGA), an intermediate step between a fast programmable processor and a dedicated ASIC, were used until ASICs emerged and dominated bitcoin mining until now.

Application-specific integrated circuits (ASICs) started being used in 2013 for bitcoin mining. They are custom built for a particular application, and in Bitcoin, these chips are customized only to perform SHA-256 hashing. They are orders of magnitude faster than GPUs. Today, ASIC mining is the only economically feasible bitcoin mining technique.

The mining process

Mining consists of the following steps, which are performed in a continuous loop:

Picking and bundling transactions that were broadcast on the peer-to-peer network into a block.

Selecting the most recent block on the longest path in the blockchain and inserting a hash of its header into the new block;

Trying to solve the Proof of Work (PoW) problem for the new block and simultaneously watching for new blocks coming from other nodes.

The new block is added to the local blockchain and broadcast to the peer-to-peer network if a solution is found to the Proof of Work problem.

Source: https://drive.google.com/file/d/1_R1hO8719NLSqUpwPha6Ohs98YTi1fU0/view

The proof-of-work problem

Proof of work is the core of the Bitcoin network. Without it, each network participant could modify the blockchain to their benefit. Without a centralized authority to resolve disputes, PoW guarantees that the network continues to function correctly.

The proof of work mechanism fulfills two purposes: it ensures that each participant shares the same copy of the blockchain and that funds are not spent more than once, a known issue for payment networks without central coordinating entities.

Bitcoin’s PoW algorithm adopts hash functions, one-way mathematical operations that transform a string of data into a fixed-length number called a hash. Even the minor change to the data, like a comma, results in the complete modification of the hash.

Bitcoin relies on SHA-256, which outputs a value that is 256 bits long and was created by the National Security Agency in 2001. For this reason, it is also considered very secure.

Miners search for acceptable blocks typically using the following procedure performed continuously:

Increment (add 1 to) an arbitrary number in the block header called a nonce;

Take the hash of the resulting block header;

Check if the block header’s hash is less than a predetermined target value when expressed as a number.

If the block header’s hash is not less than the target value, the block will be rejected by the network. Finding a block with a sufficiently small hash value is the PoW problem.

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