Understanding How Bitcoin Mining Works

In the traditional financial system, creating money is done by central authorities. Governments can easily print more money when there is a need to. Financial service companies are also responsible for processing transactions and confirming their legitimacy. For example, a user can just tell a bank to transfer $50 from their account and add it to someone else’s account. In such a case, the bank has all the powers as it is the only party allowed to update the ledger holding the balance of everyone in the system.

However, in Bitcoin, the two processes do not operate as so since it has a decentralized ledger with no government to print more money and a financial institution to update transactions on the ledger. The network gives independent miners the ability to update the ledger without giving them too much power. These independent miners are rewarded in new Bitcoin for securing the network.   

What is Bitcoin Mining?

Bitcoin mining is the process of “creating” a new bitcoin. It involves updating the ledger of Bitcoin transactions, the blockchain.

Bitcoins are artificially limited just like gold. It has a maximum supply of 21 million BTC. Additionally, bitcoin requires resources to extract, just like gold. However, unlike gold, Bitcoin is minted using extremely powerful computers called ASICs. These computers race against other miners in an attempt to solve a mathematical equation. The first miner to find the solution gets the opportunity to update the ledger and receives the reward of newly minted Bitcoins.

Reward for Miners

When Bitcoin was first made in 2012, miners would earn 50 BTC for every block they created. However, the amount of reward is reduced by half after every five years in a process called Bitcoin Halving. Currently, miners are earning 6.25 BTC. The next Bitcoin Halving is set for 2024, which will reduce the price to 3.125 BTC. Halving is designed to counteract inflation and maintain Bitcoin scarcity. This mining fee will disappear when the Bitcoin supply reaches 21 million. This will be around 2140.  

How Bitcoin Mining Works

Bitcoin allows anyone to participate in updating transactions on the network. All one needs is to guess a random number that solves a mathematical equation generated by the system.

While this process may sound simple, it is actually not. The guessing is all done by powerful computers that are costly and resource intensive. The more powerful a computer is the more guesses it can make in a second and hence the higher chances of finding the solutions ahead of other computers.

The winner gets the golden chance to update the next Bitcoin transaction on the blockchain. The solution to the equation may be very difficult to find but very easy to validate. Think of a Rubik’s cube, which is hard to solve but very easy to see that you have solved it.

Bitcoin Hashes and the Security of the Blocks

Every solved block, containing transaction details, is added to the Bitcoin blockchain, which is a distributed public ledger consisting of a long list of blocks. Bitcoin blockchain can be explored by anyone using a bitcoin block explorer. A new block, with details of new transactions, is added to the blockchain every 10 minutes. An updated copy of a new block is shared between all miners for transparency.

Blocks need to be secured to prevent manipulating the transaction data that will affect the legitimacy of the blockchain. Miners are required to process a block of transactions whenever it is ready. The process requires finding a solution to a mathematical problem. Miners cannot solve these problems logically, they have to guess the answer. They use the SHA-256 Cryptographic Hash to create a seemingly random sequence of numbers and letters known as a hash. The hash is stored together with the block at the end of the blockchain. It serves as proof of work and validation.

Are Hashes Reliable?

While it is easy to make a hash out of data in the Bitcoin block, it is virtually impossible to decrypt the data by simply looking at the hash since it is completely random and each hash is unique. Additionally, changing even one simple from the original input will yield an entirely different hash.

Furthermore, miners use some other data to secure the block. One such data is the hash of the previous block. Since all the blocks in the entire blockchain are linked through their hash, an attempt to alter any transaction will call for changing the data in the entire network, which is nearly impossible. In addition, other network users will easily detect any unauthorized actions on the network.

Wrap Up

Mining is essential in keeping the Bitcoin network working. It offers an incentive for miners to secure the network, by processing and publishing transactions on the decentralized ledger. Additionally, it is a process of creating new Bitcoins until the maximum supply is reached.