How Does Bitcoin Mining Work?

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2 years ago

What is Bitcoin mining?

The process of putting new bitcoins into circulation is known as bitcoin mining. It's also how the network confirms new transactions, and it's an important part of the blockchain's upkeep and development. "Mining" is done with high-tech hardware that solves a very difficult computational arithmetic problem. The process is restarted when the first machine solves the puzzle and obtains the next block of bitcoins.

Cryptocurrency mining is time-consuming, expensive, and only seldom profitable. Mining, on the other hand, has a magnetic appeal for many cryptocurrency investors because miners are rewarded with crypto tokens in exchange for their efforts. This could be because, like California gold prospectors in 1849, entrepreneurs perceive mining as a gift from above. Why not do that if you are technologically inclined?

Miners receive a bitcoin reward as an incentive to help with the primary goal of mining, which is to validate and monitor Bitcoin transactions to ensure their legitimacy. Bitcoin is a "decentralised" cryptocurrency, meaning it is not regulated by a central authority such as a central bank or government, because many people throughout the world share these obligations.

Key Takeaways

  • You may earn cryptocurrency without having to put any money down by mining.

  • Bitcoin miners are paid in bitcoin for completing "blocks" of validated transactions and adding them to the blockchain.

  • The miner who discovers a solution to a complex hashing challenge first receives a reward, and the likelihood that a participant will be the one to discover the solution is proportional to their share of the network's total mining power.

  • To set up a mining setup, you'll need either a graphics processing unit (GPU) or an application-specific integrated circuit (ASIC).

Why Bitcoin needs miners

The computational labour that nodes in the blockchain network do in the aim of earning additional tokens is referred to as "mine." In reality, miners are being compensated for acting as auditors. They are in charge of ensuring that Bitcoin transactions are legitimate. Satoshi Nakamoto, the founder of Bitcoin, devised this standard to keep Bitcoin users honest. Miners help to prevent the "double-spending problem" by confirming transactions.

A scenario in which a Bitcoin owner spends the same bitcoin twice is known as double spending. This isn't an issue with actual currency: when you hand someone a $20 note to buy a bottle of vodka, you no longer have it, thus there's no risk of them using it to buy lottery tickets next door. Though counterfeit money is a possibility, it is not the same as spending the same dollar twice. "There is a possibility that the holder could make a clone of the digital token and give it to a merchant or another party while retaining the original," according to the Investopedia glossary.

Let's pretend you have one genuine $20 bill and one counterfeit $20 bill. If you tried to spend both the actual and fake bills, someone who looked at the serial numbers on each of them would notice that they were the same, indicating that one of them had to be phoney. A blockchain miner works in a similar way, checking transactions to ensure that users have not attempted to spend the same bitcoin twice. This isn't a great analogy, as we'll discuss further down.

Why Mine Bitcoin?

Mining has another important purpose besides filling miners' pockets and supporting the Bitcoin ecosystem: it is the only way to release fresh bitcoin into circulation. To put it another way, miners are essentially "minting" currency. For instance, there were just under 19 million bitcoins in circulation in March 2022, out of a total of 21 million.

Aside from the currencies created by the genesis block (the first block created by founder Satoshi Nakamoto), miners are responsible for the creation of all bitcoins. Bitcoin as a network would continue to exist and be useful in the absence of miners, but no new bitcoin would ever be created. However, because the rate at which bitcoins are "mined" decreases over time, the final bitcoin will not be circulated until around 2140. This isn't to say that transactions won't be confirmed. To maintain the integrity of Bitcoin's network, miners will continue to validate transactions and will be compensated for their efforts.

How much a miner earns?

Every four years, the rewards for Bitcoin mining are cut in half. 1 One block of bitcoin was worth 50 BTC when it was initially mined in 2009. This was reduced to 25 BTC in 2012. By 2016, it had been cut in half again, at 12.5 BTC. The prize was reduced again on May 11, 2020, to 6.25 BTC.

The price of Bitcoin was roughly $39,000 per bitcoin in March 2022, therefore completing a block would have netted you $243,750 (6.25 x 39,000). 4 It may not appear to be a bad incentive to solve the complicated hash problem described above.

The Bitcoin Clock, which updates this information in real time, can help you keep track of when these halvings will occur. Interestingly, the market price of Bitcoin has tended to correlate closely with the reduction of new coins entering circulation over its history. Because of the decreased inflation rate, scarcity has grown, and prices have risen in response.

What do you need to mine Bitcoin

Early on in Bitcoin's existence, individuals were able to fight for blocks using a typical at-home personal computer, however this is no longer the case. This is because the difficulty of mining Bitcoin fluctuates over time.

The Bitcoin network strives to produce one block every 10 minutes or so to guarantee that the blockchain runs smoothly and can process and validate transactions. However, if 1 million mining rigs compete to solve the hash problem, they will most likely arrive at a solution faster than if 10 mining rigs work on the same problem. As a result, every 2,016 blocks, or roughly every two weeks, Bitcoin evaluates and adjusts the difficulty of mining.

When additional processing power is pooled to mine bitcoins, the difficulty level of mining rises in order to maintain a consistent rate of block production. The complexity level decreases as computational power decreases. A personal computer mining for bitcoin will very definitely find nothing at today's network size.

Mining Hardware

All of this means that in order to compete in the mining industry, miners must now invest in sophisticated computer equipment such as a graphics processing unit (GPU) or, more realistically, an application-specific integrated circuit (ASIC) (ASIC). They can cost anywhere from $500 to tens of thousands of dollars. Individual graphics cards are purchased by some miners, particularly Ethereum miners, as a low-cost option to put together mining operations.

Today, practically all Bitcoin mining hardware is made up of ASIC computers, which are designed to do one thing and one thing only: mine bitcoins. Today's ASICs are many orders of magnitude more powerful than CPUs or GPUs, and new chips are created and deployed every few months, increasing both hashing power and energy efficiency.Today's miners can produce almost 200 TH/s at only 27.5 joules per terahash.

Does mining damage you computer/GPU?

Because blockchain mining consumes a lot of resources, it might tax your GPU or other mining hardware. GPUs have been known to blow up, and mining rigs have been known to catch fire. 

It is, however, normally safe to run your machines at a reasonable speed and with enough power supplied.

Can you mine on your iPhone?

No. Bitcoin mining today requires vast amounts of computing power and electricity to be competitive. Running a miner on a mobile device, even if it is part of a mining pool, will likely result in no earnings.

The bottom Line

Bitcoin "mining" serves a crucial function to validate and confirm new transactions to the blockchain and to prevent double-spending by bad actors. It is also the way that new bitcoins are introduced into the system. Based on a complex puzzle, the task involves producing proof of work (PoW), which is inherently energy-intensive. This energy, however, is embodied in the value of bitcoins and the Bitcoin system and keeps this decentralized system stable, secure, and trustworthy.

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