What Is The Blockchain?
Unlike normal currency transactions being confirmed and regulated through
banks, cryptocurrencies’ transactional data appears a public ledger known
as the ‘blockchain’.
Each block can be said as a page that contains the data of transactions.
That is why it is called as blockchain. Mining helps to confirm these
transactions on a blockchain.
Miners also run cryptographic hash on blocks. A hash requires complex
computations.
These hashes are important because they make a block secure. Once a
block has been accepted in the blockchain then it can’t be altered. Miners
anonymously validate these transactions.
For their help, miners are rewarded bitcoins. ‘Proof of work’ is the term
coined for the assistance of miners in validating transactions.
What Exactly Is Bitcoin Mining?
The term ‘mining’ is often used with natural resources like gold, silver, and
other minerals. These resources are limited in supply and are therefore
very valuable commodities, much like Bitcoin.
Similarly, ‘mining’ is the term used by Bitcoin founder, Satoshi Nakamoto,
because miners will essentially be going deep into the Bitcoin network to
mine those precious coins.
Bitcoin miners may not get dirty on their hands and knees to mine bitcoins,
but with the increasing difficulty of solving complex cryptographic hash
functions, they might as well be!
The Bitcoin mining process creates these 2 results: the first is it secures
and verifies transactions that are happening on the Bitcoin network, and the
second is it creates new bitcoins.
Bitcoin mining involves using the SHA-256 algorithm. SHA stands for
Secure Hashing Algorithm which is a computational algorithm that is used
for encryption.
Since Bitcoin is a decentralized type of currency, meaning no central body
or authority gives permissions to miners, anyone with access to electricity
and a mining machine can mine bitcoin.
However, these mining machines are themselves very costly as you need
specialized computer chips to mine bitcoin efficiently, as those complex
hash functions miners need to solve become more complicated over time.
In the early days, you could use your computer’s CPU (computer
processing unit) and GPU (graphics processing unit) to solve hash
problems, but today the problems are so complicated, miners are setting up
expensive rigs and forming mining groups to pool their computer resources!
Individual miners are left with no choice but to join mining groups because
their individual machines just cannot handle the difficult workload.
Bitcoin Mining And Mining Difficulty
Computers involved in bitcoin mining try to solve complex mathematical
problems that are near impossible for a human being to solve. Not only are
these problems becoming increasingly difficult, but they are also timeconsuming for computers as these take a lot of time, and electric power, to
solve.
In fact, expert miners estimate that approximately $150,000 worth of
electricity is used each day by Bitcoin miners all over the world!
On average, it takes about 10 minutes for Bitcoin miners to find a new
block with each block containing about 2,000 transactions. These 10
minutes is the time needed for bitcoin transactions to be validated by the
network and to form a new block.
Hence, a new block is created every time these complex problems get
solved. This process is more commonly known as ‘Proof Of Work,’ and this
eliminates the possibility of having only a few miners mine all the remaining
bitcoins for themselves.
Since Bitcoin’s network is decentralized without a central body verifying the
transactions, this self-governed system means each miner is an integral
part of the system. Without miners, there would be no bitcoins, plain and
simple. Due to the important role miners’ play in the Bitcoin network, they
are rewarded in a few ways.
First, the transaction fees that users pay for each bitcoin transaction is sent
to the miners. Secondly, the network rewards each winning miner a set
number of bitcoins; the second reward is important because this is the only
way that new bitcoins are created. Thus, miners have to continue mining so
that more bitcoins are created and released into the network.
In 2009, when the first Bitcoin block was mined by Satoshi Nakamoto
himself, the reward was 50 bitcoins for each block. However, the reward is
reduced by half every 210,000 blocks or approximately 4 years.
This means that 210,000 blocks after the genesis (or first ever) block was
mined, the miner who successfully mined the 210,001st block was only
rewarded 25 bitcoins; this occurred on 28th November 2012.
Then another 210,000 blocks later, on 9th July 2016, the reward was again
halved, this time into 12.5 bitcoins. It is expected that sometime in the year
2021, the next 210,000 blocks will be completed and the reward will drop
down to 6.25 bitcoins.
Another interesting thing to note is that while the rewards are getting
smaller and smaller, the mining difficulty is increasing. There’s far more
competition now, and solo miners find it near to impossible to find a single
block by themselves. Joining mining groups allow several miners to pool
their resources, but this also means they are sharing the bitcoin reward
among themselves.
Bitcoin Cloud Mining – An Alternative To Joining Mining
Pools?
Beware! Bitcoin cloud mining platforms are full of Ponzi-style scamming
operations. While some see this as a great alternative to mining pools,
there are only a few legitimate cloud mining operations.
In theory, cloud mining is the perfect solution to people who want to mine
bitcoins without buying their own mining computers and joining a pool.
They don’t need to worry about electricity and all the other problems that
real miners have to deal with. In short, all you have to do is pay up the
subscription fee and wait for your bitcoin earnings to be sent to your wallet.
Sounds great, right?
Many people are attracted to this model, and of course, scammers and
thieves are ready to lend them a hand and relieve them of their money.
Is Bitcoin Mining Profitable?
This million dollar question will get you many different answers. Some
would encourage you to go ahead and mine, while others will tell you the
time to mine bitcoins has passed. With Bitcoin prices continuously breaking
records and reaching all-time highs, the investment may be worth it.
But Bitcoin is such a volatile cryptocurrency, and we can never predict the
direction its price is going to take, so it’s a huge risk for miners as well
when the price drops.
When this happens, the best thing for miners to do is to hold on to their
bitcoins and wait for the price to go back up again before selling their
bitcoins to eager buyers.