Bitcoin first came to light in 2009, perhaps as the first tip of the revelation of the historic invention that the pseudonym Satoshi Nakamoto had devoted time to for nobody knows how long. What began as a shroud of mystery has today not only grown to be the world’s largest and most matured cryptocurrency but has also laid the ground for the more than 2,000 (performing and non-performing or otherwise dead) cryptos whose invention we have witnessed to date.
The concept of a decentralized digital currency seemingly unsettled curious minds of investors, developers, and knowledge-seekers alike, who would then set out on a long and possibly endless path of discovery.
To understand what is bitcoin mining, let’s first get down to the basics.
What is bitcoin?
Bitcoin is the world’s original cryptocurrency or digital currency underpinned by blockchain technology. As already mentioned, it was invented and released as open-source software by someone or a group of people under the tag Satoshi Nakamoto in 2009.
Blockchain technology is quite unique from others in that it runs on a decentralized peer-to-peer network. This ensures transparency and accessibility for all participants while also making bitcoin a global currency. However, the greatest advantage by far that blockchain technology offers is the immutability of information updated on its public ledgers. Bitcoin trades under the symbol ‘BTC’ and is currently valued at $46,031.72 per (BTC / USD), with its valuation set on the rise.
How was bitcoin first created?
Bitcoin’s white paper was written a year before in 2008. Based on this white paper, Satoshi Nakamoto envisioned a world where people would transact and make payments digitally without barriers, such as the global financial crash that took place in the year 2008. He envisioned lower transaction costs, convenient and secure transactions, as well as the elimination of middlemen during transactions which often raises the cost of transactions.
Bitcoin was first created with 30,000 lines of code under blockchain technology. From then on, all transactions that take place in the bitcoin network are tracked, verified, and bundled into blocks that are joined together using a hash function to form a chain in a specific order in the distributed ledger. Once a block is added to the chain, the information contained in it cannot be altered.
When the network validates and records transactions, new bitcoins are generated through a process known as mining. Hence bitcoin mining is the process by which a block is added to the chain. The network of computers process payment in exchange for bitcoin payment. The maximum limit of bitcoins that can be mined has been set to 21 million. So far, about 12 million Bitcoins have been mined.
Step-by-step bitcoin mining explained.
In simple terms, bitcoins are created (mined) when a block is added to a chain through a controlled algorithm. Miners must solve complex cryptographic equations to crack the algorithm to validate transactions that will be shared on the peer-to-peer network for verification and recording on the public ledger. It is important to note that the time it will take to verify a block of transactions is a standard 10 minutes, not less.
This is often a competitive process for which the first miner to solve the equation gets rewarded with bitcoins, which then start circulating within the network. Owing to this, bitcoin mining is not as easy as it may sound. A miner needs speed and accuracy to be successful in bitcoin mining.
With time, as more miners get into the system and more bitcoins are generated, the mining difficulty continues to increase and fewer coins are rewarded to miners as bitcoin rewards go through halving. This happens after every 210,000 blocks are mined, which is estimated to take place after every four years until the last (21st millionth) bitcoin is mined. The current Bitcoin reward is 6.25 bitcoins after being halved from 12.5 bitcoins.
The use of algorithms to verify and record transactions in blockchain comes with many benefits. To start with, this process is highly secured for lack of centralized control of the system. The more the miners adding blocks to the ledger, the easier it is for the system to verify the transactions. In addition, the controlled release of new bitcoins in circulation eliminates instances of inflation, as is common with fiat currencies. Finally, mining prevents the double-spending of digital currency, a known cause for inflation.
Apart from mining, bitcoins can also be created through:
- accepting it in exchange for goods and services
The step-by-step summary of bitcoin mining
- Miner solves complex cryptographic equations to validate bitcoin transactions.
- The required number of validated transactions are bundled together forming a block that is then proposed in the peer-to-peer network.
- Blockchain-powered bitcoin network selects the header of the most recent block and generates a hash that will be used to link the block to the chain of blocks.
- Proof of work (PoW) is finalized based on the SHA-256 hashing function for the purposes of validating and confirming the transactions.
- The new block is then linked to the blockchain and thus recorded in the peer-to-peer network.
- The new bitcoins generated as a block reward for the new block added successfully to the chain are issued into circulation.
What are the requirements for Bitcoin mining?
Earlier on, before Bitcoin mining became as complex and demanding as it is today, miners could comfortably compete for blocks on their regular computers. However, with increased difficulty in mining, miners today need to invest in powerful hardware to mine competitively. These include:
- A bitcoin mining device, for example, the ASIC (application-specific integrated circuit) mining rig or Powerful GPU (Graphics processing unity)
- Reliable internet connection
- A bitcoin wallet
- Bitcoin mining program installed on your computer
Bitcoin mining options for miners
- Join a bitcoin mining pool where miners join their efforts and resources in Bitcoin mining and thereafter share out the reward gained.
- Individual cloud mining that utilizes the cloud platform
Bitcoin mining is certainly a rewarding venture but a difficult and capital intensive one at that. Currently, the most viable option for aspiring miners is to join a mining pool rather than go it alone. Apart from the possibility of not being able to afford the requirements, competing against mining firms makes it difficult to earn any decent profit.