Bitcoin how mining works

Bitcoin mining

Enjoyed the article? Share:

Bitcoin mining is a transaction record process with bitcoins to blockchain – the public database of all the operations with Bitcoin, which is responsible for the transaction confirmation. Network nodes use blockchain to differ the real transactions from the attempt to spend the same facilities twice. The main mining objective is reaching a consensus between network nodes on which transactions consider legitimate.

Contents

What is Bitcoin mining [ edit ]

Bitcoin mining is the process of issuing bitcoin, built on the calculation of mathematical problems, is the only way to create a cryptocurrency.

The essence of mining is that in different parts of the Earth, there are computers that solve mathematical tasks, the result of which is the creation of bitcoin. The release (production) process is distributed to all participants in the system, which ensures security and is not controlled by a single issuing center.

All Bitcoin transfers are recorded in the public transaction log, they are transmitted to the miners in a chain. The job of which is to pick up one single hash from a million combinations, which would be suitable for all new transactions and a secret key, which is a guarantee of receiving a reward of 25 Bitcoins. At the same time, many “getters” are competing for the award, who are the first to try to figure out the hash. When it is guessed, the block and all transactions are closed and the miners start generating the next block.

An example hash with the same phrases but with different additional parameters (in the example, the last line has the lowest hash value):

The target level of difficulty in the Bitcoin system is recalculated every 2016 blocks (approximately 2 times a week). It can increase or decrease, it all depends on the time of creation of new batches of the block and how much it differs from 2016 minutes (20160 * 10). Regardless of the total power of all miners, 1 block is generated on average within 10 minutes.

The miner’s probability of receiving a reward during these 10 minutes is equal to the ratio of his computing power to the computing power of the entire network. And if this ratio is small, then the probability of receiving an award, even over a long period of time, will be low.

Transaction record process [ edit ]

Besides this, mining is the only way of bitcoins emission that are allocated as a miner reward for the mathematical task solution with the help of computer equipment. The process is advisedly done resource-intensive and difficult to leave permanent the number of blocks found by miners.

Every block should contain the confirmation that the mathematical task has been solved and each of the network nods can easily check, if the block has been really closed by the rules. Emission is decentralized as a reward that means a control absence over the output by a single center. During this process miners confirm accomplishing transactions in the network. In order to protect the network from overruns, mining is possible in strictly defined capacities.

Bitcoins, issued with the help of mining are the best way to hold the transaction anonymity during the work with cryptocurrency. Nevertheless, they can be used only after getting 100 network confirmations.

How Bitcoin Mining Works [ edit ]

All the transfers in the Bitcoin system are public. Miners’ work consists in choosing the right hash, which will be convenient to all the network transactions and will provide getting of the private key. There are millions of possible combinations and that’s why the process usually takes time and demands powerful equipment.

Unknown hash is the quantity that consists of the previous block hash, a random number and transactions check value sum, made during 10 minutes. System conditions can satisfy the only one quantity, which isn’t permanent and changes after each block is closed.

As soon as the right hash is defined the transaction block closes and the miner obtains reward in the amount of 12.5 bitcoins. This process can be compared with lottery, because a lot of participants are simultaneously searching the hash. The system works pursuant to the strict rules and according to them changing of closed block is practically impossible.

Difficulty [ edit ]

Mining difficulty is a dynamic indicator that is periodically recalculated. With an increase in the processing power of mining equipment, complexity grows. It is best to look for up-to-date information on the state of difficulty in mining cryptocurrency on official currency sites. However, this is difficult. Links to mining statistics, even on official websites, are sometimes difficult to find. To simplify the process, aggregator sites of statistical information about all cryptocurrencies have been created. They collect, process and publish relevant data not only about the complexity of mining, but also several dozen indicators: price, capitalization, hashrate, profitability, transaction amount, and so on.

Mining in pools [ edit ]

Bitcoin mining is a very difficult process and it’s necessary to have essential capacities for processing. It has become practically impossible to follow mining alone, because of permanent increasing difficulty of the process and crypto-currency market development. As a result, the concept “pool mining” has appeared, which means the computational capacities banding of several participants in a group for the new block generation. The pool obtained reward for the closed block is shared between its participants.

Equipment [ edit ]

For the long time mining has been available for home computers users, but in 2013 competition between miners for finding the right hash has increased, therefore personal mining has lost it’s economic justifiability. During the development and modernization process the next computer equipment types have been used for mining:

• CPU is a one of the oldest versions working with the help of the computer processor. This option can be found in the main bitcoin client, but it’s off-stream now because of the extra low effectiveness;
• GPU lies in using graphic card. This type of mining has changed the processors. It’s hallmark is the increasing of system power;
• FPGA is an upgrade variant of GPU, which differs by lower energy consumption;
• ASIC is a mining with a special equipment created specially for work with crypto-currency. Its effectiveness far exceeds the attributes of usual graphic cards, so it has inaugurated a new era in Bitcoin development.

Potential investors can use online mining calculators to know the effectiveness and profitability of special equipment like mining farms.

Mining farm [ edit ]

Mining farm – is a data center, technically equipped to mine bitcoins or other cryptocurrencies.

They were emerged as a result of the constant complication of the process, which requires more technical, energy and financial resources.

Farms allow the productivity of computers and, consequently, the Hash Rate to be maximized. The productivity of the largest farms can be several dozen PH/s (1015 hashes/second).

Physically, farms are rooms with a large number of computers and servers that take on tasks for mining.

There are also home-mining farms. They differ from ordinary PCs, by being specially assempled and designed for mining. Home farms can bring profitability, but users often face the problem of excessive electricity consumption and overheating of the computer at home which makes mining unprofitable.

One of the main resources into which a miner has to invest is electricity. It is also a risk factor, since the farm requires a permanent 24/7 power source. In addition, a large number of processors require an appropriate cooling and ventilation system.

Cloud mining [ edit ]

Cloud mining is a process of obtaining Bitcoins with the use of a remote data processing center with the general computational power. This allows the users to mine Bitcoins or alternative crypto currencies without controlling the equipment directly. Most of all, the services of the cloud mining are used by the users from the countries with an expensive electric power supply, which doesn’t allow them to create mining rigs by their own.

Another option is a private virtual service, where a user installs the mining software.

Finally, a user may take the computational powers themselves by using already the results of their work and not coming in touch with physical or virtual servers.

Web mining [ edit ]

Web-mining, or «hidden mining» – is an alternative method of cryptocurrency mining through the web browsers of users of websites. In fact, owners of Internet resources can convert the capacities of visitors’ computers into cryptocurrency.

This method is conducted by special web-miners — programs that can work when the user’s browser is switched on or runs in the background. Technically, such a program can be started on the computer with a line of JavaScript code written on the page, or the code itself is embedded into the browser extension. There are also viruses that make computer capacities work for cryptocurrency mining.

Mining profit [ edit ]

Profitability of mining is the level of reward that a user of the blockchain network receives (providing of his technical capacities for verifying transactions and solution of network tasks, resulting in a new data block on the network).

The profitability depends on two related factors. The first one consists in the complexity of the process itself, on which the reward depends (the more difficult the process is, the smaller amounts of tasks can be made per technical resource unit and, consequently, the less reward you will receive). The second factor is the cost of bitcoin (or other crypto currency). That is, how much your reward is in terms of fiat currencies.

The average annual profitability ranges from 120 to 200% per annum, and for some products in the period of «mining boom» from the end of 2016 showed even the best result. However, this indicator does not take into account additional investments: rental of premises, management of farms and energy costs. Adjusted for these factors in 2016, the profitability of mining amounted to about 10-50% per annum.

Mining Hardware [ edit ]

Specifically for Bitcoin, the number of mining types has significantly decreased. If other cryptocurrencies can still be mined using video cards, processors, hard drives, etc., then the high complexity of Bitcoin mining makes all these methods not only inefficient, but even unprofitable.

CPU [ edit ]

A central processing unit (or CPU) is an integrated circuit that is an essential part of the hardware of a personal computer or any other equipment. Currently, any modern, high-performance computer is equipped with a powerful central processor with a high frequency of operation and several cores. Accordingly, if a miner has a good personal computer, then he will not have to invest hundreds or thousands of dollars in equipment.

GPU [ edit ]

Mining on a video card is the process of mining cryptocurrency using graphic processors (GPUs). To do this, user needs a powerful video card in his home computer or a specially assembled farm of several devices in one system. If miner is interested in why GPUs are used for this process, then the answer is very simple. The thing is that video cards are initially developed to process a large amount of data by performing the same operations, as is the case with video processing. The same picture is observed in cryptocurrency mining, because here the hashing process is just the same. See the main article: Why a GPU mines faster than a CPU.

FPGA [ edit ]

FPGA stands for Field Programmable Gate Array. The microcircuit is a semiconductor. Used in cases where the device is designed to perform logical operations, such as and, or, nand and others.

ASIC [ edit ]

An application-specific integrated circuit, or ASIC, is just a chip designed solely for one type of work – decryption of a specific algorithm. To mine Bitcoins, this is SHA-256. Due to the lack of multitasking, devices show significantly more power than those that are suitable for all algorithms at once.

Mining Hardware Comparison [ edit ]

Hardware	Power	Adaptability	Price	Availability	User Friendly
ASIC	✔️	—	—	✔️	✔️
GPU	—	✔️	✔️	✔️	✔️
FPGA	✔️	✔️	—	✔️	—

To describe the table above, ASIC uses a lot of electricity, has a high price and very user-friendly but the price is expensive and ASIC can’t change the mining algorithm. Meanwhile, GPU is using a fairly low power compared to ASIC, can adapt to various algorithms, cheap compared to other options, easy to get, and easy to use. Finally, FPGA can change algorithm but not user-friendly, you’ll need to be able to create a Verilog program. Also, FPGA was quite expensive and hard to get, but now you can find them easily and cheaply online. In terms of hashing speed, CPU History [ edit ]

Bitcoin’s public ledger (the blockchain) was started on January 3rd, 2009 at 18:15 UTC presumably by Satoshi Nakamoto. The first block is known as the genesis block. The first transaction recorded in the first block was a single transaction paying the reward of 50 new bitcoins to its creator. Blockchain mining.

Источник

How Does Bitcoin Mining Work?

Bitcoin Mining Explained

StefaNikolic / Getty Images

Bitcoin is a sovereign system of digital money. It has no direct correlation to any real-world currency, nor is it controlled by any government or centralized entity. But people can (and do) use it to purchase real-world items at major retailers such as Overstock.com and Expedia.

To process these transactions securely, entities called miners compete to solve mathematically complex problems. The miner who is successful in solving the problem adds a block to Bitcoin’s blockchain and receives a reward of 6.25 bitcoins. In November 2020, a single bitcoin was worth more than $18,000—meaning every successful miner receives more than $100,000 worth of Bitcoin.

Not only is this a reward for the miner’s efforts, but the process of mining is how new bitcoins are generated and introduced into circulation.

Key Takeaways

• A blockchain is an online decentralized ledger that records approved transactions (blocks) that are tied together (chains) throughout a network.
• Bitcoin miners add individual blocks to the blockchain by solving complex mathematical problems, with the winner receiving a set number of bitcoins.
• The mining difficulty of bitcoin is extremely high, requiring expensive hardware, large amounts of electricity, and specific software.
• Whether bitcoin mining is profitable depends on the cost of electricity, though it is most profitable when miners work in pools to combine resources.

How Bitcoin Mining Works

All mining starts with the blockchain. This is an online decentralized ledger that records transactions throughout a network. A group of approved transactions is called a “block.” These blocks are tied together to create a “chain,” hence the term “blockchain.”

In the Bitcoin network, a miner’s goal is to add individual blocks to the blockchain by solving sophisticated mathematical problems. This requires enormous computational and electrical power. While many miners compete to add each block, the miner who solves the problem will actually add the block—along with its approved transactions—to the blockchain. This miner receives a reward of 6.25 bitcoins (as of November 2020).

The reward rate is cut in half every 210,000 blocks, which means roughly every four years. This process, called “halving,” is algorithmically enforced, ensuring a predictable, unalterable rate of introducing new bitcoins into the existing supply—eliminating concerns of inflation.

Due to the inherent difficulty in mining bitcoins, there are a number of requirements when it comes to the actual mining process.

What Do I Need to Mine Bitcoin?

Bitcoin is designed to adjust the difficulty required to mine one block every 14 days (or every 2,016 blocks mined). The overarching goal is to maintain the time required to mine one bitcoin to 10 minutes. Since Bitcoin has been around since 2009, its mining difficulty is currently extremely high, which is why resource-intensive, powerful hardware is required to mine it. 

Regular household computers—even those with incredible power by today’s standard—will not see any success in the modern Bitcoin mining ecosystem.

The first and most important piece of equipment needed to mine bitcoin is specialized mining hardware called application-specific integrated circuits, or ASICs. A new ASICs device can cost anywhere from several hundred dollars to $10,000. But the price of mining hardware is only a fraction of the expense involved. ASICs consume tremendous amounts of electricity, the cost of which can quickly exceed the cost of the device using it.

You’ll also need to choose Bitcoin mining software to join the Bitcoin network. This isn’t nearly as expensive as hardware. In fact, plenty of reliable software options are available for free.

To determine the profitability of Bitcoin mining, all expenses must be considered: hardware, software, and electricity. The current value of Bitcoin, which consistently fluctuates, must also be taken into account, as well as taxes you might pay.

Each block takes roughly 10 minutes to mine. If more power and resources are dedicated to mining, and if the time required to mine one block falls under 10 minutes, Bitcoin’s mining difficulty will increase to bring the average per-block mining time back to 10 minutes.

Can You Make Money From Mining Bitcoin?

At first glance, Bitcoin mining appears profitable. As of November 2020, the reward per block was 6.25 bitcoins, and one bitcoin is worth almost $18,000. According to these figures, Bitcoin generates more than $100,000 worth of value every 10 minutes. If that sounds too good to be true, that’s because it is—in part.

A single ASIC can consume as much electricity as 500,000 Playstation 3 devices, which is why Bitcoin mining simply isn’t profitable from home.

The profitability of Bitcoin mining depends mostly on the cost of electricity. For example, if you live in Louisiana and access electricity at an industrial rate of 4.58 cents per kilowatt-hour—which is the cheapest in the United States—you will lose money, even with top-notch ASICs hardware.

Fortunately, Bitcoin mining enthusiasts without direct access to cheap electricity have another option.

Mining Pools

One way in which Bitcoin mining can still be profitable—and perhaps the only way—is through mining pools. These enable miners to pool their resources, adding power but splitting the difficulty, cost, and reward of mining Bitcoin. There are several well-known Bitcoin mining pools across the globe, including F2Pool, Poolin, and BTC.com.

When a mining pool is rewarded, the individual miners get a very tiny piece of this reward. One bitcoin can be divided by eight decimal places, meaning a transaction of 0.00000001 BTC can be facilitated by the Bitcoin network, thus accommodating thousands of Bitcoin miners who collaborate through mining pools.

But miners might still wait a long time to successfully reap their reward. Though this is highly speculative, one analysis found that top-notch ASICs hardware would require about 1,200 days to receive one bitcoin from mining efforts as part of a pool.

Taxes

The IRS treats cryptocurrencies (including Bitcoin) received from mining as income. A miner needs documentation proving when a bitcoin was mined. The bitcoin will be valued based on its price the day it was mined. If a bitcoin is later sold at a higher price, the miner will need to pay capital gains tax on the difference.

If a mining operation is not part of an established business, additional tax obligations could apply. Such miners are likely to owe a self-employment tax of 15.3% on their annual income. 

How to Start Mining Bitcoin

Though it is extremely difficult and rarely profitable, Bitcoin mining is still feasible. While the best results will derive from joining a mining pool, the following steps can be taken to venture into Bitcoin mining:

Источник