What is bitcoin mining solving

Bitcoin mining

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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.

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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.

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Bitcoin Mining

What Is Bitcoin Mining?

Chances are you hear the phrase “bitcoin mining” and your mind begins to wander to the Western fantasy of pickaxes, dirt and striking it rich. As it turns out, that analogy isn’t too far off.

Bitcoin mining is performed by high-powered computers that solve complex computational math problems; these problems are so complex that they cannot be solved by hand and are complicated enough to tax even incredibly powerful computers.

Key Takeaways

• Bitcoin mining is the process of creating new bitcoin by solving a computational puzzle.
• Bitcoin mining is necessary to maintain the ledger of transactions upon which bitcoin is based.
• Miners have become very sophisticated over the last several years using complex machinery to speed up mining operations.

The result of bitcoin mining is twofold. First, when computers solve these complex math problems on the bitcoin network, they produce new bitcoin (not unlike when a mining operation extracts gold from the ground). And second, by solving computational math problems, bitcoin miners make the bitcoin payment network trustworthy and secure by verifying its transaction information.

When someone sends bitcoin anywhere, it’s called a transaction. Transactions made in-store or online are documented by banks, point-of-sale systems, and physical receipts. Bitcoin miners achieve the same thing by clumping transactions together in “blocks” and adding them to a public record called the “blockchain.” Nodes then maintain records of those blocks so that they can be verified into the future.

When bitcoin miners add a new block of transactions to the blockchain, part of their job is to make sure that those transactions are accurate. In particular, bitcoin miners make sure that bitcoin is not being duplicated, a unique quirk of digital currencies called “double-spending.” With printed currencies, counterfeiting is always an issue. But generally, once you spend $20 at the store, that bill is in the clerk’s hands. With digital currency, however, it’s a different story.

Digital information can be reproduced relatively easily, so with Bitcoin and other digital currencies, there is a risk that a spender can make a copy of their bitcoin and send it to another party while still holding onto the original. 

Special Considerations

Rewarding Bitcoin Miners

With as many as 300,000 purchases and sales occurring in a single day, verifying each of those transactions can be a lot of work for miners.   As compensation for their efforts, miners are awarded bitcoin whenever they add a new block of transactions to the blockchain.

The amount of new bitcoin released with each mined block is called the «block reward.» The block reward is halved every 210,000 blocks (or roughly every 4 years). In 2009, it was 50. In 2013, it was 25, in 2018 it was 12.5, and in May of 2020, it was halved to 6.25.

Bitcoin successfully halved its mining reward—from 12.5 to 6.25—for the third time on May 11th, 2020.

This system will continue until around 2140.   At that point, miners will be rewarded with fees for processing transactions that network users will pay. These fees ensure that miners still have the incentive to mine and keep the network going. The idea is that competition for these fees will cause them to remain low after halvings are finished.

These halvings reduce the rate at which new coins are created and, thus, lower the available supply. This can cause some implications for investors, as other assets with low supply—like gold—can have high demand and push prices higher. At this rate of halving, the total number of bitcoin in circulation will reach a limit of 21 million, making the currency entirely finite and potentially more valuable over time. 

El Salvador made Bitcoin legal tender on June 9, 2021. It is the first country to do so. The cryptocurrency can be used for any transaction where the business can accept it. The U.S. dollar continues to be El Salvador’s primary currency.

Verifying Bitcoin Transactions

In order for bitcoin miners to actually earn bitcoin from verifying transactions, two things have to occur. First, they must verify one megabyte (MB) worth of transactions, which can theoretically be as small as one transaction but are more often several thousand, depending on how much data each transaction stores.

Second, in order to add a block of transactions to the blockchain, miners must solve a complex computational math problem, also called a «proof of work.» What they’re actually doing is trying to come up with a 64-digit hexadecimal number, called a «hash,» that is less than or equal to the target hash. Basically, a miner’s computer spits out hashes at different rates—megahashes per second (MH/s), gigahashes per second (GH/s), or terahashes per second (TH/s)—depending on the unit, guessing all possible 64-digit numbers until they arrive at a solution. In other words, it’s a gamble.

The difficulty level of the most recent block as of August 2020 is more than 16 trillion. That is, the chance of a computer producing a hash below the target is 1 in 16 trillion. To put that in perspective, you are about 44,500 times more likely to win the Powerball jackpot with a single lottery ticket than you are to pick the correct hash on a single try. Fortunately, mining computer systems spit out many hash possibilities. Nonetheless, mining for bitcoin requires massive amounts of energy and sophisticated computing operations.

The difficulty level is adjusted every 2016 blocks, or roughly every 2 weeks, with the goal of keeping rates of mining constant.   That is, the more miners there are competing for a solution, the more difficult the problem will become. The opposite is also true. If computational power is taken off of the network, the difficulty adjusts downward to make mining easier.

Bitcoin Mining Analogy

Say I tell three friends that I’m thinking of a number between 1 and 100, and I write that number on a piece of paper and seal it in an envelope. My friends don’t have to guess the exact number, they just have to be the first person to guess any number that is less than or equal to the number I am thinking of. And there is no limit to how many guesses they get.

Let’s say I’m thinking of the number 19. If Friend A guesses 21, they lose because 21>19. If Friend B guesses 16 and Friend C guesses 12, then they’ve both theoretically arrived at viable answers, because 16

Bitcoin vs. Traditional Currencies

Consumers tend to trust printed currencies. That’s because the U.S. dollar is backed by a central bank of the U.S., called the Federal Reserve. In addition to a host of other responsibilities, the Federal Reserve regulates the production of new money, and the federal government prosecutes the use of counterfeit currency.   

Even digital payments using the U.S. dollar are backed by a central authority. When you make an online purchase using your debit or credit card, for example, that transaction is processed by a payment processing company (such as Mastercard or Visa). In addition to recording your transaction history, those companies verify that transactions are not fraudulent, which is one reason your debit or credit card may be suspended while traveling.

Bitcoin, on the other hand, is not regulated by a central authority. Instead, bitcoin is backed by millions of computers across the world called “nodes.” This network of computers performs the same function as the Federal Reserve, Visa, and Mastercard, but with a few key differences. Nodes store information about prior transactions and help to verify their authenticity. Unlike those central authorities, however, bitcoin nodes are spread out across the world and record transaction data in a public list that can be accessed by anyone.

History of Bitcoin Mining

Between 1 in 16 trillion odds, scaling difficulty levels, and the massive network of users verifying transactions, one block of transactions is verified roughly every 10 minutes.   But it’s important to remember that 10 minutes is a goal, not a rule.

The bitcoin network is currently processing just under four transactions per second as of August 2020, with transactions being logged in the blockchain every 10 minutes.   For comparison, Visa can process somewhere around 65,000 transactions per second.   As the network of bitcoin users continues to grow, however, the number of transactions made in 10 minutes will eventually exceed the number of transactions that can be processed in 10 minutes. At that point, waiting times for transactions will begin and continue to get longer, unless a change is made to the bitcoin protocol.

This issue at the heart of the bitcoin protocol is known as “scaling.” While bitcoin miners generally agree that something must be done to address scaling, there is less consensus about how to do it. There have been two major solutions proposed to address the scaling problem. Developers have suggested either (1) creating a secondary «off-chain» layer to Bitcoin that would allow for faster transactions that can be verified by the blockchain later, or (2) increasing the number of transactions that each block can store. With less data to verify per block, the Solution 1 would make transactions faster and cheaper for miners. Solution 2 would deal with scaling by allowing for more information to be processed every 10 minutes by increasing block size.

In July 2017, bitcoin miners and mining companies representing roughly 80% to 90% of the network’s computing power voted to incorporate a program that would decrease the amount of data needed to verify each block.

The program that miners voted to add to the bitcoin protocol is called a segregated witness, or SegWit. This term is an amalgamation of Segregated, meaning “to separate,” and Witness, which refers to “signatures on a bitcoin transaction.” Segregated Witness, then, means to separate transaction signatures from a block — and attach them as an extended block. While adding a single program to the bitcoin protocol may not seem like much in the way of a solution, signature data has been estimated to account for up to 65% of the data processed in each block of transactions.

Less than a month later in August 2017, a group of miners and developers initiated a hard fork, leaving the bitcoin network to create a new currency using the same codebase as bitcoin. Although this group agreed with the need for a solution to scaling, they worried that adopting segregated witness technology would not fully address the scaling problem.

Instead, they went with Solution 2. The resulting currency, called “bitcoin cash,” increased the blocksize to 8 MB in order to accelerate the verification process to allow a performance of around 2 million transactions per day. On August 16, 2020, Bitcoin Cash was valued at about $302 to Bitcoin’s roughly $11,800.   

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