Why does bitcoin need mining the most

Bitcoin Mining Explained

Have you ever heard of bitcoin mining and wondered what on earth it is? Perhaps you’ve heard that bitcoins are ‘mined’ and that people who do this mysterious work are known as ‘miners’ without really knowing what this means. If you want to learn more then this article is for you. We’ll explain everything you need to know about bitcoin mining including why it’s necessary and how it works.

What is mining?
Bitcoin mining is done on special computers and the owners or operators are known as miners. In the simplest terms, miners help to confirm bitcoin transactions and provide security to the bitcoin network.

Why does bitcoin need mining?

First proposed in a 2008 white paper, bitcoin was the world’s first peer-to-peer electronic cash system that allowed people to send and receive money without relying on banks. Storing value and making purchases without involving banks sounds interesting, but remember, banks don’t just hold your money. Banks keep records of who has paid what and act as trusted central points. So, how do you do banking without the banks?

Bitcoin isn’t based on trust

On a network with no bank or central ‘mint’, who would you trust to keep the records?

Well, you wouldn’t trust me. You likely wouldn’t trust any single person. But you might trust everyone. This is the purpose of mining. Miners can run special software on their computers and help create a secure environment even if no-one trusts anyone else. Each miner puts their faith in the software, not each other.

Bitcoin runs on a global public blockchain

A blockchain is a digital record of transactions where each entry is cryptographically linked to the previous entry and then grouped into sets of data, known as ‘blocks’. There are many different types of blockchains, but the one underpinning Bitcoin is global and public. This means that anyone with a computer, enough free space and a reliable internet connection can download a piece of software called Bitcoin Core and have their computer become a ‘node’ in the Bitcoin network.

This software is distributed around the world on millions of computers and each owner of each copy records every Bitcoin transaction. As Bitcoin Core follows set rules and is programmed to decide which blockchain contains valid transactions, computers only have to trust this software, not the other computers. There’s no way that a fraudulent transaction — such as someone trying to spend their bitcoin twice (double-spending) — can be recorded onto the blockchain as it will be rejected by the other ledgers.

What is a bitcoin transaction?

A bitcoin is defined in the white paper as a “chain of digital signatures”. Bitcoins can only move from one digital bitcoin wallet to another. Each wallet has two keys, one public key and one private key. These are also known as addresses. If you give someone your public key, they can send you bitcoin. If you give someone your private key, they can take control of your wallet, therefore it must remain confidential. Each owner transfers bitcoin to the next owner by digitally signing a cryptographic ‘hash’ of the previous transaction and the public key of the next owner’s wallet. These are added to the end of the coin, meaning that the chain of ownership can be verified simply by verifying the signatures.

What prevents someone trying to double-spend their Bitcoin?

The problem with this system alone would be you couldn’t stop someone from double-spending their coins (ie. sending them to more than one recipient). One solution would be to have a central, trusted ‘mint’ that checked every transaction for double-spending but that would defeat the whole point of Bitcoin. Bitcoin’s solution is that all transactions must be publicly announced to all nodes. All participants must agree on a single history of the order they were received.

Bitcoin is based on work, not trust

Bitcoin works by having a timestamp server take a hash of a block of transactions. It then publishes this to all nodes in the network. This hash proves the order in which transactions took place. In the absence of trust, the only way to confirm this hash is through what’s known as a proof-of-work (PoW) system. PoW means that the central processing units (CPU) in computers have to actively work and scan for a value that, when hashed, produces a hash that begins with a number of zero bits.

Why is this called ‘mining’?

PoW is called mining because every time a new block is created, a new Bitcoin is minted. The computer that manages to create a valid block will inform the rest of the network and become the owner of the new Bitcoin and recipient of all transaction fees for that block. This block will be added to the blockchain and, provided that the majority of the nodes are honest, this chain will grow the fastest and become the longest chain. The rules of the Bitcoin Core software stipulate that the longest chain is always the correct one.

This reward of Bitcoin and transaction fees was the original incentive for people to use their home computers to help support the Bitcoin network. Ordinary computer users would use their computer’s CPU power and electricity in order to be rewarded with Bitcoin. It was also an efficient way to distribute the coins, as there is no central bank to issue them.

Can I mine Bitcoin on my computer?

In the early days of Bitcoin, it was possible to mine on a personal computer or even a laptop. However, the bitcoin protocol was designed to regularly adjust the difficulty of mining to ensure that all miners only produce one valid block every 10 minutes on average. As more miners joined the network, it the difficult increased to the point where it was no longer possible to mine Bitcoin on personal computers.

To attempt to mine Bitcoin at home requires a dedicated ASIC (application-specific integrated circuit) miner. The profitability of mining depends on the price of bitcoin, the cost of electricity in your area and your ability to regulate the temperature as ASIC miners generate large amounts of heat and noise.

What are mining pools?

Mining pools are groups of miners who share their processing power over a network. They then share the bitcoin rewards fairly according to how much power each member has contributed.

What are mining farms?

Bitcoin mining farms are privately-held companies that use thousands of ASIC miners to mine bitcoins. Besides the cost of buying the ASIC miners, mining farms use huge amounts of electricity. Prior to 2017, many such farms sprung up in China due to relatively cheap electricity. However, the Chinese government banned Bitcoin exchanges in late 2017 and has all but killed off this industry.

Mining farms don’t just need electricity to power the computers; they also need to power the cooling systems to prevent overheating. That’s why an increasing number of mining farms are being set up in colder climates such as Iceland and Russia. In cold conditions, you don’t need costly air conditioning; you can simply suck in freezing air from outside.

How much electricity does Bitcoin mining use?

According to Digiconomist, Bitcoin’s current estimated annual electricity consumption stands at 73.12 TWh, roughly the same as the country of Austria. A single bitcoin transaction uses 924KWh, enough to power 31 U.S. homes for one day. Environmental concerns about the amounts of electricity being used have led to a focus on renewable energy. For example, bitcoin mining farms in Iceland benefit from geothermal power, thanks to the volcanic activity underground. Even with cheap electricity, a mining farm in Iceland containing 20,000 ASIC miners will typically spend more than a million Euros per month on electricity.

In summary, bitcoin miners use specialized computers to compile bitcoin transactions into blocks. By solving this computationally difficult puzzle, miners have the chance to be the first one to place the next block on the blockchain and claim the rewards.

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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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