How Does Bitcoin Mining Work?

Governments in classic fiat money systems simply issue additional money when necessary. However, with bitcoin, money is discovered rather than printed. Computers all across the world compete with one another to’mine’ for currency.

Governments and banks can (and do) print additional money whenever they choose in a classical fiscal system. However, no one can do so with Bitcoin since the money-creation process focuses around mining, which is an exceedingly smart way of simultaneously validating Bitcoin transactions and recording them on a decentralized ledger.

But, how exactly does Bitcoin mining work? This article delves into the foundations of Bitcoin mining and the essential mechanisms that underpin it.

What exactly is Bitcoin mining?

Bitcoin mining is the process of “discovering” bitcoins. Bitcoins, like gold, are arbitrarily restricted, with no more than 21 million BTC ever being created. In addition, like gold, it requires resources and hard effort to extract. Unlike gold, however, bitcoins are intended to be created using the processing power of millions of competing computers from across the world.

It may be difficult to grasp at first, but it is actually rather brilliant. Everyone is allowed to host a Bitcoin node and try their luck at mining, but no one can promise success.

For the time being, all you need to know is that Bitcoin mining serves several purposes:

1. Protects the Bitcoin network.
2. Miners are encouraged to devote their resources to the Bitcoin network.
3. Bitcoin transactions are confirmed.
4. Ensures Bitcoin’s decentralization (which makes it free worldwide peer-to-peer (P2P) money).
5. Penalizes network bad actors by making it unprofitable to go against the system.
6. This makes bitcoins rare and difficult to get.

How does mining work?

People can constantly transmit bitcoins (or other digital assets), but it doesn’t signify anything until someone maintains track of them all. This is especially true for digital materials, which are extremely easy to replicate. So, in order to have completely functional digital cash, you must keep track of who paid what and to whom, which is essentially what banks do for us.

But how can we be certain that person A transmitted bitcoins to person B if there are no entities to monitor it? How can we avoid double-spending, which occurs when person A pays the same bitcoins to person C?

Bitcoin mining is the solution.

By processing all network transactions, placing them into a list, and locking them up into immutable blocks, the Bitcoin network substitutes banks and other intermediaries. Finally, it is up to the miners to assign their hashing power to confirm such transactions and record them in a distributed public ledger.

Bitcoin mining necessitates the use of a computer and a Bitcoin application (client). When you install the Bitcoin client on your computer, you automatically become a miner and may compete with other miners in solving challenging arithmetic challenges. Every ten minutes, all computers attempt to solve a block containing the most recent transaction data using cryptographic hash algorithms.

What exactly are bitcoin hashes?

Each solved block is recorded in the public ledger. The distributed public ledger is essentially a lengthy list of blocks that comprise the Bitcoin blockchain.

The Bitcoin distributed ledger, often known as the blockchain, is a public record of all network transactions. Because the file is public, anybody may examine it using any bitcoin block explorer. Every 10 minutes, a new block is added to the ledger. As a result, the blockchain’s size is constantly growing. An updated copy of a new block is shared among miners so that everyone is always up to date.

So, what is the point of that?

In traditional systems, a ledger must be trusted, which means it must be overseen by a trustworthy person or institution who ensures no one tampers with it. The miners fulfill this duty in the Bitcoin network.

When a block of transactions is complete, the miners must process it. They use the SHA-256 Cryptographic Hash Algorithm to generate a hash, which seems to be a random sequence of numbers and characters. The hash is kept alongside the block at the end of the blockchain at that moment in time, serving as proof of work and validation.

But what makes these hashes so reliable?

It’s simple to generate a hash from the data in a Bitcoin block. However, because the hash is fully random and each hash is unique, it is nearly hard to decode the data just by glancing at it. If you modify even one symbol in the original input, the hash will be completely different. As a result, predicting the output is impossible, and the only way to equal it is by blind guessing, which is what miners do.

Nonetheless, the miners do not only encapsulate the transactions in hashes, but also employ additional bits of data. The hash of the previous block is one of these parts.

Because each block’s hash contains the preceding block’s hash, it functions similarly to a digital wax seal. It ensures that the created block, as well as any blocks preceding it, are valid. If the block is forged, other miners will notice and reject it.

In other words, a forged transaction would alter a block as well as its original hash. Because the hash of each block is used to generate the hash of the next block, this would affect all blocks on the chain. If someone checked it, they’d immediately notice the difference between correct and false blocks because they don’t match the ones that have already been verified on the blockchain.

Coin competition

We’ve previously established that the only method to seal off a block is to properly estimate the hash result, and the most efficient way to do so is by random guessing performed by computers.

All miners compete to see who can predict it the fastest using the mining program. The miner who is the first to do so mines the block (which is composed of billions of random computer-generated guesses from all over the world) and receives the block reward, which is currently set at 12.5 BTC per block and decreases by half every 210,000 blocks. At this rate, the block reward will drop to 6.25 BTC per block sometime in 2021.

It essentially acts as an incentive to continue mining in order to keep the system running. Because block rewards are constantly falling, it is projected that the BTC price would rise. However, block rewards aren’t the only way for miners to be rewarded; they also share the collective Bitcoin transaction fees.