Crypto EDU

Bitcoin Mining

  • August 2, 2021
  • Intermediate
  • bitcoin
  • cryptocurrency
BC Mining Delivery (0-00-03-22)

The central appeal of a cryptocurrency like Bitcoin is that transactions don’t require the involvement of third-party institutions like banks or governments. It is a global, nonhierarchical, self-regulating, decentralized monetary system upheld by hundreds of thousands of participants. But that freedom comes with challenges: Without a central authority to verify the legitimacy of a crypto asset, the involved parties need a way that allows them both to agree that transactions are genuine and secure. 

Blockchain-based cryptocurrency systems achieve this through a mechanism called consensus—a process that allows all participants, or nodes, in a network to view every transaction and independently verify its legitimacy. If everyone has access to a copy of the same ledger, or set of records (which is essentially what a blockchain is), at all times, it becomes almost impossible for any single participant to falsify a transaction.

For many cryptocurrencies, including Bitcoin, the consensus mechanism consists of “proof of work.” In order to validate a transaction between two nodes on the network, a third node, called a miner, must solve a complex mathematical problem. The first node to get the answer wins the right to create (and get paid for) the next block on the blockchain, which includes a new batch of transactions. With today’s computing technology, the only way to solve this problem is through brute force: Instead of advanced mathematical techniques, the systems simply suggest every possible solution until they find the right one. It’s kind of like trying every combination on a padlock until it finally opens.

To incentivize participants to perform this expensive and energy-intensive work, the Bitcoin protocol offers them a reward of freshly minted Bitcoins. The more Bitcoin is worth, the more miners all over the world will compete to solve these problems. You might think that, as more people get into mining, the Bitcoin supply would balloon, and its value would plummet, but the Bitcoin protocol cleverly guards against this outcome. When more participants join in, the mathematical problem required to release new Bitcoin becomes harder to solve. 

Approximately every four years, in a process called halving, the mining reward for each data block is cut in half. Presumably, the price of Bitcoin will increase in response to this newfound scarcity, incentivizing miners to continue to operate. There is a cap on the total number of Bitcoins. When 21 million have been created, that’s it. At that point, miners will no longer be awarded new Bitcoin for every block added to the chain. Instead, they’ll collect fees from each transaction in the block.

Why should you care about Bitcoin mining?

Bitcoin mining is one of the central innovations that allowed cryptocurrency to become mainstream. Miners guard the integrity of transactions, so that people using Bitcoin can be confident that transactions will be seamlessly completed, even when two parties don’t trust or know one another.

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