How does mining bitcoin work?

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Perhaps you’ve read or heard about in the news: bitcoin mining. But what is bitcoin mining exactly, and how does mining contribute to the bitcoin network?

Before we dive into this, we need to nuance some things. When you hear ‘bitcoin mining’, you might think of creating new bitcoins. But the name has been chosen a bit unfortunately, because creating new bitcoins isn’t mining’s main purpose.

This is what bitcoin miners do:

  • Miners process new transactions in blocks
  • Miners receive a reward in bitcoin for their work
  • Miners secure the network

Bitcoin is a decentralized network

Before we discuss mining any further, it’s necessary to explain the bitcoin network some more. Bitcoin is the first decentralized network that enables you to send, receive, and manage money. And that is revolutionary.

Let’s say you need to pay back some friends after a night in the pub. With bitcoin, all you need to do is open your bitcoin wallet, scan your friend’s QR-code and enter the amount of coins you would like to send him. The transaction will be processed instantly from one person to another, without a third party needed.

Let’s compare that process to that of a bank transfer. You grab your phone and send the owed amount from your banking app to your friend’s bank account. Now the funds will be sent from bank to bank, and if your friend is with a different bank than you are, this transaction could take a while.

Instead of banks, computers check transactions

Instead of one centralized party (the bank) checking transactions, with Bitcoin, transactions are checked by a network of computers. A computer that checks the transactions is called a node. Each node in the network has its own copy of the entire transaction history of bitcoin, and all new transactions are checked by all computers on the network, and processed in blocks.

These transaction-filled blocks are put in chronological order from old to new, and together they form a chain. This is where the name originated from: blockchain.

This is where the miners come into play. Miners process all bitcoin transactions in blocks on the blockchain.

Miners process transactions in blocks

So how does this work? Anyone is free to add blocks to the already existing blockchain. In order to add a block to the chain, your computer needs to guess the solution to a kind of puzzle. The faster your computer is, the more possible solutions it is able to come up with.

Miner equipment comes up with possible solutions as fast as possible so they can add a block to the chain. The computer processes the information of all transactions it wants to add in a block, and runs this information through an algorithm.

The output that is provided by the algorithm needs to be correct before the miner is able to add the block. Your computer needs enough computing power to come up with possible solutions. In other words: you need to be able to prove that your mining equipment has put in effort, or work. That’s where the term ‘proof of work’ originated from.

Miners ontvangen beloning in vorm van bitcoin

Computerkracht en stroom is duur, en daarom ontvangen bitcoin miners een beloning in de vorm van bitcoin. Dit vormt voor miners dus de motivatie om hun werkzaamheden uit te voeren. De beloning per toegevoegd transactieblok is op dit moment 12,5 bitcoin. Dit zijn nieuw aangemaakte bitcoins. Daarnaast ontvangt de miner alle transactiekosten van de losse transacties.

De beloning om te minen wordt ongeveer om de vier jaar gehalveerd. Dit wordt de bitcoin block halving genoemd. Meer weten?

Miners receive a reward in bitcoin

Computing power and energy are expensive, that’s why miners receive a reward in bitcoin. That reward is a miner’s motivation to carry out the work. The reward for every added block is currently 12,5 bitcoin. Those bitcoins are newly created. In addition, the miner receives all transaction fees from the transactions that were in the block that was added.

The miner reward for adding a block to the blockchain is halved every four years. This is called the block halving.

Miners secure the network

The bitcoin blockchain code aims for an average block-time of ten minutes. This means that a new block is added approximately every ten minutes to the already existing chain.
At the moment, the bitcoin network consists of thousands of miners. To make sure the time between two blocks remains (approximately) ten minutes, the difficulty of the ‘puzzles’ has to be adjusted accordingly. Otherwise blocks will be added too fast or too slow.

Increasing the difficulty standard also improves the security of the network. If you’d want to hack Bitcoin, you will need more than half of all computing power in the network. An attack like that is therefore called a 51 percent attack. In Bitcoin, such an attack is pretty much impossible, since there is simply too much joint computing power

Would you like to know more about the current difficulty of the network? Make sure to check out bitcoinwisdom.com

Bitcoin mining at home

At the moment it is no longer profitable to mine bitcoin as an individual. In the early days, you were able to mine bitcoin with a simple laptop and some basic technological knowledge. But since more and more miners are joining, the difficulty keeps increasing. This means that you need faster and better equipment to mine bitcoin. This equipment is, in most cases, too expensive for individuals to buy and run.

Mining bitcoin is nowadays often done by so-called mining pools. Mining pools are companies that combine their power to mine bitcoin. People are able to join a mining pool, and the profits from mining will then be divided among the number of people in the pool.

Since the revenue is shared among the miners, it is often barely profitable to mine bitcoins. But instead of mining for profit, you could also start mining to empower the bitcoin network!

Mining equipment

Bitcoin mining is done by advanced ASIC chips. The most well-known bitcoin mining gear is fabricated by the Chinese company Bitmain. This manufacturer releases new equipment every once in a while, with which you can mine cryptocurrencies like bitcoin or litecoin.

The latest equipment costs thousands of euros, and that’s not all, the equipment uses a lot of power as well. In addition, most machines are quite loud and produce a lot of heat.

Some miners use this to their advantage. For example, these miners use the generated heat for their greenhouse!

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