How Bitcoin Mining Works?

Bitcoins! Bitcoins! Bitcoins! 
You come across the word every day in some medium or the other. News! Social Media! Blogs! Everyone’s talking about bitcoins these days. Everyone wants to get their hands on bitcoins. Bitcoins and cryptocurrencies have become a mainstay of daily conversations everywhere. 

In this article, we will discuss all about bitcoin mining – the system requirements, the process and mining pools.

For those still unaware of bitcoins, read our previous articles on bitcoins basics, a snapshot of the mining process, bitcoin myth-busting and how bitcoins are valued.

Let’s dive straight in!

A little insight about bitcoins and bitcoin mining

Bitcoin is a form of digital currency that is used to perform secure online transactions. It is a form of cryptocurrency, essentially digital currencies, that uses robust cryptography to secure online transactions. 

Bitcoin mining refers to the process of creating new bitcoin by solving computational puzzles. To know more, refer to our previous articles on bitcoins and bitcoin mining. We have more on bitcoin value and myths.

What are the hardware requirements?

If you think you can mine bitcoins from a regular laptop or a home desktop PC, you’re not entirely wrong. But you’ll soon realize that mining using these domestic devices is not cost-efficient, and you’ll be incurring more costs than profits.

When bitcoins were first released, they were intended to be mined on computer CPUs. However, enterprise coders soon discovered that they could get more hashing power from graphic cards (GPUs). They wrote mining software to allow this.

Over time GPUs were surpassed by Application-Specific Integrated Circuits (ASICs) – highly specialized computers, and nowadays, all serious Bitcoin mining is carried out using ASICs. 

So, you must be wondering that all you need to mine bitcoins is an ASIC, right? No! the ASICs have to be used in a thermally regulated data centre with access to low-cost electricity, which looks something like this:

What are the stages of mining?

Now that we’re ready with the mining apparatus let’s talk about the procedure. Bitcoin mining covers the following aspects and functions:

1. Issue of new bitcoins:

You know that a central bank is responsible for issuing currency in the economy. The central bank issues currency anytime they deem fit to improve the economy of the country. In India, the currency (rupee) is issued by the Reserve Bank of India (RBI).

The case of bitcoin is different. Here, miners are rewarded new bitcoins every 10 minutes when they solve a complex mathematical problem. The rate of issue of bitcoins is set in the code. Therefore, the miners cannot use any cheat codes to create bitcoins out of thin air. They have to use their computational prowess to solve complex puzzles to generate new bitcoins.

2. Confirmation of transactions by miners:

Once a miner solves a puzzle and a bitcoin is generated, it needs to be confirmed by others. Miners make the transactions sent on the bitcoin network, a part of their blocks. A transaction becomes secure and complete once it is included in the block. 

Once the transaction is included in a block, it officially becomes embedded in the bitcoin blockchain. The more confirmations you get, the larger payments you can make. Let us understand this with the help of an example:

3. Security:

Miners also play a vital role in securing the bitcoin network. Confirming transactions is just a part of it. Miners secure the network by making it difficult to attack, alter or stop. As the number of miners increases, the security of the network also increases.

The reversal of bitcoin transactions is also not easy. You need to have more than 51% of the network’s hash power to do it. The bitcoin network remains safe because of the distributed hash power among several different miners.

How does mining work?

Let’s understand the process through an example. Suppose User 1 wants to buy some goods from User 2. User 1 will send 1 bitcoin to User 2.

User 1’s wallet will announce the payment of 1 bitcoin to User 2’s wallet. This is known as a transaction and is broadcast to all the nodes connected to User 1’s wallet.

User 1’s spend against other pending transactions is checked, and if no conflicts are found, the transaction is broadcast over the bitcoin network. Remember, this broadcast does not mean that the transaction has been entered into the blockchain. The confirmation is pending. It would be a risk for User 2 to send the goods with a confirmation of the transaction.

The transaction information then reaches other miners on the network who race each other to confirm the transaction. They use their computational power to generate the 64-digit hash. The first miner who generates a 64-digit hash that is less than or equal to the target is granted the credit for completing the block, and he is awarded 6.25 BTC (the current blockchain reward).

The miner who first solves the block containing User 1’s payment to User 2 announces it to the network. If other miners also confirm the validity, the block is added to the blockchain, and the process starts afresh.

Once the transaction block is confirmed and recorded in the blockchain, User 1’s payment status changes from pending to confirmed. User 2 may then send the goods to User 1.

What are the mining pools?

Now that you understand what you have to do to mine bitcoins and the hardware requirements, you need to make a call. Do you want to mine alone or join a mining pool? Mining pools are where several miners mine as one unit and share the payout based on the percentage of hash rate contributed to the pool.

The chances of mining bitcoins solo are lesser than the chances of mining bitcoins as a part of a mining pool. The bitcoin inventors failed to anticipate the emergence of mining pools as they did with the mining transition to GPUs and ASICs.

Closing remarks:

No one knew that bitcoins would become the phenomenon they have now become. The highly volatile nature and wild fluctuations in value have made bitcoins the viral sensation they are today. 

With all the chatter around cryptocurrencies and bitcoins, it seems the buzz ain’t fading anytime soon. It would be interesting to see what the future holds.

Stay Positive, Test Negative

Happy Investing