Unlike precious metals like gold and silver, bitcoin mining is not done with picks, rakes and shovels. They are extracted from the Bitcoin protocol when blocks of bitcoin transactions are verified and validated by miners using specialised mining hardware, hence lending the term mining. Mining is also the process of adding of these new transaction blocks to the blockchain.
And just as important, bitcoin mining is how newly minted bitcoin is released into circulation.
The Bitcoin software was programmed in such a way that:
- A certain pre-set number of bitcoin is released into the system with every block of transactions once almost every 10 minutes, to be mined by miners.
- The pre-set number of bitcoin is halved every 4 years, leading to a fixed total of 21 million bitcoin to be completely mined by the year 2140.
- Miners use mining equipment in the form of purpose-built hardware running special software to solve complex mathematical problems, and are rewarded with the pre-set number of bitcoin with every successful block solved.
- Each successful block of transactions is then added to the blockchain.
Here is a quick 2-minute video to explain what bitcoin mining is:
Basically, that is a summary of what is entailed in bitcoin mining. To elaborate on this further:
Number of Bitcoin Released into the System
When Bitcoin first started in 2009, it was programmed in a way such that 50 new bitcoin would be released into the system with every block, or about once every 10 minutes. Bitcoin did not have any value back then, and was transacted amongst a few people involved in its development, as a way to see it functioning in the real world.
Halving and 21 Million Bitcoin by the Year 2140
The Bitcoin protocol was coded in such a way that the number of bitcoin released into the system to be mined shall be halved every 4 years (i.e. after 210,000 blocks), starting with 50 bitcoin per block in 2009, eventually halving to 25 bitcoin per block on 28 November 2012, and halving again to its current rate of 12.5 bitcoin per block since 9th July 2016. The next halving to 6.25 bitcoin per block will take place some time in June 2020.
210,000 blocks x 10 minutes = 2,100,000 minutes = 35,000 hours = 1,458.33 days = 3.99 years
Hence, it takes about 4 years, give or take, to reach 210,000 blocks of transactions, before the next halving occurs.
The Bitcoin protocol was also coded such that only a maximum 21 million bitcoin will ever be produced, and with the halving taking place every 4 years, the last bitcoin (or final part of it) shall be mined by the year 2140. Unlike paper money which can be printed by central banks through expansionary monetary policy which leads to inflation and drop in value of fiat currencies, the Bitcoin protocol creates a finite supply and capped limit of 21 million bitcoin, making bitcoin deflationary, or anti-inflationary by design.
Parallels can be drawn between bitcoin and gold, a commodity which is limited in its supply. If it is known that a particular gold mine will produce the last ever ounce of gold available in this world, what would happen to the price of gold globally all of a sudden? Unfortunately (or fortunately), no one knows for sure, but unlike gold, the last quantity of bitcoin available for mining is known, and as long as there is a market for it, this ensures its increasing value based on its diminishing supply rate and increasing demand. At least, it strives to be.
Proof-of-Work and Bitcoin Mining Difficulty
OK, this part gets a bit technical and complete comprehension is not really necessary. But if this is right up your alley, by all means, read on.
Bitcoin uses the hashcash proof-of-work function in its mining core and validation of blockchain transaction log. In creating these hashcash proofs-of-work, bitcoin miners deploy huge amount of resources in the form of mining hardware (capital investment) and electricity (operational investment), who are in turn rewarded with bitcoin with every successful block validated. This applies to bitcoin miners who use CPU, GPU, FPGA or ASIC based mining. Due to the nature of bitcoin mining being a highly competitive activity, the fastest and most efficient of the four – the ASIC chip – has rendered the other three forms of mining methods less viable at best, and completely obsolete at worst.
The hashcash proof-of-work function was invented in 1997 by Adam Back to serve as an anti-DoS (Denial of Service), used to prevent anonymous remailer, email spams and network abuse throttling. The principle behind this is hashcash proof-of-work requires expense of energy and resources, which taking the example of email spams, discourages the email spammer as mass email sending then becomes less viable.
The hashcash proof-of-work in preventing email spams and other uses mentioned above is based on the SHA1 (or Secure Hash Algorithm 1), which offers up to 160-bit encryption. Bitcoin uses SHA256 for 256-bit encryption for higher level of security and more resource-intensive hashcash proof-of-work. SHA256 also offers 128-bit security, which Bitcoin is built-upon. While SHA256 was used when Bitcoin first started in 2008 and 2009, these days Bitcoin is using two hash iterations known as SHA2562 or SHA256 function squared. By iterating it twice, SHA2562 becomes more robust against attacks. There have been talks about utilising hashcash based upon the newer and more secure SHA3, but there are implications that make it unsuitable for bitcoin mining for now, one of which is the invalidation of all existing ASIC mining hardware. At least, SHA3 is not required at this moment, and will likely only be used in the advent of new security risks.
To understand how a hashcash algorithm works, it would be best to take a look at the following function:
n.b. Note that the example below has been simplified with arbitrary figures to facilitate easier understanding of the hashcash proof-of-work function. In reality, it is a whole lot more complicated. Let’s begin.
Consider the equation a x b = c
If a large arbitrary figure c was such that
c = 5,367,745,493
it would be extremely difficult to figure out the numeric values of a and b.
It can take practically an infinite number of attempts or guesses to derive the correct figures.
So, in bitcoin mining, amongst all the miners who are involved in validating a particular block of transactions, the first miner who successfully figures out that a = 64,951 and b = 82,643 will be rewarded with bitcoin for that particular block, which at this moment in 2017, is 12.5 bitcoin per block.
However, before the bitcoin are awarded to the successful miner, other miners will need to check and verify that the figures were correctly derived by that miner, and this is quickly and easily verifiable by the other miners simply by multiplying a and b to check if it equates to c.
This is similar to how the hashcash algorithm works, by laying an insurmountable problem such that given only c, it is extremely difficult to derive a and b, but easy to check out after making known a and b that any other miner can quickly verify.
- The mining hardware with the fastest hashrate, and therefore the one which can afford the most number of guesses in the shortest time possible, would thus be the one more likely to figure out the correct solution first.
- To add to that, the mining hardware which runs the most efficiently with as low a power consumption as possible, would be the one to retain more of the bitcoin in profit and expend less of it in electricity and cooling.
And so it is the hashcash proofs-of-work and these factors that form the basis for bitcoin mining. Do note that the above is a simplified explanation of how the hashcash proof-of-work functions, and in reality, it involves guessing the correct number of prefix zeroes and is more complicated.
Here is a visual demo that describes the processes involved in bitcoin mining:
Bitcoin Mining Difficulty
Like a market with perfect competition, as long as there is profit to be made, new entrants will continually enter the market until profit opportunities are depleted. In Bitcoin space, this is similar but with a slight twist – an algorithm regulates matters to keep the “market” in equilibrium. The Bitcoin network sets and adjusts the mining difficulty, such that the work required by the miners to successfully find a block with the correct solution (as given in the example above) takes approximately 10 minutes.
As more miners participate in bitcoin mining, the network automatically adjusts the mining difficulty so as to keep the time it takes to successfully find a block consistently to roughly 10 minutes. Likewise, as miners pull out of the system for whatever reasons, the network throttles its difficulty down to ensure that a block is still found once every 10 minutes or so.
This rate at about 10 minutes per block, coupled with the halving (of bitcoin quantities per block) that takes place every 210,000 blocks (over every 4 years), is crucial and instrumental in the final total of 21 million bitcoin to be completely mined by the year 2140.
Watch the following video for a more detailed and technical explanation of what bitcoin mining is:
A Technical Explanation on How Bitcoin Works Under the Hood
Do I Really Need to Understand the Above to Start Mining Bitcoin?
Fortunately for nearly all of us, the answer is NO. Just as you would not need to understand the mechanics of the chipsets in a smartphone to make a phone call or to send a message, or know the components of a laptop to use one for word processing or to surf the internet, you do not need to fully understand the hashcash proof-of-work and mining difficulty to be involved in mining, especially if you’re mining with a good support team. It is however, good knowledge to know a little bit about specifications and mining difficulty, just as knowing the speed and RAM of your phone to help you determine which model to buy and when to upgrade. But if you’re mining with a community which handles all the backend hassles for you, it is even easier than deciding which phone model to buy. See Benefits of Mining with BitClub Network to learn how you can begin mining today and ride on the expertise of one of the largest bitcoin mining pools in the world today.