Mining has historically been a term usually reserved for those who dig gold and other metals deep underground, but today there is a new type of miner looking for a very different treasure in a very different way.
Bitcoin miners, equipped with high-tech computers rather than spades, are fundamental to the bitcoin ecosystem: devote the crucial computing power needed to maintain the blockchain and verify the thousands of transactions that occur every day, also providing the Network immunity to hackers, ability to track trade and (the only) way to create new bitcoins.
Learn more about bitcoin and how it works
The bitcoin mining art is not even ten years old, but the prizes offered have already seen evolve from a "hobby-like" operation that anyone could do at home in an energy-intensive industrialized market. .
Decentralization is at the heart of bitcoin, and while the importance of blockchain is well understood, the way this ledger is often overlooked, given that it is not controlled by a single person or entity. So, what's the bitcoin mining and how does it work?
What is the bitcoin mining?
Bitcoin mining is the process that ensures that the bitcoin works as intended and is the only way to add new supplies to the market. Miners are individuals or companies that provide computing power to help maintain and manage the blockchain network that supports bitcoin as a digital currency. These computers are responsible for verifying all bitcoin transactions and in return they get the "mine" opportunity for bitcoins that have just been created.
Although the Internet has created a fast and universal communication channel all over the world, the development of a truly decentralized system capable of operating on a global scale was still held back by three big questions. First of all, with nobody in control, who will maintain a registration (and will support registration costs) of all transactions? Secondly, who would take into account these record holders? And thirdly, how do you incentivize people to become record keepers in the first place?
Satoshi Nakamoto, the founder of bitcoin, came with an answer for all three. People – known as miners – would use their computers to feed and maintain the blockchain, helping to organize other people's transactions. The computers of the other miners should therefore check the work to make sure it is correct to provide a public consensus on which transactions to confirm: if the information of the original miner does not match those of all the others, it is clear that something is wrong. In exchange for this, the miners are paid transaction fees and, as long as there is still a new bitcoin, the opportunity to win the new bitcoin the protocol releases about every ten minutes.
Using bitcoin miners to make the blockchain work, many of the problems that led to the fall of previous systems have been addressed. It is decentralized: the ledger is not under a single control point and anyone can access and verify the transactions that have been registered. It is incentivized: people have a reason to use their hardware and pay for the electricity needed to make the blockchain work because they are rewarded with new bitcoins. Together, this makes it immune to hackers: the fact that it is powered by a wide range of computers all over the world rather than from a single source means that it is extremely unlikely (though not impossible) that anyone can get control of over 50% of the network to take control.
How does bitcoin really work?
Today, bitcoin mining is mainly performed using powerful, specially designed computer systems known as drilling rigs that execute bespoke software day and night. All systems were created for the same reason: to extract new bitcoins. But for mine for this bitcoin they have to help update the public ledger and help validate the work done by other miners by keeping the blockchain. Every single existing bitcoin has been created through mining, which means that every bitcoin is owned by a miner until (or if) he decides to sell it.
Every bitcoin transaction initially enters the network as pending & # 39; or & # 39; not confirmed & # 39 ;, so there is a constant flow that must be verified by the miners, so that the transaction is confirmed. This is the same principle as a bank that cancels a payment using your debit card. These transactions contain all the important information necessary for the transaction, such as the portfolios of each party and the date, as well as other optional data such as transaction codes, reference numbers or messages.
Extraction of bitcoins and hashes
Miners (also known as mining nodes) then automatically start organizing this data. First, they reduce all the information inside the transaction into a hash: an alphanumeric string of 64 characters. This not only condenses large amounts of information into a smaller file, but also encrypts the information that hash now represents. Once the hash has been created, the underlying information it represents can not be changed without messing up the hash, which then alerts the rest of the miners who manage the blockchain.
It is important to note that the blockchain is organized in chronological order and the mining software automatically starts collecting the most recent transactions before moving on to the second most recent transaction, then the third and so on. Once a transaction has been hashed, it is combined with information from another transaction to create a new hash. Transactions continue to be added together and combined into a single hash to form a block. These are blocks that are added to grow the transaction chain (hence the name blockchain).
Extraction and nonce of Bitcoin
During this process the miners run one with the other to be the only one to seal the block so that it is ready to be inserted into the chain, since the miner to do this is the & # 39; unique that is rewarded with new bitcoins. Closing the complete blocks, however, is a game of riddles rather than one based on skill. Miners compete to find the hash in random blocks that the bitcoin protocol is looking for by sending numerous hypotheses (known as nonces) in hopes of hitting a game.
The random nature of this process means that the miners can not find patterns to follow or get a better view of what the next hash will be to isolate a block and gain new bitcoins: it all comes down to luck. They can, however, maximize their chances: the more computing power a miner has the better chance of doing. It is the same principle of lottery game: you can buy more tickets to increase your chances of winning, but there is no guarantee of a prize regardless of how many you buy.
When a miner seals a new block, it creates a block number that sequentially follows the last block added to the chain, mathematically linking the new block to the other blocks of transactions in the chain that have already been confirmed and verified by consensus. based on the network.
Once the new block has been added to the blockchain, it must be confirmed by other miners. The miner who sealed the block must have the work trials (PoW) checked by other miners to make sure all information is correct. This is done by several other miners who check that the hash of the block matches that of the underlying information it represents, reaching a consensus that the new block is legitimate or not. This consensus model is what prevents scammers from tampering with previous or new transactions and prevents people from "double spending" (when someone spends bitcoins they have already spent and no longer has), as the blockchain will recognize if any new transactions involve bitcoin has already been spent
In this capacity, miners essentially act as auditors of each other's work to ensure that everyone is playing by the rules.
Why do people extract bitcoins?
The miner who completes the PoW to add a new block to the blockchain – having helped to verify a group of transactions in a certain time interval – is rewarded twice: he is assigned the new bitcoin that the protocol releases and is assigned to him transaction costs attached. This is a way to acquire bitcoins without having to buy them.
The bitcoin protocol establishes the speed and volume to which the new bitcoin supply is added to the market. The new bitcoins are released to successful miners every ten minutes, but the algorithm that controls this is not technically dictated by time. Instead, it is designed to regulate how hard it is for miners to seal a new block, to keep the flow of new supplies constant at that speed. This means that the speed with which bitcoin is released is not affected when the number of miners in operation increases or when more processing power is applied. The prizes on offer remain the same regardless of how many miners are competing for this, and the new bitcoin on offer remains the same regardless of the computing power being launched. The only thing that changes is the probability that each miner will win the prizes offered.
While the new bitcoins will continue to be released in ten minutes, the volume of new bitcoins emitted by successful miners will change, halving to about every four years (technically, every 210,000 blocks). When the bitcoin was first extracted by Satoshi in 2009, the reward was 50 bitcoin before falling to 12.5 bitcoins in 2012, and then falling to the current level in 2016. The next cut, up to 6.25 bitcoin, it should take place in 2020, when the miners hope that the lower volumes will be offset by higher prices.
There will always be only 21 million bitcoins and the overwhelming majority has already been mined – the 17 millionth bitcoin was released in April 2018. The steady rate of release of smaller and smaller volumes of new bitcoins means that the & # 39; last bitcoin will not be extracted until about 2140.
Miners are also charged transaction fees in addition to the new bitcoin being released. The huge sums that payment processors and banks eliminate from the billions of transactions we conduct every day are often cited as one of the reasons why bitcoins and other cryptocurrencies are needed. But it is often misunderstood that the use of bitcoins is not free, though less expensive than the traditional financial system currently offers. Miners should not charge transaction fees and not too long ago often applied them only to certain types of transactions, such as particularly large or small, but the proceeds from transaction fees have increased and their dependence on this income stream is set only to grow.
Is the bitcoin mining profitable?
In short, it is impossible to define whether bitcoin mining as a practice is profitable in general. There are too many variables: the cost of hardware and the energy needed to power it varies uncontrollably all over the world and the efficiency that each miner offers depends on how much he is able to compete with an increasing number of competitors. all competing for the same prize.
Likewise the chances of a gold miner finding a nugget would be reduced as more people began digging in the same territory, the odds of a bitcoin to win the new bitcoin and the transaction fees will decrease, plus the competition there will be on the market. There are no other bitcoin deposits to dig and the bitcoin miners must compete for the same treasure or not at all.
While it is not known for certain whether bitcoin mining is profitable at this time, we know certain things. One, many bitcoin miners were making profit in the early years. Two, some miners must collect prizes, otherwise there would be no incentive for them to continue mining. And three, while some may still make money with bitcoin mining, is certainly less profitable than it was once and harder to compete than ever before.
This third point is shown by how difficult it has become to seal a new block and win the reward. According to blockchain.com, the level of difficulty to find a new block (measured by the hashing power distributed by all miners) has increased exponentially in 2018, demonstrating the increase in competition.