The Way Bitcoin Mining Works

The are many ways to get Bitcoins. You can earn it by selling a product or service and accept Bitcoin as payment. You can buy Bitcoins. Or the other way is to mine Bitcoins. Mining is simply a term to produce more Bitcoin. It is a complex mathematical process requiring extensive computing power.

In the past you could mine Bitcoin through a home computer but as the system grew, mining now needs more expensive, energy-intensive and powerful computers. The resource needed to effectively Bitcoin mine has changed significantly over the past year or two but the fundamentals have essentially stayed the same.

Printing Money and Mining Mineral

We all understand the basics for making more money or acquiring minerals. For money it is simply a matter of printing more banknotes or minting new coins. The amount of money that is produced should be carefully regulated to prevent it from being worthless. However, these days printing money has become a way for governments to avoid economic disasters and has reduced the value of money.

Mining minerals is not an easy task which is why some minerals are extremely valuable. Firstly, a mineral reserve has to be identified and then mining has to be commenced. Secondly, the mineral has to be refined.  The entire process is labor intensive and also requires vast resources but it is worthwhile in most cases due to the value of the mineral.

Bitcoin mining is in a way similar to both making money and mining minerals. Bitcoins are produced but it also has to be discovered and ‘refined’. This is all done by computers around the world. In fact Bitcoins are in a way earned by miners who contribute to the authenticity of the entire system.

Bitcoin Mining

Blocks and Hashes

There are two terms that you need to understand in the Bitcoin mining process – blocks and hashes. As previously mentioned under the basics of Bitcoin, the system is not owned or regulated by any single party. Instead the Bitcoin system exists in cyberspace on thousands if not millions of computers.

Miners are people who ensure that the system is not being manipulated. They act as the accountants and auditors who keep a general ledger of Bitcoin transactions and are then rewarded in Bitcoin. Every Bitcoin transaction has to be confirmed and since there is no central authority to do this, miners essentially take on the task.

All Bitcoin transactions over a period of time are listed in what is known as a block. Each block is then added to the block chain which is an ever-expanding collection of all the transactions that has ever occurred in the Bitcoin network. The constantly updated block chain is distributed to every user so that individual manipulation by any one party can be prevented.

To make the process more efficient, the block has to be made more efficient. It is subjected to a mathematical ‘shaping’ which makes the block shorter and it is then known as a hash. The hash is also stored in the block chain along with the block from which it was produced. Each hash is unique – changing just one character in a block will change the hash.

To produce a hash, some data in the last block is also used as well as all the data in the current block. This ensures that a single block or hash cannot be manipulated as it not only depends on the preceding block, but will also influence the next block. Since every user is keeping track of the system, if a hash is rigged it will not correlate with records on other users’ computers.

Producing Bitcoin

Every time a miner successfully creates a hash, it is added to the network and all users are made aware of it. The miner to produce the hash is rewarded with 25 Bitcoins. However, the entire process is relatively simple for a computer to mine Bitcoins. If it remained as simple then millions of Bitcoin would be mined within minutes or hours across the glove.

To prevent this the system makes mining a Bitcoin increasingly more difficult. This ensures that new Bitcoins are not only produced with more Bitcoin transactions, but also with more effort on the part of the miner or more correctly the miner’s computer. However, eventually the maximum number of Bitcoin will be reached and no more Bitcoins will be added to the system. The magical number here is 21 million.

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