Everything You Need To Know About Bitcoin Mining

  • Home
  • Everything You Need To Know About Bitcoin Mining

Everything You Need To Know About Bitcoin Mining

Summary

  • As a distributed monetary system, Bitcoin relies on its members to verify the validity of all the transactions happening on the system. As there is no central entity to decide, members of a blockchain system need to come to a consensus on the state of transactions. Members can reach a consensus in various ways based on the blockchain they are working on. This is what is known as the consensus mechanism.
  • In PoW, we have miners; high-performance computers that run the Bitcoin algorithm to create (mine) new blocks. Each block consists of verified transactions and stores the details of transactions including the block hash in its header.
  • One part of the block hash is the hash of the previous block. The other part is a random number called Nonce which is added to the hash of the previous block. The new value will be rehashed by the mining node and should be less or equal to the target hash.
  • Once a new block is successfully mined, the mining node will be rewarded with newly generated bitcoins. The coin generation rate is controlled by halving, an event that happens every 4 years and slashes the block reward by half.
  • Bitcoin started with a block reward of 50 Bitcoin and has gone through 3 halving events ever since in 2012, 2016, and 2024 respectively. This brings the block reward to 6.25 coins in 2023.

Table of Contents

What is Bitcoin mining?

How does Bitcoin mining work?

Bitcoin mining: revenue and loss

Bitcoin mining: energy consumption

What is Bitcoin mining?

As a distributed monetary system, Bitcoin relies on its members to verify the validity of all the transactions happening on the system. Members have a copy of the blockchain records (the public ledger) and will use it to verify transactions.

As there is no central entity to decide, members of a blockchain system need to come to a consensus on the state of transactions. Members can reach a consensus in various ways based on the blockchain they are working on. This is what is known as the consensus mechanism.

The process of mining is related to the Proof of Work (PoW) consensus mechanism which works with high computational power.

The members of the Bitcoin blockchain interested in the mining process are called Mining Nodes. These nodes need to solve mathematical puzzles to find an answer that fits the target set by the blockchain. We will talk about this in more detail later.

Proof of Work (PoW)

Proof of Work, or PoW for short, is the consensus mechanism used in the Bitcoin blockchain. 

PoW relies on high computational power and as a result, has a very high energy consumption. This is one of the main reasons other consensus algorithms, such as Proof of Stake (PoS) were proposed as a more efficient alternative.

In PoW, we have miners; high-performance computers that run the Bitcoin algorithm to create (mine) new blocks. Each block consists of verified transactions and stores the details of transactions along with some other details in its header. One of these important details is the block hash which is linked to the previous blocks of the blockchain.

On the Bitcoin blockchain, the hash is a 64-digit string of numbers and letters created by a SHA256 hash generator. SHA256 is an encryption technique that gives you a cipher or encrypted text for the input you provided. That is the hash we’re talking about.

Here, you can see the hash of the genesis block, the first block of the Bitcoin blockchain.

000000000019d6689c085ae165831e934ff763ae46a2a6c172b3f1b60a8ce26f

Bitcoin Genesis Block - Source: BTC.com

A small change in the input will result in a totally different hash. To make blockchain records tamper-proof, the hash of each block is created with the hash of the previous block which itself is linked to the precedent block.

As you can see, the blocks are chained together through cryptography and a change in one block will require a change in all the other following blocks as their hash is linked together.

Now, you know why we call this system a Block Chain and why it is considered tamperproof.

How does Bitcoin mining work?

In the Bitcoin network, mining nodes cannot just simply hash the block information and publish the result to the network.

There’s a specific target hash that is created based on the network conditions. A mining node should produce a less or equal hash to the target hash for its block to be accepted by the network and be eligible to receive block rewards. That is why block hashes always start with multiple zeros.

One part of the new hash is the hash of the previous block. The other part is a random number called Nonce which is added to the hash of the previous block.

The new value will be rehashed by the mining node and the result will be compared with the target hash. If it meets the criteria, the new block will be accepted, otherwise, the mining node needs to create a new hash by adding a new Nounce to the hash of the previous block.

Based on the network condition, the Bitcoin blockchain tweaks the target hash to make it harder or easier for mining nodes to meet the criteria. In this way, the block creation rate will stay the 

Bitcoin Difficulty Over Time - Source: BTC.com

The difficulty of the Bitcoin network is adjusted after every 2,016 blocks or almost two weeks based on the number of nodes participating in block creation.

If the number of participants is high, the difficulty will increase to keep the rate from increasing. On the other hand, if the number of participants is low, the algorithm will decrease the difficulty to ensure enough coins are created.

Block Rewards and Halving

Once a new block is successfully mined, the mining node will be rewarded with newly generated bitcoins. This is what we know as block rewards; an incentive that keeps members motivated to keep maintaining the Bitcoin network.

As you can see, Bitcoin mining processes new transactions in the network and creates new coins in the process.

Bitcoin has a caped supply of 21 million coins and the algorithm is set in a way to create these coins gradually throughout the years. Precisely, it will take Bitcoin till the year 2140 to have all its coins in circulation.

The coin generation rate is controlled by halving, an event that happens every 4 years and slashes the block reward by half.

Bitcoin started with a block reward of 50 Bitcoin and has gone through 3 halving events ever since in 2012, 2016, and 2024 respectively. This brings the block reward to 6.25 coins at the time we’re writing this article.

Bitcoin mining: revenue and loss

The profitability of Bitcoin mining is dependent on various factors, including the spot price of Bitcoin.

Throughout the years, the difficulty of the Bitcoin network has increased significantly as more people entered the mining business. This has pushed businesses to spend more on operations to only have their rewards halved every 4 years.

Of course, the increase in the Bitcoin price has been significant as well, making the mining business an interesting option.

goodMining businesses have the following main costs to consider:

  • Mining Hardware: Bitcoin mining requires special hardware which is pricey
  • Electricity: Mining requires extensive electricity, adding a hefty cost to the business
  • Labor: A mining infrastructure needs constant monitoring and maintenance to ensure the machines are working properly 24/7

Considering these costs, mining companies try to set up their operations in regions with low electricity and labor costs and cooler weather to increase their profitability.

Bitcoin mining: energy consumption

The energy consumption of Bitcoin mining has been a major point Bitcoin critics refer to often. The negative effects of Bitcoin mining on the environment have propelled mining companies to look for different solutions to compensate for their carbon emission and footprint.

The use of green and renewable energy in the mining industry has increased over the years and businesses are trying to make their mining completely sustainable and green to make Bitcoin as environment-friendly as possible.

Companies are also trying to offset their carbon emissions by buying back their carbon emission through carbon credit.

Every network and system we’re using today is producing carbon in one way or another and Bitcoin is no exception. However, the industry’s efforts to make this business as green as possible is an indication that Bitcoin can become relatively sustainable in the near future.

Share:
Most Popular
Stay In The Know
Our articles will find their way to your mail Box!
Social Media