The images on the internet show bitcoin mining in a form reminiscent of the old gold rush miners, pickaxes digging out the gold. The actual mining is not quite like that and it changes over time.
Bitcoin miners are a special necessity in the bitcoin network. When a bitcoin is spent, a transaction occurs. Your transaction is verified by checking back through the transactions to ensure that you have the bitcoin available to spend. Your wallet synchronizes with the network to make sure that it is up-to-date and accurately reflects the amount of bitcoin you have available.
When the transaction is created, it floats into the network and is considered an unconfirmed transaction because it has not yet been allocated to a block on the blockchain. The blockchain is a public ledger and every transaction has to be verified and placed into a block.
Mining is the process of verifying each transaction. It is important that transactions are added in order. Otherwise, an unscrupulous person could send bitcoin to one person and then immediately send another payment. Unless there is a way to verify which came first, chaos could ensue. Sellers would not trust the system if their incoming fund transaction ever failed.
When miners verify the transaction, new bitcoins are created and the successful miner who created the block and adds it to the blockchain is rewarded with bitcoin. This is called the block reward. In the beginning, that is in 2009, the reward was 50 bitcoins for each block. When 210,000 blocks have been mined, the reward is halved. By 2017, the reward has halved twice so it is now 12.5 bitcoins.
The formula was set out in the bitcoin protocol when Satoshi Nakamoto determined that the bitcoin would max out at 21 million coins. By cutting the number of bitcoins in half every four years, it would cut down on the bitcoin supply. At least, he thought it would take 4 years to generate 210,000 blocks.
Miners still solve blocks but the reward is smaller. The next reduction in the block reward will bring it down to 6.25 bitcoins per block. The four-year duration was based the approximate amount of time it takes to mine 210,000 blocks. The move toward the total 21 million bitcoins is moving faster than anticipated.
Sounds easy? It involves solving a mathematical puzzle as the miner first has to identify the block and link it to the previous block. The puzzles increases in difficulty every 2016 blocks. This works out to be roughly every two weeks.
The mathematical puzzle is a cryptographic puzzle and involves in hashing the transactions. A miner takes transactions and applies a hashing algorithm. Bitcoin’s proof of work algorithm is SHA-256.
When mining started, people could use their home computers to mine bitcoin. As the number of bitcoin transactions grew, more power was needed. A computer with a more powerful graphics processing unit or card was needed for mining. By 2013, the Application-Specific Integrated Circuit (ASIC) was developed specifically for bitcoin mining.
The hash rate refers to the number of attempts involved in solving the cryptographic puzzle. Hash rates are measured in TH/s measurements. TH/s refers to one trillion hashes per second. Finding new blocks will be more challenging all the time but bitcoin cloud mining pools continue to attract miners.
A dedicated mining operation runs on banks of specialized computer hardware and electricity cost is astronomical.
As it becomes more difficult to generate bitcoin currency, mining is becoming less profitable. As well as the difficulty of hashing and the demand for more and faster bitcoin mining hardware and more mining power, there are diminishing returns for each block reward. In the future, will there be fewer miners as bitcoin mining profitability declines?