You might have heard Bitcoin mining a million times in the recent times. Do you know what exactly is this Crypto Mining thing? If not, start reading! Mining was once a word that was associated with precious metals and stones. So how did bitcoin get associated with mining? It is because the process of mining bitcoins is very similar to that of other commodities like gold. It requires a lot of resources and exertion and eventually leads to the creation of new currency. Bitcoin is popular as a digital currency which is not controlled by any government or organization. It is decentralized. But that means that unlike banks who can validate the authenticity of your money, Bitcoin does not have an organization doing the validation and verification for you. Instead, Bitcoin depends on miners who can validate the authenticity of a Bitcoin transaction. It means that when a person, “A” sends a bitcoin to another person, “B”, the validation of the transaction ensures that “A” does not end up sending the same Bitcoin to a third person, “C”.
What is Bitcoin Mining?
The process of Bitcoin mining requires a person to compile recent bitcoin transactions into a block which involves solving a computationally difficult puzzle. Whoever is able to solve the puzzle first is able to place the next block on the blockchain and also earn rewards for achieving this task. The rewards are in the form of newly released bitcoin given to the miner for placing the block in the blockchain and it also includes the transaction fees paid by users associated with transaction compiled on the block that the miner placed on the blockchain.
The block reward is the amount of bitcoin released with every new block that is mined. At this time the reward is 12.5 bitcoins for each newly mined block. The number of new bitcoins released with a block reduces to half every 210,000 blocks which are calculated to be roughly 4 years.
This makes Bitcoin mining integral to the entire bitcoin ecosystem ensuring that every transaction is validated and is authentic and helping Bitcoin users distinguish legitimate transactions from attempts of reusing coins that have already been spent.
History of Bitcoin Mining
Bitcoin mining is purposely designed to be a resource-intensive process which is difficult. This allows for a steady growth in the blockchain. Miners are able to build just a limited number of blocks every day. When more miners join the network the difficulty rises and when fewer miners are on the network, the difficulty reduces.
In early days when Bitcoin mining had started, miners used to rely on basic computers for mining but it began to get more complex and resource intensive which led to the use of GPUs and eventually mining-specific hardware known as ASIC which is short for Application Specific Integrated Circuit. The first ASICs were used in 2013.
Technical Side of Cryptocurrency Mining
A cryptographic hash function is a one-way encryption that does not have a key. A hash function takes a certain input and then returns a random, fixed-length hash value which is a hexadecimal number. It means that the letters A-F are used in the number and represent the digits 10-15.
A has value looks like this: 46550fef 26f87ddd 5e15407f 45a0b8d2 9513291c 4e0f0acc 24a974de 907a1569
When even a single digit changes in the input, the hash value returned will be totally different. This makes it close to impossible to predict the output and hence works well for validation and as proof of work. As a bitcoin miner, you will be required to find the right input which leads to a specific hash value.
The intricacy of these puzzles is recalculated every 2016 blocks to a value which allows for the creation of a block at an average of 10 minutes. This makes the difficulty level of the puzzle measurable yet it requires adequate resources and cannot be cheated on. Your system is required to guess until the time it acquires a hash value that is less than the target and if you are able to arrive at the solution first then you mined the block and you are rewarded a certain number of bitcoins depending on the existing reward set for miners (it is 12.5 bitcoins right now).
Every block is created in a sequence and the newly mined block becomes a part of the blockchain and exists as a permanent record of the transactions conducted in the past. The blocks are created in sequence and it includes the hash of the previous block which acts as a proof that the newly mined block was created after the last block. The block contains adequate proof of work to make it a reliable source for validating transactions and make it very difficult for someone to create an alternative block or blockchain.
Bitcoin Mining Softwares
Keeping in mind that mining is resource intensive which means that it requires time, hardware and energy, it is important that the right hardware is used for profitability. Since it is not easy for users to acquire such hardware easily, bitcoin cloud mining is gaining traction.
You can choose to mine on your own or you can be a part of a bitcoin mining pool or you may mine with bitcoin mining contracts. Most miners preferring mining in a pool. It is considered to be easier in working this way to increase the chances of creating a block.
You will be required to have a bitcoin wallet before you start so that you can store your bitcoins there. When you join a mining pool, your miners (software and hardware) will connect to the pool and every time a block is created by a member in the pool, the profit is shared by all members based on the number of hashes they contributed.
A small amount is also charged by the pool as a fee. Pools offer steady income but the amount paid out may be low. Solo mining, on the other hand, can help you keep everything you earn for yourself but it does not guarantee a steady income.
Cloud mining contracts are a way of earning bitcoins without having to deal with the hassle of bitcoin mining. It does not require resources like software, hardware, electricity, and bandwidth for mining the bitcoins.