Mining is an important activity in the Bitcoin network. This is the peer-to-peer network’s way of verifying transactions and reaching common consensus without the need for a centralised authority.
Mining is crucial to keep the Bitcoin network up and running. Transactions on the network are verified by miners, and miners receive newly minted units as a reward
- Miners compete with each other in solving mathematical puzzles
- Mining is an energy-intensive activity
- Specialised equipment is necessary to sustain mining profits
What is the purpose of Bitcoin mining?
Mining ensures that only legitimate transactions are verified on the blockchain of any cryptocurrency. Mining is the process of providing a stable settlement mechanism to a cryptocurrency network.
The ‘miners’ of cryptocurrencies such as Bitcoin are computer owners who allocate their computing power to the peer-to-peer network. Like gold miners who use picks and shovels to extract gold, a Bitcoin miner needs two things: mining hardware and energy.
Miners are computer owners who contribute their computing power and energy to a ‘Proof of Work’ based cryptocurrency network like Bitcoin. The first miner to verify a new block for the blockchain receives a portion of the mined currency as a reward. This fee is called the block reward.
How does the Bitcoin mining process work?
The miners’ computers (called nodes) continuously collect and aggregate individual transactions from the last ten minutes (Bitcoin’s fixed “block time”) into blocks. The computers then compete for the blockchain to solve a complex cryptographic puzzle to be the first to verify the new block.
The goal of every miner in the network is to be the first to solve the puzzle. As a reward for their efforts, the first miner to find the solution receives a certain amount of newly minted Bitcoin.
A miner is always the first to find the correct solution. This is then broadcast to the entire network and other nodes check whether the solution is correct. If everything is OK, the new block is added to the blockchain.
Block rewards incentivise everyone in the network to participate in the process and ensure that the network works properly. Without mining, blockchain technology cannot work as we know it.
Blockchain gets its name from the fact that it is a chain of blocks. This is a list of transactions made over a period of time. When a block of transactions is created, miners run it through a process. They apply a complex mathematical formula to the information in the block, and this process converts the block into a shorter. Seemingly random sequence of letters and numbers called a ‘hash’.
As more Bitcoin units are mined, the difficulty of cryptographic puzzles increases. For miners to continue earning the same amount of Bitcoin, they need to increase their computing power to solve the puzzles.
Rewards
Basically, Bitcoin mining serves the Bitcoin community by validating each transaction and making sure that each one is legitimate. They all compete against each other using software written specifically for mining blocks. Whenever a new block is ‘sealed’, meaning a miner successfully creates a correct hash sequence. And the Bitcoin miner receives a reward.
Security and Difficulty
The more miners there are, the more secure the network is. A large pool of miners makes it almost impossible for anyone to manipulate the network and its assets.
The downside is that increasing the number of miners also increases the difficulty of mining (and reduces profitability). Roughly speaking, the difficulty level is adjusted according to how much computing power is distributed across the mining networks. This adjustment ensures that a block is always added to the blockchain roughly every 10 minutes (and with varying durations due to varying numbers of miners).
In theory, if the difficulty level is higher, this means a lower profit for the miners. This is because the reward is distributed to a larger number of miners, so that each receives a smaller share. This is not a big problem if the price of Bitcoin is high or if miners have access to cheap or free electricity.
The mining reward may not cover the mining costs. In this case, many people continue mining activities, mostly because they believe that Bitcoin will be worth more in the future.