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Mining is the process through which eligible nodes are selected to add transactions to Bitcoin’s ledger. Anyone can join the Bitcoin network as a peer by setting up a node with their own hardware and following a set of predefined consensus rules. The ledger, known as the blockchain, stores transactions in a data structure similar to a linked list.
To prevent spamming of unnecessary transactions, the mechanism of “Proof of Work” (PoW) is implemented. Only nodes that provide proof of work can add transactions to the ledger. The process of generating this proof of work is called mining, and the nodes performing this operation are known as miners
Proof of Work (PoW) is a consensus algorithm used by the Bitcoin network to determine which node can create a new block and add transactions to it. It requires miners to find a specific number, the proof of work hash, through repetitive computations. Different networks use various proof of work algorithms.
The first miner to find the proof of work number is rewarded with the network’s native monetary units and transaction fees paid by users.
Mining involves running computations to find the proof of work number. Miners use specialised hardware like ASICs (application-specific integrated circuits) designed for the network’s specific proof of work algorithm. Once a miner finds a valid hash, it is broadcasted to the network, and non-mining nodes verify its validity.
Halving is an important aspect of the Bitcoin protocol. Miners receive two types of rewards for mining a block: block rewards and transaction fees. Block rewards are new monetary units coming into circulation, while transaction fees are additional rewards from users.
However, every 210,000 blocks, the block reward is halved. This event occurs approximately every four years, reducing the new Bitcoin created every ten minutes by 50%. Halving aims to slow down the rate of Bitcoin issuance and ultimately limit the total supply to 21 million coins. Halving will continue until 2140, after which no new Bitcoin will be created.
The difficulty to find the proof of work number adjusts based on competition between miners. In Bitcoin, miners compete to find a hash value that meets a predetermined difficulty target. The target value is adjusted every 2016 blocks (approximately two weeks) to maintain an average block creation time of 10 minutes.
If the total interval between blocks is longer than 20,160 minutes, the proof of work number becomes easier to find. Conversely, if the interval is shorter, the number becomes harder to find. These adjustments optimise the average block creation time.
When two blocks are mined simultaneously, a “fork” occurs in the blockchain. Multiple mining nodes find the proof of work number, add transactions to their respective blocks, and broadcast them to non-mining nodes. Non-mining nodes accept the first valid block they receive and listen for new blocks.
As a result, the network temporarily splits into two branches, each adding new blocks. The branch with the longest chain becomes the valid blockchain, while the shorter chain is discarded. This process is known as a chain reorg.
Bitcoin mining requires specialised hardware like ASICs, designed for Bitcoin’s proof of work algorithm. Miners repeatedly generate different hash values until they find one that satisfies the network’s criteria. Once a miner finds a valid hash, it is broadcasted and verified by non-mining nodes.
As competition among miners increases, individual miners join mining pools to improve their chances of earning rewards. Mining pools are collaborations where miners combine their resources. Each pool may have different fees, payout methods, minimum hasrate requirements and payout thresholds. It’s essential to consider factors like reputation and stability when choosing a mining pool.
There are two common misconceptions about mining that need clarification:
1. Bitcoin miners are solving complex mathematical puzzles: In reality, miners participate in a global game of chance, computing a hash to find the proof of work number. Mining does not involve solving complex puzzles.
2. Bitcoin miners are destroying the environment: Although mining consumes significant energy, it has its environmental benefits. Bitcoin miners can help balance energy grids by reducing or increasing operations based on supply and demand. Excess cheap energy can be utilised, benefiting both the grid and miners.
In conclusion, mining plays a crucial role in the Bitcoin network, determining which nodes can add transactions to the ledger. Proof of Work is a widely used consensus algorithm that involves finding a specific number using the SHA 256 algorithm. Halving, difficulty adjustment, and the possibility of simultaneous blocks being mined are key considerations. Miners require specialised hardware, and mining pools offer collaborative solutions.
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