Bitcoin mining

What is Cryptocurrency Mining and how does it work?

In cryptocurrency, mining is a validation of the transactions that happen on the ledger. It is labelled ‘mining’ as it is similar to gold mining, in that bitcoins exist in the ongoing protocol of the blockchain algorithm, just as gold exists in the ground, but the bitcoins haven’t been brought to the surface yet. What miners do is dig them up a few at a time by validating the data across the network.

This system of rewards or incentives is what keeps the whole system secure and decentralised, and helps reduce transaction fees.

Super computers!

As more and more machines compete for these rewards, it becomes more and more difficult to generate hashes, which validate the transactions. This has meant that over time, a kind of arms race has developed for cheaper and yet more efficient machines that can compete.

Therefore, over time, many people have invested large sums of money into employing high performance computers (FPGAs and ASICs) in order to try and keep this process profitable. Often the value of the currency obtained for finding a hash often does not justify the amount of money spent on setting up the machines, the cooling facilities to overcome the heat they produce, and the electricity required to run them.

To combat this, some miners pool their resources and then share the reward, proportional to the amount of work they contributed.

Some have also found ways to utilise their access to electricity. A power station in Missouri, Montana that was built in 1910 was facing an uncertain future after it stopped operating in 2003. However, in a ground-breaking decision the Federal Energy Regulatory Commission approved an application in 2019 to convert it into a cryptocurrency mining centre.

Nodes

Nodes is the name given to a computer that runs the bitcoin software and helps keep bitcoin running and distributing the shared information.

Anyone can be a node. The software is open source and easily downloadable. However, the downside is the current size of the bitcoin blockchain is around 300GB and growing, and of course the energy you use to be part of the process.

Nodes spread changes to blockchain through their network. One node sends to a few known nodes, who send to others etc etc. And it travels through the entire network relatively quickly.

Some nodes are mining nodes, or ‘miners’. These computers group transactions into blocks and add them to the blockchain. Each block has a complex mathematical puzzle attached to it that needs solving before the reward is given.

Essentially, the puzzle is a random number that must be found and announced to the rest of the network. All other miners then stop working on that particular puzzle and go on to the next one, and the winning miner gets some bitcoin for their efforts.

Rewards

At the moment the reward is 12.5 bitcoins per block, which at the moment is worth $100,000. So it sounds like a pretty good deal, except that there are a lot of nodes competing for that reward, and it comes down to a lot of computing power and a lot of luck if you make a lot of money this way.

On top of that, over time the rewards decrease. Every four years or so, the rewards are halved, further decreasing the inflation of the coin.

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