How Does Bitcoin Mining Work?

Bitcoin Mining In traditional fiat money systems, governments simply print more money when they need it. But with bitcoin, money is not printed at all – it is discovered. Computers around the world “mine” coins by competing with each other.

How does bitcoin mining work?

Under the traditional tax system, governments and banks can (and do) issue more money whenever they want. However, no one can do this with Bitcoin, because the process of issuing coins revolves around mining a very clever process to confirm Bitcoin transactions and record them on the decentralized ledger at the same time. at the time. But how does Bitcoin mining work? In this guide, we dive into the fundamentals of Bitcoin mining and the key processes behind it.

What is Bitcoin Mining? 

Bitcoin mining can be defined as the process of “discovering” bitcoins. Just like gold, bitcoin is artificially limited and can never have more than 21 million BTC. Also, like gold, you have to allocate resources and work hard to mine it. However, unlike gold mining, bitcoin is designed to be minted using the computing power of millions of competing computers around the world. This can be confusing at first, but it’s actually pretty awesome. Everyone is free to run a Bitcoin node and try their luck in mining, but no one is guaranteed to be profitable. However, these millions of computers guarantee one thing: the functionality and security of the network.

How does mining work?

People can send bitcoins (or any other digital asset) all the time, but that doesn’t mean much unless someone keeps track of it all. This is especially true of digital assets that are super easy to replicate. So to have a fully functional digital currency you need to keep track of who paid what for whom and that’s basically what the banks do for us.
But how do we know that person A sent bitcoins to person B if there is no organization monitoring it?

How to avoid double spending when person A sends the same bitcoins to person C?
The answer is Bitcoin mining.
The Bitcoin network replaces banks and other intermediaries by processing all transactions on the network, listing them, and locking them into immutable blocks. Ultimately, it is the miners themselves that will do all the work allocating their hashing power to confirm these transactions and record them into the distributed public ledger.
Bitcoin mining requires a computer and a special Bitcoin program (client). When you install the Bitcoin client on your computer, you become a miner and can compete with rival miners to solve difficult math puzzles. Every ten minutes, all computers will attempt to solve a block containing the latest transaction data using cryptographic hash functions.
What is bitcoin hash? Each solved block is added to the public register. Essentially, the distributed public ledger consists of a long list of blocks that make up the Bitcoin blockchain. The Bitcoin distributed ledger or blockchain is a public record of all the transactions that have taken place on the network. Since the file is public, anyone can explore it with any bitcoin block explorer. A new block is added to the registry every 10 minutes. As a result, the size of the blockchain is constantly increasing.

An updated copy on a new block is shared among miners, so everyone always knows what’s going on. Now, what is it for?
In traditional systems, the ledger must be trusted, which means that there must be a trusted person or organization that oversees it and ensures that no one tampers with it. In the Bitcoin network, this role is performed by miners.

When a block of transactions is ready, miners must process it. They apply the cryptographic hashing algorithm SHA256 to turn into a seemingly random string of numbers and letters called a hash. The hash is stored with the block at the end of the blockchain at that exact moment, serving as proof of work and validation.

But how are these hashes so reliable?

Well, it’s easy to generate a hash from the data contained in the Bitcoin block. However, it is nearly impossible to decrypt the data just by looking at the hash because it is completely random and each hash is unique. If you change even one symbol in the original input, you get a completely different hash. It is therefore completely impossible to predict the output and the only way to match it is to blindly guess what the miners are doing. However, miners not only encapsulate transactions in hashes, but also use other pieces of data. 

One of these parts is the hash of the last block.
Since the hash of each block contains the hash of the previous block, it functions as a digital wax seal. It ensures that the generated block, as well as all blocks before it, are legitimate. If the block is tampered with, other miners can see it and reject it. In other words, a forged transaction modifies a block with its original hash. Since the hash of each block is used to generate the hash of the next block, this will affect all blocks in the chain. So, if someone checks it, they will immediately notice the difference between a true block and a false block because they don’t match a verified block on the blockchain.
This is how miners “seal” a block. Now let’s move on to the contest part.

Competition for parts

We have determined that the only way to seal a block is to correctly guess the hash output, and the most efficient way to do that is to make a random guess by a computer.
All miners compete with each other who can guess it faster using mining software. The miner who was the first to do this mined the block (taking billions of random computer-generated predictions from around the world) and reaped the block reward currently set at 12.5 BTC each. blocks and halved every 210,000 blocks. At current rates, this means that the block reward will drop to 6.25 BTC per block by 2021.
Basically, this serves as an incentive to keep mining to keep the system running. Since the block reward is continuously decreasing, the price of BTC will continue to increase. However, block rewards are not the only incentive mechanism for miners, as they also share common Bitcoin transaction fees.