what is bitcoin mining

Bitcoin Mining Guide: What is the process?

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When governments in fiat money systems run short of currency, they simply create more. Bitcoin, on the other hand, does not rely on the printing of currency but rather on the discovery of new bitcoins. Coins are “mined” by computers all over the world in a competitive process. To put it simply, governments and banks in a conventional fiscal system can and do create new money whenever they see fit. With Bitcoin, however, no one can do this since new Bitcoins are issued through a process called “mining” or “bitcoin mining”, which is a very ingenious way to confirm Bitcoin transactions and record them on a decentralized ledger at the same time.

But how exactly does Bitcoin mining work perfectly? This article will introduce you to Bitcoin mining and its central processes from the ground up.

What is Bitcoin mining?

Simply said, bitcoin mining is the act of “discovering” new bitcoins. Just like there will never be more than 21 million ounces of gold, there will never be more than 21 million bitcoins. It’s like gold in that it takes time and money to get to it. Bitcoins, on the other hand, were created to be mined utilizing the combined processing power of millions of computers in a global competition rather than a single, centralized location.

This concept is difficult to grasp at first, but ultimately proves to be brilliant. Anyone may set up a Bitcoin node and try their hand at mining, but there’s no assurance they’ll make a profit. Yet, the network’s operation and security are guaranteed by these millions of machines.

See our self-titled guide if you’re interested in learning more about “what is bitcoin mining.”

All you need to know about Bitcoin mining for the time being is that it has various functions:

  • provides protection for the Bitcoin network.
  • provides an incentive for miners to contribute their computing power to the Bitcoin network.
  • Authenticates Bitcoin deals.
  • protects Bitcoin’s decentralization (therefore its status as a free, global, P2P currency).
  • causes bitcoins to become scarce and difficult to obtain.
  • Reward loss for going against the network’s established order, effectively punishing bad actors.

The Bitcoin Mining Process: How Does It Work?

Although bitcoin (and other digital assets) can be sent often, this is largely meaningless unless their whereabouts are tracked. For digital assets in particular, it’s important to remember that they’re very simple to replicate. Having a record of who was paid and by whom is vital for a fully functional digital cash system, and this is essentially what banks do for us.

In the absence of regulatory bodies, how can we verify that, say, A has sent B Bitcoins? How can we stop “double spending,” wherein User A re-spends Bitcoins that User B sent to User C?

Mining Bitcoins is the correct response.

By recording and securing all Bitcoin network transactions in permanent blocks, the Bitcoin network functions as an alternative to traditional financial institutions like banks. The final step is completed by miners, who use their allocated hashing power to confirm transactions and add them to a public distributed ledger.

In order to mine Bitcoin, you need a computer and a Bitcoin mining application (client). When you download the Bitcoin client and run it on your computer, you join the ranks of “miners” who compete to solve difficult mathematical riddles on behalf of Bitcoin. Using cryptographic hash functions, all computers attempt to solve a block containing the most recent transaction data every ten minutes.

What are bitcoin hashes?

The public ledger is updated after each block is successfully solved. The Bitcoin blockchain is the long list of blocks that make up the distributed public ledger.

Bitcoin transactions are recorded publicly on a distributed database called the blockchain. Due to its public nature, any bitcoin block explorer can be used to inspect the file. Every 10 minutes, the blockchain is updated with a new block. Therefore, the size of the blockchain is growing exponentially. As soon as a new block is generated, it is distributed to the miners so that everyone can have access to the most recent version.

So, tell me, what good does that do?

Traditional trust-based systems necessitate an honest third party to keep tabs on the ledger and make sure it isn’t tampered with. The miners in the Bitcoin network fulfill this function.

When a transaction block is complete, it must be processed by the miners. Using the SHA-256 Cryptographic Hash Algorithm, they generate what is called a hash, which appears to be a random string of numbers and letters. As a proof of work and validation, the hash is recorded with the block at the end of the blockchain at that time.

However, how do these hashes guarantee such trustworthiness?

The information in a Bitcoin block may be hashed quite simply. However, due to the randomness and uniqueness of the hash, decrypting the data by simply looking at the hash is an extremely remote possibility. A different hash will be generated even if only one letter is changed in the original input. Because of this, it is impossible to anticipate the output, and miners must rely on guesswork to try to keep up.

Still, miners employ more than only the hashes to verify transactions. The hash of the preceding block can be found in one of these components.

A digital equivalent of a wax seal, since the hash of each block includes the hash of the prior block. It ensures the integrity of the newly generated block and all previous blocks. Other miners will be able to detect a tampered block and refuse to validate it.

As a result of a fraudulent transaction, the hash of the corresponding block would also be altered. Every block in the chain would be impacted because the hash of one block is used to generate the next. Someone checking it would be able to tell the difference between a valid block and a fake one since the fake ones wouldn’t line up with the confirmed ones.

As thus, a block is “sealed off” by the miners. Let’s check out the contest section now.

A race for the coins

We’ve already established that the only method to seal off a block is to estimate the output of the hash correctly, and the most efficient way to do so is random guessing done by computers.

All miners race against one another to see who can use their mining program to guess the solution first. The first miner to solve a block (which requires billions of computer-generated guesses from around the world) is rewarded with 12.5 Bitcoins at the moment, a sum that is halved after every 210,000 blocks. In 2021, the block reward is expected to decrease to 6.25 BTC from its present level.

This is done to encourage miners to continue their efforts, which are necessary for the system to function. It is widely believed that the price of Bitcoin will continue to rise as long as the block reward percentage keeps dropping. Miners are incentivized not only by block rewards, but also by a proportional percentage of all Bitcoin transaction fees.