Bitcoin mining doesn’t involve extracting anything from the ground. It’s actually a competition amongst computers.
Specialised equipment and a heap of electricity is needed as computers compete against each other to try and be the first to solve advanced maths problems. Every 10 minutes a winner is awarded 12.5 new Bitcoins.
Competition is fierce and there are a number of mining operations which have invested tens or even hundreds of millions into their operation. It is an arms race for brute computing force and cheap electricity. The mining network creates new blocks for the blockchain and a winner is rewarded for verifying these transactions.
Miners verify and update the blockchain – a secure, peer-to-peer, public, distributed and constantly growing digital record of every Bitcoin transaction.
Proof of work
The mechanism for achieving consensus on the Bitcoin network is known as Proof of Work. As explained earlier, the whole process is costly to produce, but does an excellent job of securing the network.
A common alternative is Proof of Stake but it is very different to what is used by the Bitcoin network. PoS uses a combination of cryptocurrency ownership and random selection to secure the network and award fees to the verifier of transactions.
But back to Bitcoin mining…
Winner take all
The massive mining operations (along with some smaller players who are up against the big biys) compete against each other to be the first to approve the most recent Bitcoin transactions and verify those transactions in the ledger. Every 10 minutes it is literally winner take all and is comparable in many ways to a lottery. This has led to some miners joining forces in pools and sharing the spoils.
The miner’s reward halves every four years and by 2140 it will be cut to zero. Miners will then rely on transaction fees to earn revenue.
Good guys only
Mining is an essential aspect of the Bitcoin ecosystem, as every legitimate transfer needs to be verified and attempts at double spending or other fraudulent activities need to be rejected. To be successful, a hacker would need to have more computing power than all other bitcoin miners combined. Bitcoin has survived for 9 years so far without any successful hacks. Exchanges have been hacked to the tune of billions of dollars at today’s prices, but the Bitcoin network itself has never been successfully hacked.
Preventing double spending is what made Bitcoin so innovative and feasible as a genuine currency. There was no such thing as a scarce digital asset until Bitcoin came along in 2009.
The blockchain is secured by decentralisation. Rather than a single master document stored on a server, the ledger is broken up into blocks which each contain approximately 10 minutes worth of Bitcoin transactions. Each block is ‘stacked’ on a previous block, which means the blockchain contains every transaction in the history of Bitcoin. Every bitcoin miner has a copy of the entire block chain on their computer.
Bitcoin mining is a somewhat controversial process due to it’s electricity use and alleged centralisation, but has proven to be a very effective method of verifying legitimate transactions and securing the Bitcoin network.
Want to learn more? This BBC Explainer does a good job:
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