When
you hear about bitcoin
"mining," you envisage coins being dug out of the ground. But bitcoin
isn't physical, so why do we call it mining? Because it's similar to gold
mining in that the bitcoins exist in the protocol's design (just as the gold
exists underground), but they haven't been brought out into the light yet (just
as the gold hasn't yet been dug up). The bitcoin protocol stipulates that 21
million bitcoins will exist at some point. What "miners" do is bring
them out into the light, a few at a time.
They get to do this as a reward for
creating blocks of validated transactions and including them in the block
chain. Bitcoin miners help keep the Bitcoin network secure by approving
transactions. Mining is an important and integral part of Bitcoin that ensures
fairness while keeping the Bitcoin network stable, safe and secure. Backtracking
a bit, let's talk about "nodes." A node is a powerful computer that
runs the bitcoin software and helps to keep bitcoin running by participating in
the relay of information. Anyone can run a node, you just download the bitcoin
software (free) and leave a certain port open (the drawback is that it consumes
energy and storage space – the network at time of writing takes up about 145GB).
Nodes spread bitcoin transactions around the network. One node will send
information to a few nodes that it knows, who will relay the information to
nodes that they know, etc. That way it ends up getting around the whole network
pretty quickly. Some nodes are mining nodes (usually referred to as
"miners"). These group outstanding transactions into blocks and add
them to the blockchain. How do they do this? By solving a complex mathematical
puzzle that is part of the bitcoin program, and including the answer in the
block. The puzzle that needs solving is to find a number that, when combined
with the data in the block and passed through a hash function, produces a
result that is within a certain range. This is much harder than it sounds.
How
hard are the puzzles involved
in mining? Well, that depends on how much effort is being put into mining
across the network. The difficulty of the mining can be adjusted, and is
adjusted by the protocol every 2016 blocks, or roughly every 2 weeks. The
difficulty adjusts itself with the aim of keeping the rate of block discovery
constant. Thus if more computational power is employed in mining, then the
difficulty will adjust upwards to make mining harder. And if computational power is taken off of
the network, the opposite happens. The difficulty adjusts downward to make
mining easier.
In addition to being the means of
generating new bitcoin, bitcoin mining creates the blockchain that
verifies bitcoin transactions. The block reward is gleaned by placing a new
block on the block chain, which acts as an advancing public ledger of verified
transaction. This is an essential function for bitcoin's operation as it
enables the currency to be safely and predictably created without the
centralized regulation in the form of a bank or federal government. Blocks must
to be a validated by a proof-of-work (Bitcoin uses Hashcash), which can only be
obtained by expending a great deal of processing power. Once a block is
obtained a message is broadcast to the mining network and verified by all
recipients. In the earliest days of
Bitcoin, mining was done with CPUs from normal desktop computers. Graphics cards, or graphics processing units
(GPUs), are more effective at mining than CPUs and as Bitcoin gained
popularity, GPUs became dominant.
Eventually, hardware known as an ASIC, which stands for
Application-Specific Integrated Circuit, was designed specifically for mining
bitcoin. The first ones were released in
2013 and have been improved upon since, with more efficient designs coming to
market. Mining is competitive and today
can only be done profitably with the latest ASICs. When using CPUs, GPUs, or even the older
ASICs, the cost of energy consumption is greater than the revenue generated.
The
difficulty of the calculation (the
required number of zeroes at the beginning of the hash string) is adjusted
frequently, so that it takes on average about 10 minutes to process a block.
That is the amount of time that the bitcoin developers think is necessary for a
steady and diminishing flow of new coins until the maximum number of 21 million
is reached (expected sometime in 2140).
If
you've made it this far, then congratulations! There is still so much more to
explain about the system, but at least now you have an idea of the broad
outline of the genius of the programming and the concept. For the first time we
have a system that allows for convenient digital transfers in a decentralized,
trust-free and tamper-proof way. The repercussions could be huge. What is the
point of Bitcoin mining? This is something we're asked every day.
Traditional
currencies--like the dollar or euro--are issued by central banks. The central
bank can issue new units of money at any time based on what they think will
improve the economy. With Bitcoin, miners are rewarded new bitcoins every 10
minutes. The issuance rate is set in the code, so miners cannot cheat the
system or create bitcoins out of thin air. They have to use their computing
power to generate the new bitcoins. Miners include transactions sent on the
Bitcoin network in their block. A transaction can only be considered secure and
complete once it is included in a block. Because only a when a transaction has
been included in a block is it officially embedded into Bitcoin'sblockchain.
·
More
confirmations are better for larger payments. Here is a visual so you have a
better idea:
·
Payments
with 0 confirmations can still be reversed! Wait for at least one.
·
One
confirmation is enough for small Bitcoin payments less than $1,000.
·
Enough
for payments $1,000 - $10,000. Most exchanges require 3 confirmations for
deposits.
·
Enough
for large payments from $10,000 - $1,000,000. Six is standard for most
transactions to be considered secure.
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