Cryptocurrency mining is the process of securing cryptocurrency networks by solving cryptographic problems.
In layman’s terms, cryptocurrency mining involves using your computer’s processing power to decipher a math problem. By solving these mathematical problems, cryptocurrency “miners” create cryptographic proofs. Miners compete to provide the first cryptographic proof to a specific problem. Then, the first person to provide cryptographic proof will receive a reward.
Confused? That’s okay. To put things in even more basic terms, crypto mining involves dedicating your computer’s resources to solving really hard math problems. The first computer to solve that problem will get a reward in the form of bitcoin.
Mining Increases in Difficulty Over Time
In the early days of cryptocurrency mining, the math problems were relatively easy to solve. They still took an enormous amount of computing power to solve – but anyone with a high-powered gaming PC could compete for block rewards. You didn’t need to have a specialized mining rig.
Today, bitcoin mining is significantly harder. The difficulty of the bitcoin network has increased over time. That means the math problems are harder to solve than ever before. Today, bitcoin mining is virtually impossible for a single user with a gaming PC. Instead, most individual users will join a mining pool with dozens or hundreds of other users, then agree to split the reward.
Difficulty increases in the bitcoin network are deliberate. The difficulty increases approximately every two weeks. That means every two weeks, it gets even harder to mine bitcoin. That may seem silly – but the reason is simple: computing power has steadily increased over time (remember Moore’s Law?). The bitcoin network raises its difficulty to keep pace with the growing processing power.
Mining Hardware Has Changed Over Time
The equipment we use to mine has also changed over the years. In the early days, miners used gaming PCs and high-powered PCs to mine bitcoin and other cryptocurrencies. Today, we have specialized “miners” – like the popular Antminer S9.
These miners are special chips devoted specifically to mining cryptocurrencies. They’re hundreds of times more efficient than an average gaming PC because they’re devoted exclusively to that task.
Today’s mining often takes place in enormous warehouses in countries like China, which has cheap electricity and easy access to mining hardware.
Someone – like a corporation – will purchase dozens, hundreds, or even thousands of bitcoin miners, then dedicate the entire space to cryptocurrency mining. Today, approximately 80% of bitcoin mining capacity comes from China. The Czech Republic (10%), Iceland (2%), Japan (2%), Georgia (2%), and Russia (1%) are the other major sources of bitcoin mining operations.
Is Centralized Mining Good for Bitcoin?
When you look for information about mining pools online, you’ll find the same names popping up frequently, including BTC.com, Antpool, ViaBTC, Slush, and F2pool. All of these, with the exception of Slush, are Chinese-based bitcoin mining pools. They’re the top 5 biggest mining pools in the bitcoin network. They control a huge proportion of bitcoin mining capacity.
The bitcoin community struggles with the idea of centralized mining.
If you read the original bitcoin whitepaper written by Satoshi Nakamoto, you’ll learn that the bitcoin network was designed so one node = one vote. The vision, in the eyes of Satoshi, was to create a network of computers worldwide that contribute to the bitcoin network for rewards, then participate in a democratic voting system.
Today, the bitcoin network still works on a one node = one vote system. However, centralized corporations like Bitmain (which runs Antpool and mines 25% of all bitcoin blocks) control thousands of nodes. This concentrates power in the hands of a few privately-run corporations.
Projects like Ethereum have countered this problem (somewhat) by introducing ASIC-resistant features. It remains to be seen how centralized bitcoin mining capacity will become.
How Does Bitcoin Mining Work?
Approximately every ten minutes, mining computers – or miners – collect a few hundred pending bitcoin transactions together. This collection of transactions is called a block.
Your mining software turns this block into a mathematical puzzle.
The first miner to solve this mathematical puzzle will announce the solution to other miners on the bitcoin network. At this point, the other miners will check the solution and then plug it into the puzzle to verify that the solution is correct. These puzzles are designed to be incredibly difficult to solve – but very easy to verify.
If the majority of blocks on the network grant their approval and verify the solution, then the block of transactions is cryptographically added to the ledger. The miners then move onto the next set of transactions.
The miner who processed the block – the miner who found the solution – will receive 12.5 BTC as a block reward.
What is Hashrate? Why Do We Use Hashrate to Measure Mining Capacity?
Some people describe bitcoin mining like it’s a computer solving a really complicated math problem.
That’s sort of true. Up to this point, we’ve told you that bitcoin miners are solving complex math problems to compete for rewards.
However, there isn’t really a math problem involved in bitcoin mining. There’s no math or computation involved in the process. Instead, miners are trying to be the first to create the correct 64-digit hexadecimal number. This is called a “hash”. Essentially, it’s guesswork.
Basically, the goal of bitcoin mining is to come up with a 64 digit hexadecimal number. That number will look like this:
When you compare different mining hardware, you’ll probably notice people talking about “hashrate”.
Hashrate is simply a measure of a bitcoin miner’s power. The higher the hashrate is, the more mining power a bitcoin rig has, the better it will be at mining bitcoins.
Hashrate is measured in terms of megahashes per second (MH/s), gigahashes per second (GH/s), and terahashes per second (TH/s).
Each of these numbers refers to the number of hashes your computer can input each second. The more numbers the bitcoin miner is inputting, the more likely you are to earn a block reward. The miner that enters more numbers more quickly than other machines is more likely to earn a block reward.
Why Do We Need Bitcoin Mining? What’s the Point of Bitcoin Mining?
Bitcoin mining secures the network. The bitcoin network – and most other cryptocurrency networks – is secured with cryptography. Cryptography is basically just a really complicated math problem. It takes an enormous amount of computing resources to solve that math problem. A computer needs to try millions of numbers each second before finally arriving at the correct solution. The miner that solves the problem first will receive a bitcoin block reward.
Once a miner discovers the cryptographic hash, and that hash is verified by other nodes, that hash is used to secure the block of transactions being added to the blockchain. The hash is added to the block, and the block is added to the blockchain.
Why do miners do this? Why would someone contribute their PC’s valuable resources and electricity towards mining bitcoin? They do so because of the block reward.
Today, the bitcoin block reward is 12.5 BTC per block. That means the miner that solves the block will receive 12.5 BTC delivered directly to their bitcoin wallet. The block reward has gradually decreased over time. When bitcoin first launched, the block reward was set at 50 BTC. The reward gets cut in half approximately every four years.
By 2020, the number of bitcoins rewarded to miners for each block will drop to 6.25 bitcoins, before dropping to 3.125 bitcoins in 2024.
These bitcoins aren’t sent from one bitcoin user to another.
Instead, these bitcoins are released from the bitcoin network itself. Picture the bitcoin network like an ordinary coal mine. You’ve already extracted, say, 17 tons of coal from the coal mine – but you know there’s still 4 tons of coal remaining inside that mine. You continue mining until all the coal has been extracted.
The bitcoin network works in a similar way. There’s a total supply of 21 million bitcoins. As of 2018, approximately 17 million bitcoins have been mined. That means there are just 4 million bitcoins remaining.
Miners earn more than just the block reward. Bitcoin miners also receive the sum of all transaction fees within the block of transactions. So your reward includes the 12.5 BTC block reward in addition to the small transaction fees of every transaction within your block.
What Happens When All the Bitcoins Are Mined?
What happens when all of the bitcoins are mined?
Well, everyone reading this will be dead by then. The bitcoin blockchain will likely mine the last bitcoin over 120 years from now – all the way in 2140.
Yes, 80% of the world’s bitcoins have already been mined and just 20% of the total supply of bitcoins remain to be mined. However, since the block rewards continue to decrease over time, the emission of blockchains continually decreases. Based on current trends, the last bitcoin will be mined in 2140.
The bitcoin network won’t suddenly crash when the last bitcoin is mined. At this point, the network will still require miners to process transactions. The only difference is that miners will not receive a block reward for mining. Instead, they’ll exclusively receive transaction fees. Transaction fees would likely rise to cover the costs of mining.
Today, miners who successfully mine a block will receive two rewards bundled together, including the block reward (12.5 BTC) and every transaction fee within the block. Once the last bitcoin is mined, miners will only receive the transaction fees.
- We understand bitcoin mining is a bit confusing, so here’s a summary of everything we learned above:
- Bitcoin mining used to be a profitable way for hobbyists – like gamers with high-end graphics card – to make money from their machines
- Today, bitcoin mining is dominated by industry giants like Bitmain that control thousands of specialized “miners”
- Bitcoin “miners” include rigs like the Antminer S9, a high-end computer built specifically to mine cryptocurrencies
- By running these bitcoin miners next to a cheap, renewable source of electricity, you can still generate enormous profits through bitcoin mining
- In the early days of bitcoin, miners received 50 BTC every time they processed a block (which occurred every 10 minutes)
- The block reward drops every 4 years; since the bitcoin network launched in 2013, the block reward has dropped to 25 BTC every 10 minutes and then to 12.5 BTC every 10 minutes
- There’s a total of only 21 million bitcoins that can ever be created
- 80% of the world’s bitcoins (17 million bitcoins) have already been mined
- The last bitcoin will be mined in the year 2140
That’s a basic overview of how bitcoin mining works and why we need it. Next, we’ll look at how someone like you can mine bitcoins.