What is Bitcoin mining?
Bitcoin mining is an essential part of the network. The peer-to-peer network verifies transactions and reaches consensus without a central authority.
- To keep the Bitcoin network running, mining is essential
- The network’s transactions are verified by miners, who are rewarded with newly minted units as a result
- Solving mathematical puzzles is a competition between miners
- Mining consumes a lot of energy
- In order to remain profitable, mining requires special hardware
What is the purpose of mining Bitcoin?
Mining ensures that only legitimate transactions are verified in any cryptocurrency. A cryptocurrency’s mining process serves as a settlement mechanism for the network.
Bitcoin miners use mining hardware and energy much like gold miners use picks and shovels to extract gold.
In a “proof-of-work” based cryptocurrency, such as Bitcoin, miners contribute their computers’ computing power. A portion of the currency mined goes to the first miner who validates a new block for the blockchain. These rewards are called block rewards.
Process of mining Bitcoin
We have already discussed how the Bitcoin blockchain works. The computers of Bitcoin miners (called nodes) continuously collect and bundle transactions from the past ten minutes (the “block time” of the currency). Afterwards, the computers compete to solve a complex cryptographic puzzle in order to be the first to validate the new block.
There is always one miner who finds the correct solution first. Then the solution is broadcast to the entire network and the other nodes verify it. A new block is added to the blockchain if everything is in order.
The block rewards provide an incentive for everyone in the network to participate in the process.
As more Bitcoins are mined, the difficulty of these cryptographic puzzles increases. Therefore, miners will need to increase their computational power to earn the same amount of Bitcoins that are stored in a Bitcoin wallet.
To prevent the Bitcoin network from being compromised by attackers, the puzzle-solving mechanism is necessary. To reverse transactions in the Bitcoin blockchain, for example, would require 51% of the network’s computing power (= a 51% attack).
Nevertheless, such a heist would be quite an expensive and fruitless undertaking because it would be very difficult to modify transactions that were validated before the attack – the older the transaction, the harder it would be.
According to the Bitcoin protocol, there will never be more than 21,000,000 Bitcoins. Therefore, the Bitcoin supply is finite and the total supply is fixed, which could increase its value as a result of scarcity.