How Bitcoin Mining Works

While new dollars are printed under the control of the US federal government, bitcoin is created through “mining”, which is not under the control of any government or company. How is it possible? Let’s break down what that means.

Bitcoins are sent from one person to another in transactions. People run specialized computers called miners that verify bitcoin transactions and create new blocks of transactions to add to the older blocks stored by each miner. Each miner validates each new proposed transaction. When there are enough transactions to fill a block, all the miners work on the new block to ensure that it and all the transactions are valid. Once they have agreed that a new block is good, it is added to the older ones in what is called BitcoinBTC
blockchain. This process is called “mining” of bitcoin. A transaction is not complete and confirmed until a majority of bitcoin miners, worldwide, have confirmed it.

In bitcoin’s case, this mining process is called “proof of work,” and refers to the large number of guesses that must be made to find a “hash code” that meets bitcoin’s exacting criteria. This requires a lot of power and specialized hardware.

Bitcoin Mining is a decentralized ecosystem

There are hundreds of crypto mining companies around the world that operate these verification machines. There is no central power that approves bitcoin miners or their operators.

Miners are volunteers. No one chooses them – they just go up, collect the hardware and software and start mining. All on your own – without permission and without even an invitation! They do it because bitcoin mining makes money, in the form of newly issued Bitcoin. The formula and rules are built into the open source Bitcoin Core software that everyone uses. The more you mine, the more you can make.

If you as a miner are ever tempted to think about tinkering with the software, cheating and just taking a bunch of money (bitcoin), you immediately think of the huge investment you have already made in mining equipment, which is not good for much of something other than mining. Trying to prevent the integrity of the bitcoin mining system will harm your future earning potential and devalue all the equipment.

If people started to believe that miners were corruptocrats acting themselves, the value of bitcoin would immediately plummet. Then the miner’s investment, both the machines and the accumulated digital assets, would be worthless. So, as a miner, you continue to be a trusted transaction verifier – and by the way, you keep a close eye on the other miners to make sure none of THEM are cheating. If the other miners cheated, it would hurt you too. Bad. This is how the incentives in the bitcoin mining ecosystem make transparency and integrity mutually beneficial.

Open source money is only as valuable as the trust users have in network participants. In short, while there are trade associations and groups for professional crypto mining operations, miners are independent groups that put up their own money and time to create bitcoin.

Proof-of-Work

What the miners actually do is solve computationally intensive problems—all using off-the-shelf software on screwed-up hardware—with two key functions:

• First, the data processing ensures that every new transaction that someone tries to enter into the ledger follows the rules. Simple rules that are essential for virtual currency to work. Things that you can only use money you have. You can only use it once. Things like that, things you don’t even think about when your money is physical and sitting in a wallet – but when it’s digital, it has to be enforced with software.
• Second, the data processor sets a lock on the new transaction, a special fancy lock that joins all previous locks on all previous transactions. For ease of computing, the transactions are grouped into blocks, and it is actually the blocks that are locked and linked together with software locks that are difficult to break. Thus the name “blockchain.”

The rules built into the Bitcoin Core software used by all the miners are the key to everything. Since all the miners run the same software, they all follow the same rules. These rules enforce the fact that there is a known supply of bitcoin at all times, with the ledger tracking who owns how much. The number of bitcoins is fixed – until a miner earns something as a result of mining. In that case, brand new bitcoins are created – according to an established formula – and deposited into the miner’s own account in the ledger.

Finally, the bitcoin miners see every single transaction. Every transaction is checked to ensure that the rules are followed. The owner is identified only by a VERY long string of letters, a public key. This is the cornerstone of the Bitcoin network’s solution to the problem of government-issued currency. No snooping!

Bitcoin’s supply cap

There is a publicly known amount of bitcoin in the world, which slowly grows as it is created to pay the miners who earn it by running the system. The Bitcoin protocol states that there will never be more than 21 million bitcoins. Once miners have produced so many, unless there is a consensus change to the Bitcoin Core software, no more can be created. The limit will not be hit until about a century from now.

It becomes more difficult for bitcoin miners to earn bitcoin rewards as the supply increases. This is called the difficulty adjustment, which means that the more bitcoin there is in the world, the harder it is for miners to earn bitcoin rewards. This makes the mining industry more competitive as the value of bitcoin rises.

Despite the expensive hardware, a large number of volunteer miners keep transactions flowing, safe and secure, without the network depending on any of them as a single point of failure. Competition keeps bitcoin mining diversified. Bitcoin miners typically create a new Bitcoin block every ten minutes. Due to thousands of volunteer miners roaming the world, no single entity is responsible for verifying bitcoin transactions. No one is responsible. Just a bunch of different miners, all encouraged to be honest. No governments, no bureaucracies, no politics, no one snooping on you. Problem solved!

That is why the Bitcoin blockchain is innovative and deserves the attention and credit it has received.