How does Bitcoin Mining Work?

How does Bitcoin Mining Work?

Anyone with a computer connected to the internet can potentially be a bitcoin miner.

Bitcoin’s blockchain technology requires that a large network of computers, running the same client software, be used to randomly succeed at validating blocks of encrypted transactions every 10 minutes or so. That’s where bitcoin mining comes in.

Mining is the act of letting one’s computer run what’s known as the “hash function” over and over and over in an attempt to crack the codes on the blocks that need validation. The codes that need cracking are all similar and are only difficult enough to require an average of 10 minutes for a random mining computer to get the right answer. The code and the answers are only significant in that they take time to complete, and that they allow the transactions to be validated and added to the ledger of all bitcoin transactions.

The ledger of transactions is shared by all of the nodes of the network in extreme redundancy, in such a way that no change can ever be made to the ledger besides adding new validated transactions to it. The fact that it takes a few minutes for computers to solve the codes is known as the ‘proof-of-work’ that makes it nearly impossible to hack, manipulate, and modify the system without expending more resources that it would be worth. Miners are rewarded each time they randomly succeed at solving the hash function by receiving a certain amount of bitcoins which are new to the system, like freshly minted dollar bills.

It used to be that anyone with a computer with an internet connection could be a bitcoin miner and make money doing it. Today, large warehouses of computers designed specifically to do just that, and have all but pushed the “little guys” out of the game. Some other cryptocurrencies, such as Litecoin and Vertcoin, are attracting more independent miners in recent years because they have become easier to mine than bitcoin.

Eventually, by about the year 2040 it is estimated, the reward system for miners is designed to decrease in value until it no longer pays out new bitcoins for mining efforts. Instead, miners solving blocks will be rewarded by the transaction fees paid by the payor and payee. The logic behind that fee is that the privilege of having your transaction validated and completed is worth paying for, since there is work being done in order to validate it, and only so many validations can take place at a time.

In mining pools, a common way to pay miners is based on a rate for the number of “shares” the miner has submitted, regardless of how many correct solutions the pool has submitted.