binaryoption.ae forex forum binary options trade - What is Bitcoin? - Bitcoin Mining, Explained.
  • Welcome to binaryoption.ae forex forum binary options trade. Please login or sign up.
 

Bitcoin Mining, Explained.

Started by admin, Oct 28, 2019, 04:46 pm

Previous topic - Next topic

admin

Bitcoin Mining, Explained.
Chances are you hear the phrase "bitcoin mining" and your mind begins to wander to the Western fantasy of pickaxes, dirt, and striking it rich. As it turns out, that analogy isn't too far off.
Far less glamorous but equally uncertain, bitcoin mining is performed by high-powered computers that solve complex computational math problems (read: so complex that they cannot be solved by hand). The luck and work required by a computer to solve one of these problems is the equivalent of a miner striking gold in the ground -- while digging in a sandbox. At the time of writing, the odds of a computer solving one of these problems is 1 in 6 trillion, but more on that later.
The result of "bitcoin mining" is twofold. First, when computers solve these complex math problems on the bitcoin network, they produce new bitcoin, not unlike when a mining operation extracts gold from the ground. And second, by solving computational math problems, bitcoin miners make the bitcoin payment network trustworthy and secure, by verifying its transaction information.
There's a good chance all of that only made so much sense. In order to explain how bitcoin mining works in greater detail, let's begin with a process that's a little bit closer to home: the regulation of printed currency.
Bitcoin Basics: What is Cryptocurrency Mining?
Consumers tend to trust printed currencies, at least in the United States. That's because the U.S. dollar is backed by a central bank called the Federal Reserve. In addition to a host of other responsibilities, the Federal Reserve regulates the production of new money and prosecutes the use of counterfeit currency.
Even digital payments using the U.S. dollar are backed by a central authority. When you make an online purchase using your debit or credit card, for example, that transaction is processed by a payment processing company such as Mastercard or Visa. In addition to recording your transaction history, those companies verify that transactions are not fraudulent, which is one reason your debit or credit card may be suspended while traveling.
Bitcoin, on the other hand, is not regulated by a central authority. Instead, bitcoin is backed by millions of computers across the world called "miners." This network of computers performs the same function as the Federal Reserve, Visa, and Mastercard, but with a few key differences. Like the Federal Reserve, Visa, and Mastercard, bitcoin miners record transactions and check their accuracy. Unlike those central authorities, however, bitcoin miners are spread out across the world and record transaction data in a public list that can be accessed by anyone, even you.
When someone makes a purchase or sale using bitcoin, we call that a "transaction." Transactions made in-store and online are documented by banks, point-of-sale systems, and physical receipts. Bitcoin miners achieve the same effect without these institutions by clumping transactions together in "blocks" and adding them to a public record called the "blockchain."
When bitcoin miners add a new block of transactions to the blockchain, part of their job is to make sure that those transactions are accurate. (More on the magic of how this happens in a second.) In particular, bitcoin miners make sure that bitcoin are not being duplicated, a unique quirk of digital currencies called "double-spending." With printed currencies, duplicating money isn't an issue. Once you spend $20 at the store, that bill is in the clerk's hands. With digital currency, however, it's a different story.
Digital information can be reproduced relatively easily, so with bitcoin and other digital currencies, there is a risk that a spender can make a copy of their bitcoin and send it to another party while still holding onto the original. Let's return to printed currency for a moment and say someone tried to duplicate their $20 bill in order to spend both the original and the counterfeit at a grocery store. If a clerk knew that customers were duplicating money, all they would have to do is look at the bills' serial numbers. If the numbers were identical, the clerk would know the money had been duplicated. This analogy is similar to what a bitcoin miner does when they verify new transactions.
With as many as 600,000 purchases and sales occurring in a single day, however, verifying each of those transactions can be a lot of work for miners, which gets at one other key difference between bitcoin miners and the Federal Reserve, Mastercard, or Visa. As compensation for their efforts, miners are awarded bitcoin whenever they add a new block of transactions to the blockchain. The amount of new bitcoin released with each mined block is called the "block reward." The block reward is halved every 210,000 blocks, or roughly every 4 years. In 2009, it was 50. In 2013, it was 25, in 2018 it was 12.5, and sometime in the middle of 2020 it will halve to 6.25.
At this rate of halving, the total number of bitcoin in circulation will approach a limit of 21 million, making the currency more scarce and valuable over time but also more costly for miners to produce.
How Does Bitcoin Mining Work?
Here's the catch. In order for bitcoin miners to actually earn bitcoin from verifying transactions, two things have to occur. First, they must verify 1 megabyte (MB) worth of transactions, which can theoretically be as small as 1 transaction but are more often several thousand, depending on how much data each transaction stores. This is the easy part.
Second, in order to add a block of transactions to the blockchain, miners must solve a complex computational math problem, also called a "proof of work." What they're actually doing is trying to come up with a 64-digit hexadecimal number, called a "hash," that is less than or equal to the target hash. Basically, a miner's computer spits out hashes at a rate of megahashes per second (MH/s), gigahashes per second (GH/s), or even terahashes per second (TH/s) depending on the unit, guessing all possible 64-digit numbers until they arrive at a solution. In other words, it's a gamble.
The difficulty level of the most recent block at the time of writing is about 6,061,518,831,027. That is, the chance of a computer producing a hash below the target is 1 in 6,061,518,831,027 -- less than 1 in 6 trillion. That level is adjusted every 2016 blocks, or roughly every 2 weeks, with the goal of keeping rates of mining constant. That is, the more miners competing for a solution, the more difficult the problem will become. The opposite is also true. If computational power is taken off of the network, the difficulty adjusts downward to make mining easier.
Explain it Like I'm Five (ELI5)
Here's a helpful analogy from Investopedia Editor Euny Hong:
"Say I tell three friends that I'm thinking of a number between 1 and 100, and I write that number on a piece of paper and seal it in an envelope. My friends don't have to guess the exact number, they just have to be the first person to guess any number that is less than or equal to the number I am thinking of. And there is no limit to how many guesses they get.
"Let's say I'm thinking of the number 19. If Friend A guesses 21, they lose because 21>19. If Friend B guesses 16 and Friend C guesses 12, then they've both theoretically arrived at viable answers, because 16 How Can You Compete with Millions of Miners?
If 1 in 6 trillion doesn't sound difficult enough as is, here's the catch to the catch. Not only do bitcoin miners have to come up with the right hash, they also have to be the first to do it.
Because bitcoin mining is essentially guesswork, arriving at the right answer before another miner has almost everything to do with how fast your computer can produce hashes. Just a decade ago, bitcoin miners could be performed competitively on normal desktop computers. Over time, however, miners realized that graphics cards commonly used for video games were more effective at mining than desktops and graphics processing units (GPU) came to dominate the game. In 2013, bitcoin miners began to use computers designed specifically for mining cryptocurrency as efficiently as possible, called Application-Specific Integrated Circuits (ASIC). These can run from $500 to the tens of thousands.
Today, bitcoin mining is so competitive that it can only be done profitably with the most up-to-date ASICs. When using desktop computers, GPUs, or older models of ASICs, the cost of energy consumption actually exceeds the revenue generated. Even with the newest unit at your disposal, one computer is rarely enough to compete with what what miners call "mining pools."
A mining pool is a group of miners who combine their computing power and split the mined bitcoin between participants. A disproportionately large number of blocks are mined by pools rather than by individual miners. In July 2017, mining pools and companies represented roughly 80% to 90% of bitcoin computing power.
Is Bitcoin Mining Sustainable?
Between 1 in 6 trillion odds, scaling difficulty levels, and the massive network of users verifying transactions, one block of transactions is verified roughly every 10 minutes. But it's important to remember that 10 minutes is a goal, not a rule.
The bitcoin network can process about seven transactions per second, with transactions being logged in the blockchain every 10 minutes. As the network of bitcoin users continues to grow, however, the number of transactions made in 10 minutes will eventually exceed the number of transactions that can be processed in 10 minutes. At that point, waiting times for transactions will begin and continue to get longer, unless a change is made to the bitcoin protocol.
This issue at the heart of the bitcoin protocol is known as "scaling." While bitcoin miners generally agree that something must be done to address scaling, there is less consensus about how do it. At the time of writing, there are two major solutions to the scaling problem, either (1) to decrease the amount of data needed to verify each block or (2) to increase the number of transactions that each block can store. With less data to verify per block, the Solution 1 would make transactions faster and cheaper for miners. Solution 2 would deal with scaling by allowing for more information to be processed every 10 minutes.
In July 2017, bitcoin miners and mining companies representing roughly 80% to 90% of the network's computing power voted to incorporate a program that would decrease the amount of data needed to verify each block. That is, they went with Solution 1.
The program that miners voted to add to the bitcoin protocol is called a segregated witness, or SegWit. This term is an amalgamation of Segregated, meaning "to separate," and Witness, which refers to "signatures on a bitcoin transaction." Segregated Witness, then, means to separate transaction signatures from a block -- and attach them as an extended block. While adding a single program to the bitcoin protocol may not seem like much in the way of a solution, signature data has been estimated to account for up to 65% of the data processed in each block of transactions.
Less than a month later in August 2017, a group of miners and developers initiated a hard fork, leaving the bitcoin network to create a new currency using the same codebase as bitcoin. Although this group agreed with the need for a solution to scaling, they worried that adopting segregated witness technology would not fully address the scaling problem.
Instead, they went with Solution 2. The resulting currency, called "bitcoin cash," increased the blocksize to 8 Mb in order to accelerate the verification process to allow a performance of around 2 million transactions per day. On February 10, 2019, Bitcoin Cash was valued at $122.45 to Bitcoin's $3,605.01.