How Does Bitcoin Mining Work

While new dollars are printed under the control of the US federal government, bitcoin is made through “mining,” which isn’t under the control of any government or company. How is that 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. Every miner validates every new proposed transaction. Once there are enough transactions to fill a block, all the miners work on the new block to make sure it and all its transactions are valid. Once they’ve agreed that a new block is good, it’s added to the older ones in what’s called the Bitcoin
BTC
blockchain. This process is called “mining” bitcoin. A transaction is not complete and confirmed until a majority of the bitcoin mining machines, all over the world, have verified it.

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In bitcoin’s case, this mining process is called “proof of work,” referring to the the huge number of guesses that need to be made to find a “hash code” that meets bitcoin’s exacting criteria. This requires lots of electricity and specialized hardware.

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Bitcoin Mining is a Decentralized Ecosystem

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

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

If, as a miner, you’re ever tempted to think about fiddling with the software, cheating and just taking a bunch of money (bitcoin), you immediately think of the huge investment you’ve already made in mining equipment, which isn’t good for much of anything except mining. Trying to thwart the integrity of the bitcoin mining system would harm your future earning potential and devalue all that equipment.

If people started thinking that miners were self-dealing corruptocrats, the value of bitcoin would immediately plummet. Then the miner’s investment, both the machines and the digital assets accumulated, would be worthless. So, as a miner, you continue being a trustworthy transaction verifier– and, by the way, watching the other miners closely to make sure none of THEM cheat. If the other miners cheated it did it would hurt you, too. Badly. That’s 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 who put up their own money and time to make bitcoin.

Proof-Of-Work

What the miners actually do is solve computationally intensive problems – all using standard software on juiced-up hardware – with two important functions:

• First, the computing assures each new transaction that someone tries to put in the ledger follows the rules. Simple rules that are essential to virtual currency working. Things like you can only spend money you have. You can only spend it once. Stuff like that, things you don’t even think about when your money is physical and sits in a wallet — but when it’s digital, it has to be enforced with software.
• Second, the computing puts a lock on the new transaction, a special fancy lock that links to all the earlier locks on all the prior transactions. For ease of computing, the transactions are grouped into blocks, and it’s actually the blocks that are locked up tight and chained together with hard-to-break software locks. 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, everyone follows the same rules. These rules enforce the fact that, at any given moment, there is a known supply of bitcoin, with the ledger tracking who owns how much. The number of bitcoin is fixed – until a miner earns some as a result of the mining work. In that case, brand-new bitcoin is created – according to an established formula – and deposited in the miner’s own account in the ledger.

Finally,the bitcoin miners see each and every transaction. Each transaction is vetted to assure that the rules are followed. The owner is identified only by a VERY long string of letters, a public key. This is the capstone 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 bitcoin. Once miners produce that many, unless there’s a consensus change to Bitcoin Core software, no more can be created. The limit won’t be hit until roughly a century from now.

It gets harder for bitcoin miners to earn bitcoin rewards as the supply increases. This is called the difficulty adjustment, which means that the more bitcoin exists 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, large numbers 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 generally create a new Bitcoin block every ten minutes. Because of thousands of volunteer miners crunching away, around the world, there is no single entity in charge of verifying bitcoin transactions. No one’s in charge. Just a variety of different miners, all incentivized to be honest. No governments, no bureaucracies, no politics, no one snooping on you. Problem solved!

That’s why the Bitcoin blockchain is innovative and deserves the attention and the credit it’s gotten.