Bitcoin mining is a process by which new bitcoins are brought into circulation, with the help of high end sophisticated computer hardware equipment, graphic cards, and power or energy consumption. The process involves confirming and validating Bitcoin transactions on the network, since there are thousands of nodes mining Bitcoins at the same time by solving computationally complex math equations. The first node to solve mathematical problems and mine a particular block, receives the next bitcoin block to work upon.
Crypto mining is surely painstaking, but highly rewarding especially in the long run. Miners are rewarded a specific number of tokens of the cryptocurrency they are mining for every block discovered or mined. Imagine it, like a diamond or gold mine, wherein valuable things are mined with expensive market value covering all the costs of mining.
Mining rewards are not just a source of covering mining costs, but a way to incentivize the miners and keep them engaged with the block chain network for processing and legitimizing the transactions forever. Since the job of validation is performed by thousands of validators across the network, cryptocurrency tends to be a decentralized financial asset as there is no one financial institution or regulation authority overlooking the same. The power lies in the hands of people instead of a centralized Government body, and it would always be like that as cryptocurrencies are here to stay.
Importance Of Bitcoin Miners
Bitcoin mining is all about connecting your nodes to the block chain network using computational hardware to process and authenticate transactional blocks in return for a set number of bitcoin as mining rewards. Think of miners as auditors who get paid for authenticating the accounts and finances of an organization and with a 7% decline quite recently in bitcoin mining, it only raises the mining efficiency. The whole concept of Bitcoin miners was invented by none other than the Bitcoin founder Satoshi Nakamoto, who wanted to avoid the scenario of “double spending.”
Double spending is that redundancy problem wherein a Bitcoin owner might spend the same bitcoins a number of times illicitly. This is not a problem with paper currencies wherein if one spends a $1 bill, it has permanently changed hands and can’t be reused by that same person again and again. However, digital currencies always run the risk of same tokens being duplicated ‘n’ number of times, for reusing them across a number of third parties.
If a physical $1 bill has a counterfeit copy in the market, one would get to know if the signs of a counterfeit bill are verified. This is what a block chain miner is meant to do, which is checking out the block chain transactions to see whether the same bitcoins are used again or not illicitly. A single bitcoin block contains 1MB of transaction data, which after verification by a bitcoin miner is added to the chain of blocks, and in return is rewarded with a few bitcoins.
Why Mining Bitcoin Is Important?
Mining bitcoin has three crucial benefits – supporting the Bitcoin ecosystem, allowing miners to earn from mining, and releasing new supply of Bitcoin into circulation. It is quite similar to central banks minting physical currency of a country. This is the reason, there are 19 million Bitcoins available for circulation at the moment out of 21 million supply, all of which will be out by the year 2140.
There has been a tremendous surge in the demand of ASIC miners in Russia. As per Kommersant, a Russian news agency, ASIC distributors in Russia sold 65% more equipment in 2022 as compared to 2021.
The circulating supply of 19 million is a combined result of the genesis block created by Satoshi Nakamoto himself and miners mining out additional bitcoins over the course of the past decade. Bitcoin as a network does not rely on miners for existence, but in absence of mining there wouldn’t be any additional Bitcoins created. The cycle would go on until 2140 when the final batch of Bitcoins will be mined, but the miners would still continue with addressing and verifying transactions to maintain the integrity of the Bitcoin ecosystem, to benefit by receiving mining rewards in the form of network transaction fees.
Bitcoins are earned by a miner when (s)he is the first person to arrive at the closest answer, or the actual right answer, of a numeric puzzle. This is Proof of Work (PoW) where miners are rewarded based on proof of validating the transaction by solving the mathematical computation the earliest. In reality, there are no actual mathematical equations involved, but what the miners are actually doing is trying to be the first in guessing a hexadecimal number consisting of 64 digits, which should be equal to or less than the targeted hash.
So, it is all about randomness, with the number of guesses going into trillions, before one arrives at solving the math puzzle. With more and more miners getting added to the network, the number of possible solutions only adds up. There is an extreme level of computational power required to mine successfully and that too if the computational hardware suffices higher level of hash rate in terms of Gigahashes per second (GH/s) and Terahashes per second (TH/s).
Aside from mining awards, bitcoin miners do give the position of a validator, or in other terms ‘voting’ power to partake in key decisions associated with the bitcoin network. Also known as “Bitcoin Improvement Protocol (BIP),” it allows miners to have a certain level of influence in any processes related to decision making, especially connected with ‘forking.’ The more hash power one has, the more one can mine, and the more votes can be casted for initiatives.
Is Bitcoin Mining Beneficial For Miners?
Bitcoin mining rewards get reduced to half every four years during the event of Bitcoin halving. Keeping this in mind, taking a look at the history, when Bitcoin was introduced in 2009, one could earn 50 bitcoins for mining each block. This went down to 25 bitcoins per block during first halving in 2012, 12.5 bitcoins per block during second halving in 2016, and 6.125 bitcoins per block during third halving in 2020.
If you multiply any of the numbers above with the maximum price of Bitcoin ever; which has been $68,789 on November 10, 2021; imagine how much a miner earned over the years by mining a good number of blocks. Multiplying it with 6.25, would have a miner earn almost half a million dollars on mining just 1 block of Bitcoin. Multiplying it with 50, would have a miner earn almost $3.5 million on mining just 1 block of Bitcoin.
Bitcoin mining is profitable only if one invests in either an ideal equipment or joining an already existing pool of bitcoin mining. Other than that there are a lot of variables involved to consider bitcoin mining or not.
Why is it critical to own Mining Hardware to Mine Bitcoins?
In the early days of Bitcoin mining, one could simply use a personal computer with minimal computational power to mine bitcoins. However, it is no longer the case now, with increased mining Bitcoin complexities, and millions of Bitcoin mining rigs present globally. For bitcoin transactions to be processed and verified smoothly, a block needs to be produced nearly every 10 minutes.
With millions of rigs based worldwide, there is a faster solution achieved, as compared to 10 rigs worked upon the same early on. This is why the Bitcoin mining algorithm is programmed in a manner in which the difficulty is adjusted after evaluation at 2016 blocks each or approximately 2 weeks. When computational power increases, so does the mining difficulty, keeping the production rate of blocks stable.
Looking at the other side, if there is low computing power, the mining difficulty decreases, again keeping the production rate of blocks stable. Henceforth, it goes without saying, nowadays miners need to invest into a powerful graphics processing unit (GPU) or an application specific integrated circuit (ASIC) specifically. Today’s Bitcoin mining hardware are completely built as ASIC machines whose only job is to mine bitcoins, with the help of powerful magnitude of energy efficiency and hashing power, generating 200 terahashes per second (TH/s) utilizing only 27.5 joules of energy per terahash.
Bottom Line
Bitcoin mining serves dual key purposes of not just validating and confirming transactions, but even avoiding double spending scenarios to maintain the integrity of the Bitcoin ecosystem over a long haul. Other than that it serves additional dual purposes of letting miners earn out of the process and new bitcoins being added to the circulation. Based on Proof of Work (PoW) consensus protocol, Bitcoin mining is a decentralized financial system guaranteeing trustworthiness, security, and stability.
