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How Does Bitcoin Mining Work?

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  • Last Updated : 21 Sep, 2021

Bitcoin is a digital currency that works in a decentralized way and can be sent from peer to peer irrespective of geographical location without any intermediator in between(for example bank or administrator). It was first created in 2009 by Satoshi Nakamoto. Bitcoin has the following advantage when compared to normal currency:

  • Bitcoin offers lower transaction fees than traditional online payment mechanisms.
  • Normal currencies are issued by the government, but bitcoin is operated in a decentralized way.
  • There is no tax in bitcoin, unlike normal currency where one has to pay tax.
  • No Third-Party Seizure occurs in bitcoin as there’s no central authority responsible for this.
  • No one can track the bitcoins except the owner and receiver of that bitcoin.

It is a cryptocurrency and the transactions related to bitcoins take place in the blockchain network. Every bitcoin is stored in a virtual wallet and the transaction involves the transfer of bitcoin from one wallet to another. Bitcoins can be sent from peer to peer irrespective of geographical location without any intermediator in between(for example bank per se). It works in a decentralized way, meaning nobody can interfere with your digital money, only you are responsible for your bitcoins.

Bitcoin Mining

It is the process of verifying bitcoin transactions and storing them in blockchain(ledger). The miner is the person who solves mathematical puzzles(also called proof of work) to validate the transaction. Anyone with mining hardware and computing power can take part in this. Numerous miners take part simultaneously to solve the complex mathematical puzzle, the one who solves it first, wins 12.5 bitcoin as a part of the reward. Miner verifies the transactions(after solving the puzzle) and then adds the block to the blockchain when confirmed. The blockchain contains the history of every transaction that has taken place in the blockchain network. Once the minor add the block to the blockchain, bitcoins are then transferred which were associated with the transaction.

Mining as Verifying Transactions

For the miners to earn rewards from verifying the bitcoin Transactions, two things must be ensured-

  1. The miners must verify the one-megabyte size of the transaction.
  2. For the addition of a new block of transaction in the blockchain, miners must have the ability to solve complex computational maths problems called proof for work by finding a 64-bit hexadecimal hash value.

How Does Bitcoin Mining Works?

The nodes of the blockchain network are based on the concept that no one in the network can be trusted. Proof of work is accepted by nodes to validate any transaction. Proof of work involves doing hefty calculations to find a 32-bit hash value called nonce to solve the mathematical puzzle. the miners create new blocks by abiding by the fact that the transaction volume must be less than 21 million. 21 million is the total number of bitcoins that can be generated. The verified transaction gets a unique identification code and is linked with the previous verified transaction.

Let’s understand this with the help of an example-

  • Suppose A wants to share 10 BTC with B.
  • Now the transaction data of A is shared with the miners from the memory pool. A memory pool is a place where an unconfirmed or unverified transaction waits for its confirmation.
  • Miners start competing with themselves to solve the mathematical riddle in order to validate and verify the transaction using proof of work.
  • The miner who solves the problem first shares his result with other nodes(miners).
  • Once maximum nodes agree with the solution, the transaction block is verified and is then added to the blockchain.
  • At the same time, the miner who solved the puzzle gets a reward of 12.5 bitcoins.
  • Now, after the addition of the transaction block, the 10 BTC associated with the transaction data is transferred to B from A.

Requirements to Mine Bitcoin

In past, users of the system used to mine bitcoins using the home computers but as the technology has improved, this is no longer the case. The general time a bitcoin network takes to verify a new transaction is 10min. Within that time, there are more than one million miners competing with each other to find the hash value. When there is more computing power working together to mine for bitcoins, the difficulty level of mining increases. Therefore, in order to mine bitcoins, the user must possess-

  • Specialized mining hardware called “application-specific integrated circuits,” or ASICs.
  • A Bitcoin mining software to join the Blockchain network.
  • Powerful GPU (graphics processing unit).

What Happens In Case of Hack

If someone tries to tamper with the data present in the blocks and changes the data. Now, when the data of the block is changed, the hash value of the block also changes. Thus, it will corrupt the chain and the block which are ahead of the corrupted block will automatically get de-linked as the hash value changed and the blocks after the corrupted block will become invalid too. For the hacker to validate the corrupted data, he has to change the hash of all the blocks preceding the corrupted block within a short period of time, thereby demanding huge huge computational power which is considered as next to impossible to do so. Thus, in this way, the blockchain ensures the security of the whole network and prevents data modification.

How to Start Mining Bitcoin?

The following steps display the ways to mine bitcoins:

  1. Profit calculation: One must, first of all, calculate the profit by taking hardware cost, electricity costs, and bitcoin cost into consideration.
  2. Buying the Mining Hardware: After ensuring the feasibility of mining bitcoins, the user must purchase mining hardware like ASICs.
  3. Mining Software: For proper access to bitcoin, mining software provides a pathway to join the Blockchain network. There are lots of free mining software available online.
  4. Installing Bitcoin Wallet: After the user receives bitcoins as a reward for mining, the bitcoins are to be kept in the bitcoin wallet.
  5. Joining a Mining Pool: This increases the possibility of mining bitcoins efficiently.

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