Bitcoin mining is the processing of Bitcoin transactions on the Bitcoin blockchain. The blockchain’s decentralization comes from Bitcoin miners. These miners are located all over the world, decentralizing and distributing the blockchain. If you do not know what Bitcoin is, learn about what Bitcoin is here.
What is POW?
POW (Proof of Work) is a consensus algorithm that verifies and processes blockchain transactions. Used by Bitcoin, POW was the original blockchain consensus algorithm. In a POW blockchain, miners compete against each other to confirm transactions.
How Does POW work?
Miners compete against other miners to solve mathematical puzzles. These puzzles hold the solutions to blocks. Once found, solutions are broadcast to the network for verification by other miners. After the solution is verified, the block is confirmed and the miner receives a reward for solving the block.
What actually happens:
POW blockchains consist of a distributed node network. A node is a computer running and maintaining the latest version of the blockchain. The Bitcoin blockchain has over 9,000 nodes globally. Some of these nodes add new blocks to the blockchain through a process known as “mining”.
In order to add new blocks, miners guess random numbers. These numbers are combined with the data in the unsolved block and are run through a hash function. If the resulting hash is the solution to the block, it is announced to the network where it is verified. If the solution is correct, the miner that found the solution receives a reward and miners continue solving the next block.
Miners with faster hardware will be able to calculate the puzzles faster, thus generating more rewards. Theoretically, as total network mining power increases through more powerful hardware and a greater quantity of miners, blocks should be solved quicker. However, Nakamoto created a way to compensate for more power.
POW blockchain’s have difficulty adjustment algorithms. Difficulty adjustment algorithms, adjust the difficulty of the mathematical puzzles to compensate for adjustments in mining power. The difficulty algorithm works by changing the difficulty of the calculation based on previous block times.
How does this work? The Bitcoin blockchain is coded to create a new block every 10 minutes on average. If previous block times were less than 10 minutes, the calculations are too easy and the difficulty is increased to increase the block time. Conversely, difficulty is decreased if block times are less than 10 minutes.
A variety of difficulty algorithms exist. Bitcoin’s difficulty algorithm adjusts difficulty every 2016 blocks (~14 days). Other difficulty algorithms adjust difficulty every block. Difficulty algorithms are crucial in maintaining block times.
The miner that solves the block receives the block reward on top of the transaction fees. Transactions on POW blockchains require users to pay fees when transacting on the network. On the Bitcoin blockchain these fees are usually under $1 per transaction. Miners receive all the transaction fees within the block as a reward for solving it. In addition to transaction fees, miners receive block rewards. These block rewards are a way to distribute new coins fairly. The current Bitcoin block reward is 12.5 Bitcoin. Therefore, the miner that solves a Bitcoin block will receive 12.5 Bitcoin plus transaction fees.
Block rewards vary across different cryptocurrencies. Block rewards depend on the age of the blockchain and total supply. Bitcoin’s total supply is 21 million Bitcoin, therefore Bitcoin is designed to reduce block rewards as the blockchain ages. The decrease in block rewards is called a halving.
Bitcoin block rewards initially started with a reward of 50 BTC per block back in 2009. Coded within the Bitcoin protocol, Bitcoin block rewards would half every 210,000 blocks (~four years). The block reward halved in 2012 from 50 BTC to 25 BTC. The current block reward is 12.5 BTC with another halving schedule in 2020 to 6.25 BTC. Block rewards ensure that coins are distributed fairly over a considerable time period.
Advantages of POW
Decentralization – Proof of work blockchains consist of miners globally. Miner distribution ensure that no one miner can control the blockchain. Attacks on proof of work networks are very difficult and expensive.
Fair Distribution – Miners are paid according to much mining power they provide. This allows for a fair distribution of coins. Furthermore, miners have to sell coins to cover costs of mining, therefore providing liquidity.
Disadvantages of POW
Electricity Consumption – Cryptocurrency miners use lots of energy. According to a Cointelegraph article, Bitcoin and Bitcoin Cash Blockchains use about 0.13% of global energy. Bitcoin and Bitcoin Cash are just two of thousands of POW blockchains. Many see proof-of-work as a waste of energy.
Network Attacks – POW blockchains are vulnerable to 51% attacks. A 51% attack is an attack in which a single miner controls 51% of the network’s mining power. 51% attacks allow attackers to modify transactions. Although, 51% attacks are infrequent, POW blockchains will always be vulnerable to these attacks.
How to Mine Bitcoin
Bitcoin is the largest cryptocurrency by market cap. Therefore, it has a plethora of miners. Cryptocurrency mining often requires expensive hardware.
Bitcoin mining initially began on CPUs in 2009. Individual miners with CPUs could mine Bitcoin with a good chance of hitting multiple Bitcoin blocks. At the time the block reward was a staggering 50 BTC, worth about $450,000 today. However, the days of CPU mining were short lived.
In October 2010, the code to mine Bitcoin on GPUs (Graphical Processing Units) was released. GPUs could mine at hundreds of times of the capacity of CPUs. Difficulty increased exponentially as block times quickly fell. Miners built cryptocurrency mining rigs with multiple GPUs. However like CPU mining, GPU mining was quickly replaced by an even more powerful type of miner.
Designed for Bitcoin’s mining algorithm, SHA-256, the first ASICs debuted in 2013. These miners can mine the equivalent of hundreds of GPUs, with the electricity usage of only a few. ASICs unlike GPUs and CPUs, can only mine the algorithm they are designed for.
ASICs turned Bitcoin mining from a hobby to an industry, with mining farms consisting of thousands of ASIC miners. Today ASIC miners remain the standard for mining Bitcoin.
Should You Mine Bitcoin?
Is bitcoin mining worth it? In short, Bitcoin mining for small individual miners is not worth it.
ASICs dominate the Bitcoin network. These miners are not home friendly. ASICs are loud, power hungry miners that usually require dedicated electrical circuits and cooling. Furthermore, ASICs can mine one algorithm only and do not have use cases beyond mining. Unlike ASICs, GPUs can be used for a variety of purposes beyond mining, such as rendering, and deep learning.
Even if you do have a dedicated facility to mine Bitcoin with ASIC miners, is it worth it? Bitmain, the leading ASIC manufacture has controlled the ASIC monopoly for years. Their latest Bitcoin miner, Antminer S17+, has a hashing power of 73 TH/s. At current difficulty and an electric rate of $0.1 per KWh, the S17+ will take over a year to recoup its value with a static bitcoin price and difficulty. Bitcoin’s future price and difficulty are uncertain, making Bitcoin mining a risky venture. You can access a Bitcoin mining calculator here.
Bitcoin mining is no longer viable for the individual home miner. However, many hobbyist miners mine other cryptocurrencies that are GPU friendly. These cryptocurrencies do not support ASICs, thus making GPU mining a profitable venture for many.
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