What is Bitcoin Mining?
Learn essential concepts & fundamentals, and how the whole process of Bitcoin mining work
Proof of Work
Bitcoin uses a consensus protocol called proof of work (PoW). PoW is a form of cryptographic proof in which one party (the prover) proves to others (the verifiers) that a certain amount of a specific computational effort has been expended
What has to do PoW with Mining?
Proof-of-work is the underlying algorithm that sets the difficulty and rules for the work miners do. Mining is the “work” itself. It’s the act of adding valid blocks to the chain. It is the way the network confirms new transactions and is a critical component of the blockchain ledger’s maintenance and development.
So Mining is performed using sophisticated hardware that solves an extremely complex computational math problem. The first computer to find the solution to the problem receives the next block of bitcoins and the process begins again.
Let’s introduce ASICS. An application-specific integrated circuit (ASIC) is an integrated circuit chip that has been designed for a specific purpose. An ASIC miner refers to a computerized device or hardware that uses ASICs for the sole purpose of “mining” digital currency. Generally, each ASIC miner is constructed to mine a specific digital currency. So, a Bitcoin ASIC miner can mine only bitcoin. One way to think about bitcoin ASICs is as specialized Bitcoin mining computers, or “bitcoin generators,” that are optimized to solve the mining algorithm.
Bitcoin miners perform complex calculations, known as hashes. Each hash has a chance of yielding bitcoins. The more hashes performed in a set period of time, the more likely a miner will earn bitcoin. ASIC miners are optimized to compute hash functions efficiently.
How do you measure the rewards you get from mining?
To explain this we need to introduce another concept: hashrate.
Hashrate is a measure of the computational power per second used when mining. More simply, it is the speed of mining. It is measured in units of hash/second, meaning how many calculations per second can be performed.
Here you can check the historical total network hash rate from Bitcoin: https://www.blockchain.com/en/charts/hash-rate
What is Bitcoin Halving?
Bitcoin halving refers to the events when the pace at which Bitcoin rewards are distributed per block is cut in half.
It’s part of an overall strategy to keep the maximum supply of bitcoins fixed, in contrast with fiat currencies, which have essentially unlimited supplies and lose value when governments print too much of it.
The reward for mining a block is reduced by half for every 210,000 blocks added. It currently takes some four years to add that many blocks, so Bitcoin halving has been occurring at approximately four-year intervals
This may sound like bad news for miners, but the halving usually comes with another effect and is that as fewer new bitcoins are introduced to the market, the demand pushes the price up, so the ROI for the mining investment tends to stay on the same level.
What are the profitability drivers of mining?
With this simple formula, we can calculate how much BTC rewards are distributed annually, and traduce it to any fiat currency.