What is Mining
Bitcoins are acquired in three main ways: purchasing them on an exchange, using them for products and services, and mining new ones. Mining is a method of adding records of transactions to the public Bitcoin ledger called the Blockchain. It exists so that any transaction can be verified, and this ledger is open to every single network user. It is often used to separate legitimate Bitcoin purchases from attempts to re-spend money already spent somewhere else.
Mining — a process of record-keeping, done through the use of computer processing power.
Blockchain — a public distributed ledger where records of every Bitcoin transaction are held.
The Blockchain is so-called because it is a chain of blocks basically, which are lists of transactions made over a fixed period of time. When a transaction block is created, it’s put through a process by the miners. They apply a complex mathematical formula to the block details, making it a much shorter, obviously random sequence of letters and numbers called a ‘hash.’
Hash — a fixed-length unique sequence of random digits, which can be created from data of any size.
A hash consists not only of information from the transaction block but also of some other pieces of data. Most notably, it contains the hash from the previous block stored in the Blockchain.
While it is relatively easy to generate a hash from a data set like a transaction block, just by looking at the hash chain, it is nearly impossible to know what data was being used. In addition, each and every hash is unique, and modifying only one character in a Bitcoin block changes the hash sequence entirely.
As you can see in the example above, the hash will always remain the same length no matter how much data is used as input.
Hash acts as a digital wax seal, because of these attributes. If anyone tampers with only one block of transactions his hash will alter instantly, and so will all the subsequent Blockchain hash sequences. So any attempt at theft inside the Bitcoin network is quickly detected by everyone who uses it.
In essence, miners represent the Bitcoin community by checking every transaction and making sure that each is valid. They all compete with each other, using software specially designed for blocks of mine. Any time a new block is ‘sealed off,’ meaning a miner has successfully produced a proper sequence of hash, he or she earns a reward.
The bounty stands at 12.5 Bitcoins per block as of October 2017, and that value will decrease by half every 210,000 blocks. The total number of Bitcoins is small, so the more coins are mined, the more each of them becomes valuable. Thus, while the sum of Bitcoins per block will eventually decrease, the value of the rewards of miners will most likely remain the same, or even increase.
Normally, generating a hash from a set of information will be extremely simple, so computers are very good at that. Therefore, the Bitcoin network needs to intentionally make the method more complicated to avoid users from hazing thousands of transaction blocks per second and mining all of the Bitcoins available within minutes.
This is achieved through a ‘Proof of Work’ required. It is a device that needs some effort from the service requester, which generally means a computer processing period. Producing a working proof is a random process with low probability, so for a valid work proved to be produced a lot of trial and error is typically needed. As for Bitcoins, the hash is what serves as job verification.
Proof of Work — an economic measure used to ensure against fraudulent activities by requiring some work from the service requester, usually meaning processing time by a computer.
In the meantime, something called the Bitcoin Complexity is being introduced to confuse mining even more. It is a measure of how challenging it is when compared to the simplest it can ever be to find a new block.
Bitcoin Difficulty — a measure of how difficult it is to generate a correct hash.
This measure is recalculated on every block of 2016. It’s built to take about 10 minutes to mine one block. The rate of block generation eventually goes up as more miners join in. Then, after recalculating the difficulty level, it rises to compensate for and carry down the rate of generating block back. Any block released by fraudulent miners which fail to meet the required level of difficulty will be rejected by all on the network, thus being worthless.
So this mechanism involves exertion and eventually becomes accessible via new currency. The rate of production of new coins matches the rate at which resources such as gold are extracted from the earth. Then why it’s called the method ‘mining.’