Mining is a transaction record process with bitcoins to blockchain – the public database of all the operations with Bitcoin, which is responsible for the transaction confirmation. Network nodes use blockchain to differ the real transactions from the attempt to spend the same facilities twice. The main mining objective is reaching a consensus between network nodes on which transactions consider legitimate.
Bitcoin Mining is the process of adding transaction records to Bitcoin’s public ledger of past transactions (and a mining rig is a colloquial metaphor for a single computer system that performs the necessary computations for mining). This ledger of past transactions is called the block chain as it is a chain of blocks. The block chain serves to confirm transactions to the rest of the network as having taken place. Bitcoin nodes use the block chain to distinguish legitimate Bitcoin transactions from attempts to re-spend coins that have already been spent elsewhere.
Bitcoin mining is intentionally designed to be resource-intensive and difficult so that the number of blocks found each day by miners remains steady. Individual blocks must contain a proof of workto be considered valid. This proof of work is verified by other Bitcoin nodes each time they receive a block. Bitcoin uses the hashcash proof-of-work function.
The primary purpose of mining is to allow Bitcoin nodes to reach a secure, tamper-resistant consensus. Bitcoin Mining is also the mechanism used to introduce Bitcoins into the system: Miners are paid any transaction fees as well as a subsidy of newly created coins. This both serves the purpose of disseminating new coins in a decentralized manner as well as motivating people to provide security for the system.
Bitcoin mining is so called because it resembles the mining of other commodities: it requires exertion and it slowly makes new currency available at a rate that resembles the rate at which commodities like gold are mined from the ground.
Transaction record process
Besides this, mining is the only way of bitcoins emission that are allocated as a miner reward for the mathematical task solution with the help of computer equipment. The process is advisedly done resource-intensive and difficult to leave permanent the number of blocks found by miners.
Every block should contain the confirmation that the mathematical task has been solved and each of the network nods can easily check, if the block has been really closed by the rules. Emission is decentralized as a mining reward that means a control absence over the output by a single center. During this process miners confirm accomplishing transactions in the network. In order to protect the network from overruns, mining is possible in strictly defined capacities.
Bitcoins, issued with the help of mining are the best way to hold the transaction anonymity during the work with cryptocurrency. Nevertheless, they can be used only after getting 100 network confirmations.
All the transfers in the Bitcoin system are public. Miners’ work consists in choosing the right hash, which will be convenient to all the network transactions and will provide getting of the private key. There are millions of possible combinations and that’s why the process usually takes time and demands powerful equipment.
Unknown hash is the quantity that consists of the previous block hash, a random number and transactions check value sum, made during 10 minutes. System conditions can satisfy the only one quantity, which isn’t permanent and changes after each block is closed.
As soon as the right hash is defined the transaction block closes and the miner obtains reward in the amount of 12.5 bitcoins. This process can be compared with lottery, because a lot of participants are simultaneously searching the hash. The system works pursuant to the strict rules and according to them changing of closed block is practically impossible.
The Computationally-Difficult Problem
Mining a block is difficult because the SHA-256 hash of a block’s header must be lower than or equal to the target in order for the block to be accepted by the network. This problem can be simplified for explanation purposes: The hash of a block must start with a certain number of zeros. The probability of calculating a hash that starts with many zeros is very low, therefore many attempts must be made. In order to generate a new hash each round, a nonce is incremented. See Proof of work for more information.
The Difficulty Metric
The difficulty is the measure of how difficult it is to find a new block compared to the easiest it can ever be. The rate is recalculated every 2,016 blocks to a value such that the previous 2,016 blocks would have been generated in exactly one fortnight (two weeks) had everyone been mining at this difficulty. This is expected yield, on average, one block every ten minutes.
As more miners join, the rate of block creation increases. As the rate of block generation increases, the difficulty rises to compensate, which has a balancing of effect due to reducing the rate of block-creation. Any blocks released by malicious miners that do not meet the required difficulty target will simply be rejected by the other participants in the network.
When a block is discovered, the discoverer may award themselves a certain number of bitcoins, which is agreed-upon by everyone in the network. Currently this bounty is 12.5 bitcoins; this value will halve every 210,000 blocks. See Controlled Currency Supply.
Additionally, the miner is awarded the fees paid by users sending transactions. The fee is an incentive for the miner to include the transaction in their block. In the future, as the number of new bitcoins miners are allowed to create in each block dwindles, the fees will make up a much more important percentage of mining income.
Bitcoin mining is a very difficult process and it’s necessary to have essential capacities for processing. It has become practically impossible to follow mining alone, because of permanent increasing mining difficulty and crypto-currency market development. As a result, the concept “pool mining” has appeared, which means the computational capacities banding of several participants in a group for the new block generation. The pool obtained reward for the closed block is shared between its participants.
For the long time mining has been available for home computers users, but in 2013 competition between miners for finding the right hash has increased, therefore personal mining has lost it’s economic justifiability. During the development and modernization process the next computer equipment types have been used for mining:
- CPU-mining is a one of the oldest versions working with the help of the computer processor. This option can be found in the main bitcoin client, but it’s off-stream now because of the extra low effectiveness;
- GPU-mining lies in using graphic card. This type of mining has changed the processors. It’s hallmark is the increasing of system power;
- FPGA-mining is an upgrade variant of GPU mining, which differs by lower energy consumption;
- ASIC is a mining with a special equipment created specially for work with crypto-currency. Its effectiveness far exceeds the attributes of usual graphic cards, so it has inaugurated a new era in Bitcoin development.
Mining farm – is a data center, technically equipped to mine bitcoins or other cryptocurrencies.
They were emerged as a result of the constant complication of the mining process, which requires more technical, energy and financial resources.
Mining farms allow the productivity of computers and, consequently, the Hash Rate to be maximized. The productivity of the largest farms can be several dozen PH/s (1015 hashes/second).
Physically, mining farms are rooms with a large number of computers and servers that take on tasks for mining.
There are also home-mining farms. They differ from ordinary PCs, by being specially assempled and designed for mining. Home farms can bring profitability, but users often face the problem of excessive electricity consumption and overheating of the computer at home which makes mining unprofitable.
One of the main resources into which a miner has to invest is electricity. It is also a risk factor, since the mining farm requires a permanent 24/7 power source. In addition, a large number of processors require an appropriate cooling and ventilation system.
Cloud mining is a process of obtaining Bitcoins with the use of a remote data processing center with the general computational power. This allows the users to mine Bitcoins or alternative crypto currencies without controlling the equipment directly. Most of all, the services of the cloud mining are used by the users from the countries with an expensive electric power supply, which doesn’t allow them to create mining rigs by their own.
Another option is a private virtual service, where a user installs the mining software.
Finally, a user may take the computational powers themselves by using already the results of their work and not coming in touch with physical or virtual servers.
Web-mining, or “hidden mining” – is an alternative method of cryptocurrency mining through the web browsers of users of websites. In fact, owners of Internet resources can convert the capacities of visitors’ computers into cryptocurrency.
Profitability of mining is the level of reward that a user of the blockchain network receives for mining (providing of his technical capacities for verifying transactions and solution of network tasks, resulting in a new data block on the network).
The profitability of mining depends on two related factors. The first one consists in the complexity of the process itself, on which the reward depends (the more difficult the process is, the smaller amounts of tasks can be made per technical resource unit and, consequently, the less reward you will receive). The second factor is the cost of bitcoin (or other crypto currency). That is, how much your reward is in terms of fiat currencies.
The average annual profitability of mining ranges from 120 to 200% per annum, and for some products in the period of “mining boom” from the end of 2016 showed even the best result. However, this indicator does not take into account additional investments: rental of premises, management of mining farms and energy costs. Adjusted for these factors in 2016, the profitability of mining amounted to about 10-50% per annum.
The mining ecosystem
Users have used various types of hardware over time to mine blocks. Hardware specifications and performance statistics are detailed on the Mining Hardware Comparison page.
Early Bitcoin client versions allowed users to use their CPUs to mine. The advent of GPU mining made CPU miningfinancially unwise as the hashrate of the network grew to such a degree that the amount of bitcoins produced by CPU mining became lower than the cost of power to operate a CPU. The option was therefore removed from the core Bitcoin client’s user interface.
FPGA mining is a very efficient and fast way to mine, comparable to GPU mining and drastically outperforming CPU mining. FPGAs typically consume very small amounts of power with relatively high hash ratings, making them more viable and efficient than GPU mining. See Mining Hardware Comparison for FPGA hardware specifications and statistics.
An application-specific integrated circuit, or ASIC, is a microchip designed and manufactured for a very specific purpose. ASICs designed for Bitcoin mining were first released in 2013. For the amount of power they consume, they are vastly faster than all previous technologies and already have made GPU mining financially unwise in some countries and setups.
Bitcoin’s public ledger (the block chain) was started on January 3rd, 2009 at 18:15 UTC presumably by Satoshi Nakamoto. The first block is known as the genesis block. The first transaction recorded in the first block was a single transaction paying the reward of 50 new bitcoins to its creator.