How does Bitcoin Mining work?

Bitcoin Mining generates new bitcoins. This process requires processing power to transact, synchronize, and secure all users in the Bitcoin network. Mining basically takes place in the network, over which no single user has control. The Miners (Miners) receive a transaction fee from Bitcoin users for their work and the effort of Bitcoin Mining. Many technology-savvy people would like to mine bitcoins themselves, so they ask themselves: How does Bitcoin Mining work?

Bitcoin Mining: decentralized process

It is important for every Bitcoin Miner to know that he is in a decentralized computer network, where participants from all over the world are active. The term “mining” is based on gold mining, and indeed, new bitcoins are already worth more than twice as much in July 2017 as a troy ounce of gold. The reward for mining depends on the yield, which in turn depends on the computing capacity a miner can provide. An important fact in this context is the finiteness of bitcoins. There are only 21 million of them, in July 2017, around 16.43 million bitcoins have already been mined. They are thus essentially different from the so-called fiat money, that is, paper money with no real intrinsic value (as opposed to a gold coin) that central banks can issue and reprint arbitrarily when the government needs money. This traditional system is highly controversial, which accounts for a large part of Bitcoin’s success. Bitcoins can not be mined indefinitely, and their mining becomes more difficult over time, requiring more computing power and power. It can take place both on a private or industrial computer as well as in the cloud, but it always requires a hardware, software and power expenditure that a miner must pay attention to. The people involved in mining Bitcoins all over the world compete with each other.

How does Bitcoin Mining work?

Technically speaking, mining works through a cryptographic hash function that leads to the so-called proof of work. The result is the block header, which encodes the data structure for new bitcoins. For each newly created hash, the mining software uses a new, randomly generated number, the “nonce”. Depending on this nonce and other data, it creates the hash, which is a very long number-letter combination. The mining is associated with a target difficulty to limit the possibilities. For a valid block, the miner must find hashes that are smaller than this target difficulty. People do this work around the clock and around the world. If they manage to generate the corresponding hashes and summarize them in a block, this block is finally appended to the blockchain, from which users can retrieve bitcoins. The user confirms this user transaction, for which he receives a (voluntary but recommended) transaction fee from the user. All transactions can be traced at any time via the blockchain. This is so intentional that the decentrally generated bitcoins should remain transparent. New blocks are permanently attached to the blockchain, resulting in an ever-growing list of transactions. Since the blockchain is visible, users can view current and past transactions. Of course, the names of Bitcoin senders and recipients remain anonymous, but the transaction itself is visible. Therefore, the Bitcoin system is called transparent and at the same time (pseudo-) anonymous.

Tasks of the miners for the intact block chain

The blockchain must remain intact and must never be manipulated. The miners take over in this regard, a control function. Once a transaction block has been generated, miners begin an information extraction process. Then, using a mathematical formula, they convert the transaction to the hash, which is kept in the block at the current end of the blockchain. The properties of hashes are quite interesting. It is relatively easy to generate from the information in the Bitcoin block, but it is almost impossible to reconstruct its origin. The hash is made technically simple from many datasets and is therefore always unique. Changing a single character in the block would change the entire hash. Miners use additional data in addition to the transaction data, including those from the last hash in the blockchain. In this way, every hash is linked to its predecessor, creating a kind of seal. This confirms that both blocks match. A manipulation would notice immediately, because it would require a change of the hash. If the authenticity of the block is then checked by means of the hashing function, the manipulation would be immediately recognizable.

Competition for bitcoins

The miners search the network for blocks and compete with each other. They use special software for this. When they create a new hash, they get a fee, the blockchain gets an update, every other miner hears about the new hash. This incentive promotes mining and transactions. To make the creation of hashes not too easy, there is the proof of work in the Bitcoin protocol, which increases the mining difficulties with progressive prospecting. The Bitcoin network does not accept every hash; it has to be in a certain way. The miners must therefore permanently change the data used to create new hashes. For this they use the “nonce”, which often requires many experiments.

How does Bitcoin Mining work in the cloud or on your own computer?

There are two variants of cloud mining or mining at home on your own PC. In the case of cloud mining, an external service provider provides the hardware and software for a fee. Purged bitcoins are credited to the miner on his wallet. Who wants to do this, must set up a wallet, rent the cloud miner and then Mine bitcoins.

If you want to mine Bitcoins yourself, you need a Bitcoin Miner hardware. It has a special ASIC chip designed specifically for this purpose. One example is the Bitmain AntMiner S9, which is connected to the router with a LAN cable and then configured via the web browser. Of course, there are many more bitcoin miners, including, for example, the Raspberry Pi 3. Considering the mining at home, the high electricity costs and the enormous amount of time. In Mining Pools, miners join forces to pool their computing power. The mining pools have advantages and disadvantages. But those who can not profitably dig at home and also do not want to use the cloud solution should consider the possibility of mining in the pool. Benefits include:

  • Mining works without any in-depth know-how
  • no high capital expenditure
  • no self-government

A deterrent is the large number of mining pools, making the decision difficult. Also, small private miners have no decision-making power. Reputable mining pools are officially listed in the Blockchain list.

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