What is Bitcoin Mining and why we need it
Published 2 years ago
When we hear for the first time about miners from experts we hear a short explanation of a complex process which involves solving mathematical problems. But the next questions that I ask myself are what problems do they solve? Why do they solve them? How complex are those problems? How are they getting paid for mining? And so on. In this article, we are going to find out the answers to these questions.
Let's start with the process of generating bitcoins. We know that the bitcoin amount is limited to 21 million and this is a number of bitcoins that can ever be available in circulation. This fact makes a big difference comparing to existent fiat currencies like dollars which have a huge problem with inflation. Today people accept this problem as it is and don't think about it. But cryptocurrency community wants to solve this problem with limiting the number of bitcoins which could ever be available in circulation. But the question is now who is initially holding this number of bitcoins. And the answers are miners. Miners are initially holding this coins. Now the question is how to decide how to allocate bitcoins to miners. And the answer is miners should work for this. In other words, miners are rewarded in bitcoins in exchange for their work (mining). Now next question is what kind of work miners are doing? And the answer is they are solving those complex mathematical problems that we were talking at the beginning of the article.
Ok as you can see there are a lot of questions arriving on this topic and we are going to continue in this manner in order to understand how this process works. So the next question is: ok I saw a lot of people making money from mining and what should I do to mine some bitcoins? Especially today, as at the moment of writing of this article the bitcoin price is $7400 which looks like a profitable labor. The answer is you need a few powerful computers with a special software installed on them which perform some computation. Let's imagine we bought some powerful computers now the question is what problems should we solve in order to receive bitcoins? Ok if we installed the required software on our computers we are now a part of the blockchain network and we compete with other miners for those available coins. As you will see the more questions we answer the more questions will arrive and that's ok. When you will understand how all this process works you will understand how powerful technology the blockchain is. The next question is who decides which miner how many bitcoins should get? The answer is the system itself. To understand this let's see how mining works from the technical point of view and what problems miners are really solving?
As we discussed in previous article participants in the distributed ledger can make transactions and those transactions are registered on the blockchain. And miners are the part of the system who keeps track of those transactions and keep all the history of all the transactions made on the network. Think about them as blockchain maintainers. How do they do this? Our transactions are arranged in blocks of information in order to be registered on the blockchain. The miners should perform some hashing algorithm on that block which we explained in this article. They need to generate the hash of each block. Now the hashing process of a block nowadays is pretty fast with current computational power available and all miners would generate that hash in milliseconds, if it would be so why we would need so many miners? The answer is a concept of proof of work. The process of generating the hash of each block is complicated by requiring some amount of leading zeros in front of the final hash. And the job of the miner is to find the right nonce in order to generate the hash with the correct amount of required zeros. And who finds it first get the reward in bitcoins. One the hash is generated miners proceed to the next block. On average one block is mined once in 10 minutes and who first solve this problem get the reward.
So the question now is should I invest in mining equipment to mine some bitcoins. There is no exact answer to this question. You should consider a few facts. First of all nobody guarantee that you are going to get the reward and it does not matter how powerful your computer is. Also, more miners are joining the party and the system is designed like so that the complexity of calculation is growing along with the computational power of the miners by adding more leading zeros to the hash. So if you want to invest now in this you should consider buying very powerful computers in order to have a higher probability to be the first who solved the problem.
This is mining in a nutshell. Will come back on this topic later so keep in touch with us. As you can see mining is an important part of the blockchain and the miners should be paid for their work. They are the maintainers of the blockchain network. But people who use it actually write the history.