Cryptocurrency mining is the process of verifying and adding transactions between users to the blockchain public ledger. This concept of mining is also responsible for introducing new coins into the already existing circulating supply.
It is also one of the major factors that allow cryptocurrencies to work as a decentralized peer-to-peer network, without the need for a third party central authority. It is worthy to note that not all cryptocurrencies are mineable. However, the most popular cryptocurrency, Bitcoin, is a good example of a mineable cryptocurrency. The mining of Bitcoin is based on a consensus algorithm known as proof-of-work.
How does Cryptocurrency Mining Work?
A cryptocurrency miner is a node in the network that collects transactions and organizes them into blocks. Anytime a transaction is made, all network nodes receive that transaction and verify its validity. After that, miner nodes compile these transactions from the memory pool and assemble them into a block.
The first step is to hash each transaction taken from the memory pool individually to mine a block. Meanwhile, before starting the process, the miner node adds a transaction where they send themselves the mining reward known as a block reward. This transaction is called the coinbase transaction. A coinbase transaction is a special kind of transaction in which coins are created “out of thin air,” In most cases; it is the first transaction to be recorded in a new block.
After all, transactions have been hashed; the hashes are organized into a Merkle Tree or a hash tree. This hash tree is formed by organizing the various transaction hashes into pairs and then hashing them. After that, the outputs are then organized into pairs and hashed again, and this process is repeated until “the top of the tree” is reached. The top of the tree is also called the Merkle root or a root hash and is a single hash representing all the previous hashes used to generate it.
The root hash, together with the previous block’s hash and a random number is known as a nonce, is then placed into the block’s header. This block header is then hashed, producing an output based on these elements (root hash, previous block’s hash, and nonce), including other parameters.
The resulting output is the block hash, and it will serve as the identifier of the block generated newly (candidate block). The block hash (the output) must be less than a certain value determined by the protocol to be considered valid. This implies that the block hash must start with a particular number of zeroes. The hashing difficulty, which is also known as the target value, is regularly adjusted by the protocol.
The regular adjustment ensures that the rate at which new blocks are created remains constant and is proportional to the hashing power devoted to the network. This means that every time new miners join the network and competition increases, the hashing difficulty will also rise, preventing the average block time from decreasing. In another perspective, if miners decide to leave the network, the hashing difficulty will go down. This keeps the block time constant, although there is less computational power dedicated to the network.
The process of cryptocurrency mining requires that miners keep hashing the block header over and over again. This is done by iterating through the nonce until one of the network miners eventually produces a valid block hash. Once a valid hash is found, the founder node automatically broadcasts the block to the entire network. All the nodes will check if the hash is valid, and once it has been confirmed that the hash is valid, the nodes will add the block into their copy of the blockchain and move to mine the next block. There can be a situation where two miners broadcast a valid block at the same time. In such a case, the network ends up with two competing blocks. However, miners start mining the next block based on the block that they received first.
The competition will rage on until the next block is mined based on either one of the competing blocks. Any of the blocks that eventually get abandoned becomes an orphan block or a stale block. The miners of the orphan block will switch back to mining the chain of the winner block.
How much Does A Bitcoin Miner Earn?
The reward for Bitcoin mining halves every four years. For example, when Bitcoin was first mined in 2009, you would earn 50 BTC for mining a block. In 2012, the amount you would earn was halved to 25 BTC, and 12.5 BTC in 2016. In May 2020, the reward halved again to 6.25 BTC. This reward is always a good incentive considering the level of work miners have to put in to mine a “block.” It is interesting to note that Bitcoin’s market price has always tended to marginally correspond closely to the cost of mining a Bitcoin. Several websites show how many blocks have been mined thus far, and you can always check them to see for yourself.
The Equipment Needed To Mine Bitcoin
Early on in Bitcoin’s history, individuals were able to compete for blocks using their regular home computers. Meanwhile, this is no longer the case today. The difficulty of mining Bitcoin has increased over time. Therefore, to ensure the blockchain functions smoothly and retains its ability to process and verify the transaction, the Bitcoin network maintains a block’s production every 10 minutes. However, if 100, 000 mining rigs are competing to solve the hash problem and create a block, there is a higher chance of reaching a solution faster than just 100 mining rigs.
For this reason, the design of the Bitcoin network enables it to evaluate and adjust the difficulty of mining every 2,016 blocks (or roughly every two weeks). Whenever there is more computing power collectively working on mining Bitcoin, the difficulty level of mining increases to stabilize the rate of block production. When there is less computing power, the difficulty level decreases. To give you a clear perspective on the amount of computing power involved, the difficulty level was “1” when Bitcoin was launched in 2009. Today, the difficulty level is more than 13 trillion. This gives you a clear knowledge of the computational power required to mine Bitcoin.