How does Bitcoin mining work?

May 29, 2021 Education

How does Bitcoin mining work?

Bitcoin is said to be a digital gold which has passed more than USD $50,000 in value in 2021. It all runs digitally and is powered by number of computers using Blockchain technology. Surprisingly, the price of Bitcoin has been growing a lot faster than Gold, Oil and Dow Jones according to analysis done by Capital.

The beauty of Bitcoin in DeFI (Decentralised Finance) system is that there is no government or centralised entity who control it. Recently, the Bitcoin has been recognised as digital currency and some vendors have started accepting Bitcoin as a payment system such as Expedia.

So, if there is nobody controlling the system, how exactly is transactions in Bitcoin network so secure? Bitcoin Mining.

What is Bitcoin Mining

The concept of mining in cryptocurrency is similar to gold mining. Just like gold mining, you get new Bitcoins in mining process, which are then entered into the circulation. Unlike gold mining, you don't physically try to find Bitcoin somewhere on the "Internet". It is performed by using powerful computers to solve mathematically complex algorithm to validate and verify the block before that block gets to the Bitcoin network. Once the block is successfully added to the Bitcoin network, the miner receives a reward of some Bitcoins.

Bitcoin mining is quite costly. As the size of Bitcoin mining pool become bigger, it gets harder to solve that complex algorithm. Thus, the miner requires to set up more powerful computational units to solve the algorithm much faster. The cost does not only go to the equiments, it also goes to the electricity that runs the mining machines.

Bitcoin mining equipment Bitcoin mining equipment. Image from Canva

How Bitcoin mining works

In Blockchain, each block is linked with the very complicated hash. If the data or information is mutated in one of the block, the hash will be changed and thus, it breaks the Blockchain. The miner set up a very powerful computer to run the Bitcoin software to solve that complicated mathematical hash function, and validate the block before adding that block to the Blockchain, called ledger.

Depending on how large the payment is, it is required more than one confirmation in order to push the block into the network. The standard number of confirmation is six for most transactions to be considered secure. At this stage, whoever solved the first block will be rewarded with some Bitcoin. If the block cannot be confirmed, that block will be rejected and will not be in the network.

How much in Bitcoin a miner is rewarded

Bitcoin is a limited resource. There are only 21 million Bitcoins can be mined in the world. Since the creation of Bitcoin in 2009, the rewards for successfully completing one block halve every 210,000 blocks, which is roughly every 4 years. So, the mining gets harder and harder.

Bitcoin rewards halve every 4 year The amount of Bitcoin that miners receive halve every 4 years or 210,000 blocks.

In 2009, a miner was rewarded 50 Bitcoins for completing 1 block. Today, a miner gets 6.25 Bitcoin for completing one block. In 2024, it will decrease to 3.125 Bitcoin.

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