Bitcoin Mining Unplugged: How It Really Works

Bitcoin Mining Explained

You already know what mining is right? It is simply the process of creating new cryptocurrencies using the specialized mining hardware. Same goes for Bitcoin mining, it is also a process of generating new Bitcoins using the most specialized and specifically engineered ASIC miners.

Once the Bitcoin miners solve the mathematical puzzles the miners receive the greater rewards and mining also protects Bitcoin from attacks like double-spending or other malicious attacks.

The verification is an integral part that promotes safety everywhere right? Even in Bitcoin mining the miners verify new transactions before adding it to the main ledger.

A new block is mined every 10 minutes on an average. Once a block is uploaded to the blockchain, the transaction is confirmed.

Working Mechanism of Bitcoin Mining

Bitcoins are not sent and received like file attachments in an email. Bitcoins contain public addresses, and this public address has a private key that helps the miner digitally sign for fresh transaction requests.

Do you know that there are inputs available that contain the record of all the transactions that have previously occurred on the chain? Using the previous transactions only the new Bitcoin mining transactions are carried out.

As the bank authorities verify your documents upon inquiry, miners also look at two things initially for Bitcoin transactions. They first verify the digital signatures you provide as it confirms that you are a recipient of data.

Secondly, they verify that you haven’t already used those inputs. In order to complete this second check, miners look for information in a publicly accessible database known as the blockchain to see if they have already been utilized in a transaction or are still available.

Every system connected to the Bitcoin network has a copy of blockchain transactions.

The miners are the ones responsible for maintaining the security of the network as they verify and examine customer’s identification and seek proof that the customer has required an amount of money to complete the transaction.

The miner will add the transaction to their list of all legitimate transactions made within the previous several minutes if everything checks up.

A single miner will be chosen every few minutes to add a block, or their list, to the main blockchain, updating the public record.

Other than this, there are a few important things involved in the working of Bitcoin mining that involve nonce, nodes, and miner incentives.

Let’s discuss it in detail in the next section to know how they all work cohesively to keep the working smooth.

Process and Components of Bitcoin Mining

Below are the crucial parameters of Bitcoin that are required for its working as well its working, let’s understand it in detail.

1. Nonce

Miners modify a 32-bit field known as a Bitcoin nonce while they work on fresh blockchain blocks.

Miners utilize this random number to make sure that every block has a distinct hash or electronic signature.

Miners guess the various answers to find the one that produces a valid block by altering the nonce, which changes the block’s hash.

The nonce is the only unknown component in Bitcoin mining; all other hash algorithm inputs are predictable.

The act of guessing is done by the miners using the Bitcoin nodes in proof-of-work consensus.

SHA-256 algorithm is what helps with the nonce selection. When correctly guessed, the miners are rewarded with the Bitcoin block rewards, which are distributed every ten minutes.

Unusually, two miners will never generate the identical hash for a particular block since every nonce is effectively a random number. As a result, if one miner discovers a solution, the others will be able to confirm it fast and append the block to the chain.

The nonce is also employed in resisting the “51% attack.” It involves a selected group of miners holding more than half of the network’s computational capacity and can influence the blockchain for their gains potentially.

2. Nodes

Computers running Bitcoin software and linked to the Bitcoin network are known as Bitcoin nodes. Bitcoin nodes transmit, process, store, and verify transactions with Bitcoin.

Bitcoin transactions are grouped and stored in units known as blocks. It is where the word “blockchain” originates: past transactions are kept in interconnected blocks.

Nodes must confirm that the transactions in a block are legitimate before the block is added to the blockchain.

This verification entails determining whether a sender indeed possesses the Bitcoin they are attempting to send, as well as whether the identical Bitcoin was spent the second time(double-spending).

Consensus is the process by which different nodes come to a consensus over the legitimacy of a block (and every transaction it comprises) before the block is added to the blockchain.

Since Bitcoin is a peer-to-peer payment system, there are no intermediaries or third parties to impose rules of consensus on the entire network. Nodes must agree among themselves. They use the Bitcoin program to accomplish this.

The Bitcoin software includes an entire copy of the Bitcoin blockchain in addition to the guidelines for the protocol.

Thus, upon downloading and connecting to the Bitcoin network, a node gains access to the duplicate historical transactions and a set of rules for transaction verification as all other Bitcoin nodes.

3. Miner Incentives

Block rewards are a mechanism used to encourage bitcoin mining. However, it becomes crucial to look into alternative strategies to encourage miners to uphold the security of the network, given the approaching halving of the block reward.

There have been other suggestions for substitutes or additional incentives to the block reward in addition to transaction costs.

The community’s reaction to these suggestions has been conflicted because they offer benefits and drawbacks.

While some contend that it might result in a more decentralized network, others are concerned about the possible disadvantages of depending just on transaction fees.

Thousands of transactions are processed daily by the Bitcoin network, averaging four transactions per second. Blocks of these transactions are handled.

Up to 1 Megabytes of transactions can be made in each block, which means that there could be one single transaction or hundreds of them.

Miners receive incentives as compensation for handling these transaction blocks. New bitcoins that are released into the network are used as Block incentives for miners.

This reward system is designed such that when every 210,000 blocks are mined, which takes up to a total of four years, the overall bounty is cut in half. It is a calculated move to control the overall supply at a specific moment in time, protecting the coin’s value.

Miners see the block reward as a clear monetary incentive. They can either hold onto the substantial amount of Bitcoin they receive by solving a block or sell it for fiat money. In addition, the block reward can be used to reduce mining-related fees like electricity and expenses for equipment.

But the Bitcoin network as a whole also gains from the block reward. The blockchain’s dependability and security grow as more miners contribute their processing power to the network.

Consequently, this enhances Bitcoin’s appeal to prospective users and financiers.

Why to Mine Bitcoin?

It would sound too good to be true if we say, no one mine for rewards or money right? Majority of the people invest their time and money on Bitcoin mining resources to receive greater rewards in return.

It is also known that Bitcoin rewards are halved every four years. In 2009, the BTC rewards were 50 BTC, in 2012 the rewards were halved to 25 BTC, in 2016 the BTC rewards were halved to 12.5 BTC and then in 2020 the rewards reduced to 6.24.

In April 2024, the Bitcoin mining rewards were reduced to 3.125 BTC. The possibility of mining Bitcoins reduces when the halving arrives and mining becomes all the more important as the supply of new Bitcoins slowly reduces.

It is anticipated that by 2140 there will be no room for creating more Bitcoins.

Bitcoin mining is also crucial to discard the persistent problem of double-spending.

Let us understand what double spending is, taking an example. For instance, Andrew has $10 and he gives it to Jack. Would Jack be sure that he has successfully received the amount rather than a forgery? We can say that yes he would in the physical however, it is not the case for the virtual world.

In reality Andrew would have to find physical things such as ink, paper, machines etc. to make a convincing replica of $10. However, in reality it can be done easily with a few techniques and tools at effectively less cost.

Same way Bitcoin is also prone to such issues of double-spending with the Bitcoins record of transactions on all the nodes, such issues can be avoided, making Bitcoin mining important.