Why Is Bitcoin Mined?

Bitcoin network is decentralized, i.e. it does not need a bank or any other institution to send and make transactions. What it does need, however, is what we call miners. You are about to find out what exactly they do and why Bitcoin needs them.

How are grandparents imagine bitcoins are mined – it’s far from truth. 🙂

Did you know? Mining creates new bitcoins. They are limited to 21 million, though, so that we could not print them infinitely (as we would paper money). Moreover, miners are rewarded in the form of transaction fees as a motivation to support the network even when all new BTCs have been mined.

In the article on how BTC works, we said that miners add blocks with transactions to the Bitcoin Blockchain, which updates and validates the status of all addresses. They have to “burn” energy with calculations to secure the network (this is called Proof of Work). To mine a block means that a miner finds the correct hash with a given number of zeros and gets the right to add a new block of transactions to the network. In the mining process, no complex equations are calculated (this widespread idea is misleading).

Basically, miners only try to guess the random number as quickly as possible. It’s like lottery. The winner gets the right to add a new block and get a reward. In other words, by using the computing power of their computers, miners compete to be the fastest to “mine” a given block. More computing power = a greater likelihood of becoming the “lucky winner” with the right to add a new block.

Mining farm with ASIC computers – this is how industrial bitcoin mining really looks like. It’s very loud and hot 🙂

Miners are economically motivated to secure the network. For each new block they add, miners get new bitcoins and transaction fees in the block. On the other hand, the cost of mining is not only electricity but also expensive computers. These expenses play an important role in the network: motivating miners to support the network and to not attack it. For example, if someone wanted to delete or overwrite Bitcoin transactions in the past, they would have to control most of the computing power (a so-called hashrate) across the entire Bitcoin network and spend more resources and energy than on all previous blocks. That’s very expensive nowadays (according to a 2017 research, the cost of this type of attack on Bitcoin is more than a billion dollars a day). That’s why Bitcoin is considered to be a very secure network. The risk that someone would change the history of bitcoin payments and transfer some bitcoins to their account is virtually zero.

The Bitcoin mining algorithm is set up in such a way that the difficulty of mining changes with the amount of computing power (hashrate) that is in the network. The more machines mine and the more powerful the machines are, the more demanding and costly the mining is, and vice versa. This mechanism ensures that Bitcoins are released in a relatively stable manner.

Increase of hashrate of BTC network from 2016, source

Why do miners group together to form pools?

Everyone can become a miner, but mining has lately become quite computationally demanding, because there is a lot of computing power in the network. In 2009, it was also possible to mine on a run-of-the-mill notebook, and a few years later it was necessary to use more expensive graphics card sets. To be successful today, a miner needs to invest in powerful, specialized computers (so-called ASIC miners) that are optimized for Bitcoin mining and cannot be effectively used for anything else.

So, as a small miner you buy ASICs and compete in mining with large mining farms. But soon you will find out that you will mine a new block very rarely, because the large miners have the advantage in this “lottery”: it’s as if they bought a lot more lottery tickets than you did. Even though the “lottery” runs every 10 minutes, the big players will win more often. This has forced miners to join so-called minig pools. A mining pool is a service that unites the computing power of miners, turning them into a large miner. This way, the rewards for mined blocks are more frequent, and the mining pool pays them all fairly based on the share of computing power.

Bitcoin mining pool distribution. None of the current pools as of 2019 controls majority of hashrate.

In unity, there is strength, but so also centralization. Many criticize mining pools for accumulating too much computing power and gaining potential influence over the network as a result. That’s only partly true, since mining pools can really use the borrowed computing power (i.e. hashrate) temporarily in order to try to reorganize transactions on the network. But within a few minutes the miners can go to another pool, which means that this unfriendly pool will most likely fail, burn up a lot of capital during the attack, and lose its reputation.

Did you know? The first mining pool in the world is slushpool. It is also one of the largest pools to have turned down a proposal in order to increase the block to 2MB (which would have favored large miners).

Since 2009, the Bitcoin network has been hit by multiple miner attacks (among others). Further evidence that the Bitcoin network is resistant to the power of miners is the Bitcoin Cash spin-off: the changes that some miners were pushing for were rejected by the community. Although Bitcoin is not perfect, it looks like its economy works robustly enough, and it pays more to help the network than harm it.

The practical instructions on how to mine Bitcoin are still under construction. Please read our article on the role of node owners in the Bitcoin Network.

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