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What is Bitcoin Mining?

The cryptocurrency market has grown immensely in recent years. The global market cap of cryptocurrency is roughly touching $2.34 trillion. Bitcoin is the top-ranking cryptocurrency in the world and is valued at around $1 trillion. Launched in 2009, it was the first cryptocurrency in the market. Over the years, the valuation of Bitcoin mining and its popularity has skyrocketed and continues to rise.

Bitcoin is built on top of a distributed and decentralized ledger system called blockchain. The transactions in the Bitcoin network are recorded in blocks, and those blocks are linked together to create a chain of ledger which is maintained by many parties in the network.

The blocks are generated by an entity called miners who are responsible for producing the proof-of-work, which is the consensus algorithm used in Bitcoin (other cryptocurrencies use different consensus algorithms)

How does Bitcoin mining work?

The way Bitcoin mining works is actually pretty simple. The miner gets a list of transactions that are broadcasted by the user in the network, and then they form a block with those transactions. The transactions are validated using a public-private key encryption system and the digital signature against the transaction that is broadcasted into the network.

The number of transactions per block is roughly around 2,700. We can expect each block to be generated every 10 minutes in a Bitcoin network. The miner broadcasts the block once they generate the proof-of-work. This is a number added to the block so that the entire block along with the transaction details has a few zero bits in the beginning. This difficulty level for proof-of-work keeps changing based on a few factors and is adjusted periodically by the network automatically. 

The other participants on the network receive and update their respective chains of blocks and trust the one which is the longest chain. Statistically, it is nearly impossible to spoof these systems by sending spurious blocks to other parties and gaming the system. This is what makes cryptocurrencies so secure. 

How Mining fits in the Big Picture

Now, there needs to be an incentive for the miners to generate the proof-of-work for the Bitcoin consensus algorithm to work. This is done by awarding a small fraction of bitcoin to the miner who has successfully added a block into the blockchain after generating the proof-of-work, and also in the form of transaction fees included in the block 

There is a huge industry for bitcoin mining and people who use specialized hardware and large centers to do bitcoin mining. This gave rise to a multibillion-dollar industry of bitcoin mining companies and mining pools (of smaller miners to come together as a single mining entity). The market share of the big miner is disproportionately high in comparison to the smaller miners since mining Bitcoins is fairly resource-intensive from the point of view of money spent on real estate, power, cooling, and the capital cost of the mining equipment. 

Wrapping Up

Currently, around 83% of the total theoretical cap of 21 million Bitcoins has been mined already. It becomes increasingly difficult to mine more Bitcoins as the number of miners and the difficulty of proof-of-work keeps increasing with time. The awarded bitcoin will also keep going down over time, which may lead to a state of diminishing return for the miner over time. Bitcoin mining rewards are reduced by half every 4 years. 


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